Could your business reverse into one and pick up the cash?

Shell companies are a time-honoured route for entrepreneurs to bring businesses to market and research by Business XL – a sister publication of GrowthBusiness.co.uk – has found 49 shells with combined cash resources of £79 million.

The bulk of the funds can be found in the 23 shells on AIM with available cash of £63 million, while PLUS has 26 ventures with £16 million. If you’re an entrepreneur seeking to advance his or her venture, using a shell can cut out some of the time, trouble and expense of conducting a conventional IPO (initial public offering) on a stock market.

Moreover, shells can enable shareholders in unsuccessful ventures to retain some, albeit sharply reduced, stake in a transformed and possibly more successful enterprise.

Recent examples include Twenty, an AIM-quoted marketing services provider headed by Virgin Cars founder Ian Lancaster. It floated last year with a £10.5 million reverse takeover of customer relations management specialist Dataforce Holdings. Or there’s Tanzania Gold, steered by ex-stockbroking entrepreneur Clive Sinclair-Poulton, another AIM counter this time probing mining prospects in East Africa, which floated on AIM by reversing into bombed-out, erstwhile ‘e-commerce specialist’ Voss Net.

Some shells have abundant cash resources, such as AIM’s Nettworx, with £8 million in its coffers while it looks for suitable investments in the voice, video and data network fields, or Cue Energy, with £2.8 million to back its quest for opportunities in the fashionable energy sector.

Clean or dirty cash shell?

Before committing yourself to investing or participating in a shell, you need to determine what kind of shell it is. Is it a ‘dirty shell’, with funds left over sale of its original failed operations (if so, be sure to check for debts and obligations to previous customers, suppliers, lenders, employees et al). Or is it clean: set up with a bank of cash purely for the purpose of finding a business that wants to ‘reverse’ into it?

Concern had arisen in the markets that the shell route could allow some less scrupulous operators to extract money from investors and their friends and fritter or divert it away.

Two years ago, the AIM authorities introduced new rules, obliging shell companies that had floated before April 2005 and raised less than £3 million on or immediately before admission either to make an acquisition or reverse takeover, or satisfy the AIM authorities that the company had ‘substantially implemented’ its investment strategy. Non-compliance meant suspension and eventual delisting.

That prompted a significant exodus of weaker brethren and made some companies planning a shell route to look at the tertiary exchange run by PLUS Markets. Now offering a trading platform for many Full List shares too, PLUS Markets says ‘we can accept investment vehicles and we have no rigid requirements’.

PLUS executive Nemone Wynn-Evans says the guiding principles are disclosure and common sense: ‘We ask about the business plan and why the company is not invested. PLUS is not seeking cash shells. But several market participants have introduced them and we like to see them coming and doing deals.’

One shell chief who is not cheering at the AIM rule changes is Keith Smith, former veteran of stockbroker Nabarro Wells and now chairman of Aspen Clean Energy, whose shares were suspended last year and will be delisted if it cannot complete a reverse takeover by 17 November. Although initially looking for deals in the financial sector, Aspen, which recently came close to one deal but pulled out after exhaustive due diligence, is now talking enthusiastically about a new deal in the energy sector. Smith suggests this could take the company from a £3 million market value to nearer £20 million, provided the deal can be done in time.

Early days

Aspen began life as Shield Capital, but transformed itself for the first time at the end of 2005 by issuing shares to buy Aspen Clean Fuels, a Swedish business supplying alkylate ‘clean fuel’ for use in lawn mowers, chain saws and the like. The company was headed by Swedish entrepreneur Sven Lindblad, who, with a 52 per cent shareholding, is still chief executive of Aspen Clean Energy.

The company later sold the alkylate business locally and distributed £10 million or so of the proceeds to shareholders. That leaves it now with around £3.5 million cash, though £1 million is temporarily in escrow pending any warranty claims over the business disposed.

Smith says that does not satisfy the AIM authorities because the money was not raised ‘at or immediately before admission to AIM’. Lindblad has been over to Sweden to look at the possible new energy deals and Smith, though critical of what he sees as AIM’s pedantry, sounds reasonably upbeat about prospects for pulling it off.

Many a slip

Lining up suitable deals and carrying them through can be a chancy business, liable to be thwarted by external events. This was the experience of Aldgate Capital, which raised £5 million last year at 10p when it was floated on AIM by Cayman Islands-based hedge fund Marwyn Neptune Fund.

Chaired by David Williams and with James Corsellis, ex-boss of Ofex fallen star icollector on the board, Aldgate, where Neptune holds a preponderant stake, set out to trawl consolidation opportunities and was poised to be the vehicle for Marwyn’s £200 million acquisition of a film distribution business owned by two Toronto-quoted groups, Alliance Atlantic Communications and Movie Distribution Income Fund.

However, at the beginning of this year, the takeover talks came to an abrupt end when the mighty Goldman Sachs investment colossus and another group, Canwest Global Communications, announced plans to acquire Alliance Atlantic themselves.

Still, Aldgate retains most of its cash and Marwyn, which has a fair track record and promises a deal will be on the cards ‘sooner rather than later’, continues to study its options.

This feature is an abridged version of a more comprehensive report called Business XL Cash Shells 2007.

The full report details:

• Every single Cash Shell on AIM and PLUS

• Total cash available in each company

• Market value, share price and other key financial and market data

• The key directors and their contact details

• The broker and/or adviser to each cash shell

• Cash shells by the amount of cash they have available

• Whether they are trading at a premium or discount to their net assets.