To expand its horizons beyond Wales, Tinopolis took control in February of the remains of a quoted investment business that had decamped to Bermuda. As a specialist producer of TV programmes in Welsh, Tinopolis knew next to nothing about what its target, Acquisitor, used to do. What mattered was that it was now a £1 million shell listed on AIM.

For Arwel Rees, managing director of the Llanelli-based TV production company, it was an opportunity to gain a listing without going through an IPO.

It was not so much the speed of the deal that appealed to him, although the transaction only took three months. What excited him was the certainty of the result.

Lower your risks

‘The risk in any IPO is that you can go a long way down the line and have to pull it,’ he says. ‘With a transaction like ours, this risk is severely diminished.’

Tinopolis is now one of the big three production companies outside the M25, producing 600 hours of programmes a year with annual sales of £8 million. ‘We are as strong as we want to be in Welsh-speaking production and can grow organically. We are now looking for acquisitions outside our realm.

Listing on AIM gives us the ability to raise new funds at the right time and allows us to be at the heart of any future consolidation in the fast-changing TV production industry.’

At first sight, it might have appeared that Tinopolis was acquiring Acquisitor. In fact, it was a reverse takeover. Under the AIM rules, this occurs when a smaller AIM entity (in this case Acquisitor) buys a target larger than itself, requiring shareholders to be consulted about any changes in the nature and control of the business.

Acquisitor was open to taking this approach, says Rees, even though its original business was far removed from TV production. ‘As long as we had a business and a strategy that was reasonable, they were happy to move forward.’

The deal was worked out on the basis of 41p a share. For their pot of £1 million, Acquisitor shareholders took ten per cent of the enlarged company, which is now listed on AIM as Tinopolis.

After the deal, all of Acquisitor’s former shareholders remained involved, giving Tinopolis an immediate institutional base. So far, the switch from Bermuda to Wales is paying off, as the share price has moved up towards 50p.

In from the cold

Reversing onto AIM in this way can be quicker and cheaper than a conventional IPO, as you avoid many exhausting and difficult regulatory hurdles. You also save time in introducing yourself to fund managers and analysts, as your cash shell will already have done this for you, although you will still have to produce a public share document.

For international companies, it can be a particularly attractive option, as they would otherwise have to present themselves to the market cold. Among the 41 reverse takeovers on AIM last year was Content Film from the US, which took control of Winchester, a listed European distributor of films. In effect, it was a back door listing with a £9 million exchange of preference shares and a private placing of £8.5 million. The name of the enlarged group is now Content Film and there has been a change in board control.

In this case, the deal was brokered by the chairman of Content Film, who also sat on Winchester’s board. For those without such contacts, corporate finance advisers usually have a list of potential targets. Or you can just make a direct approach. Shells sitting on a pile of cash accumulating interest should be open to all manner of serious investment proposals.

Details and diligence

If you are thinking of reversing into a cash shell, Linda Main at KPMG Transaction Services advises that you need to check they are as clean as possible. ‘Make sure they have genuinely disposed of businesses for cash and that there are no nasty loss-makers still lurking. You don’t want any liabilities to come back to haunt you. Using a reverse takeover to list sounds attractive, but it can at times involve just as much work as an IPO.’

Reverse takeovers, she believes, are likely to be more attractive for new cash shells that are brought onto AIM with the express purpose of making acquisitions. ‘Sometimes investors are prepared to back the individuals to run a business.

‘It is easy to produce the information for a listing because the company hasn’t done anything. All you have to say is that your intention is to make acquisitions.

‘You then have the finance in place with cash on your balance sheet, so you don’t have to negotiate with banks or do a placing. It gives you certainty that the market won’t turn against you. Once you make the acquisition, you have to produce a new admission document and produce all the information on the target company as if it was floating in its own right.’

New cash shells

This is the route being taken by David Williams, chairman of Marwyn Capital. He runs a stable of former top executives who he is helping to take back into the public arena by raising money for reverse takeovers.

‘Shells are the most effective way of doing this,’ he says. ‘It is more credible to say that you have a small listed company which has raised some money, but which has significant institutional support for a bigger deal. It gives you the currency of quoted paper which might sway a vendor. When we believe we are in with a shout on a deal, it is useful to get a public quote. We don’t go for the approach of, “let’s float and hope we can find something” .’

In September, Williams listed Augean at 125p as a vehicle for John Huntingdon, ex-managing director of the Waste Recycling Group, in the belief that niches were emerging for pre-treating and recycling hazardous waste, as opposed to just landfill. Within six weeks, two deals were agreed, with Augean taking control of Atlantic Waste for £80 million and Zero Waste for £26 million. To fund these reverse takeovers, £100 million was raised at 180p.

‘It was a lot of graft in a short space of time,’ says Williams. ‘A float would have taken longer. It is easier in a shell. There is a formula that you have to stick to, and it is pretty well the same for a £2 million deal as for a £20 million one. It is not rocket science. We put together top executives with teams of good people. We help them to identify a company to buy and then we list in advance.

‘It is almost a variant of a management buy-in, although we like a business to be well run. We don’t want to turn them round. We like the vendor to keep an interest and develop it further.’

Williams has already listed his next cash shell, raising £750,000 for Zetar in January to make acquisitions in food and confectionary. And he sees no reason why he should not do two or three of these types of transactions a year. ‘The market is ripe for it,’ he says.

Acquire on AIM

Ben Simpson, principal in business and finance at Withers, the UK/US law firm, agrees that there are clear advantages in cost and speed for new cash shells, although the London Stock Exchange is thinking about tightening up its rules. It is becoming less tolerant of shells with a blanket approach and will expect them to have a definite investment strategy in future, possibly stipulating that £3 million in cash should be raised and a deal finalised within 12 months.

For acquirers, AIM will still remain an attractive market, he believes, partly because improving valuations make equity a cheap form of currency and partly because there are fewer obligations to consult your shareholders than on the main market. ‘If you are an acquisitive company,’ he says, ‘stay on AIM while you are doing your acquisitions, because you then don’t have to go back to your shareholders.’

Speculative flexibility

For more speculative enterprises, shells and reverse takeovers can help a business to adapt when it might otherwise have closed down. Gold Mines of Sardinia, for instance, which listed on AIM in November 2002, ran into trouble with a change of government on the island.

It had extracted 120,000 ounces from its first mine, but then needed to raise more money to explore further. ‘Without any support from local politicians, we had argy bargy over every square metre,’ says Martin Gloak, the company’s finance director.

So he and his fellow directors agreed to sell to an Italian company with better local support, which invested £5 million in developing a new mine.

Shareholders ended up with a stake in the new operation, as well as in a shell with nothing but loose change.

‘Instead of closing the shell down, we decided to look for a target for a reverse takeover,’ says Gloak. ‘Through the chief executive, John Morris, we found two companies for sale in Paraguay which had applied for rights in oil and gas exploration.

‘It was an interesting idea. Paraguay had never been properly explored for oil and gas before, because of a difficult dictator, but was sitting on four different geological basins from which other countries had extracted oil and gas. Our targets had preliminary rights covering two large basins, so we did a whip-round for cash to keep the company going, then put the idea to shareholders. From being gold in Sardinia, we have moved to oil and gas in Paraguay.’

Last November, Gold Mines of Sardinia raised £750,000 on AIM and changed its name to Chaco Resources. Its purchase of Amerisur SA and Bohemia SA in Paraguay was highly contingent and the funds are largely to be used for processing seismic data.

Chaco has opened a small office in Asunsión, the capital of Paraguay, and has been vetted as a credible candidate for exploration. The next step will be to reach agreement with the ministry, before having its right enshrined by Congress.

Depending on what its seismic data reveals, Chaco has to decide whether to undertake more geological surveys or start partnering for drilling. Since starting on AIM at a penny last November, it is currently up to 2.5p.

‘The advantage of AIM is that it is user friendly,’ says Gloak. ‘We are a synthetic company and it is not over the top in terms of regulation. And when you are raising new money, you will always get an audience. It is fertile ground for us.’

Case Study – Acquiring scale

For companies with small capitalisations, reverse takeovers can be a way of putting themselves on analysts’ radar screens. Avingtrans, for instance, had built its market cap up to £5 million through a series of small acquisitions, but realised that it had to increase its scale to justify its listing and to meet the overheads of being a Plc.

It decided on a large acquisition and bought Stainless Metalcraft for £8 million last October. It technically qualified as a reverse takeover, because the asking price was larger than its existing market capitalisation.

The firm now has a market value of £17.4 million and its interests include manufacturing and repairing road and rail signals, manufacturing components for the scientific and research industries, and specialist polishing and finishing services to the aero engine and power generation industries.