An increasing number of growing companies are looking for cash shells as a funding option and route to a listing on the UK stock markets.

What are cash shells?

Cash shells are simply stock market vehicles which have no assets apart from some cash and their listing on a stock market.

Some cash shells are regarded as ‘legacy cash shells’ meaning that they were once trading companies which, for a variety of reasons, have decided to cease trading. At this point, they can either return cash on their balance sheet to their shareholders or leverage the value of their listed status by finding a private company to undertake a reverse transaction with.

Other cash shells or SPACs (Special Purpose Acquisition Company) may have listed on a stock market with the sole intention of seeking an attractive privately-owned company to undertake a reverse transaction with.

The cash shell marketplace

The UK cash shell market place is very dynamic with new cash shell companies formed or coming to the stock market frequently. In most cases cash shells don’t wait around too long before commencing a transaction with a private company. Understandably, owners of cash shells are generally risk averse and so more inclined to be attracted to private companies that have a successful track record or growth opportunities.

What benefits do cash shells offer?

Entrepreneurial led companies seeking a stock market listing can use a cash shell as a vehicle to raise funding and secure a successful stock market listing. Cash shells offer significant benefits including;

1. There is already a transparent amount of cash in the cash shell ready for the private company to use
2. The cash shell will pay the majority of the upfront stock market listing fees, thereby de-risking the listing process from the private company’s perspective

3. The cash shell will already have shareholders and it may be possible to raise further funding from these

4. The private company will gain control of the new entity that is created (combined cash shell and private company)

5. The process of listing the private company on a stock market by using the cash shell may be more beneficial than a traditional route such as an IPO

What is a reverse takeover?

Often cash shell transactions are referred to as reverse takeovers. In a reverse takeover, the stock market listed cash shell acquires the private company. Since the private company will nearly always be larger than the cash shell in terms of its value, it will end up with the majority of shares in, and thus control of, the merged entity. Therefore in these transactions, the cash shell is said to have undertaken a ‘reverse takeover’, and the private company is said to have ‘reversed into the cash shell’.

What do growing companies gain by undertaking a cash shell transaction?

Growing companies who are considering a listing on a stock market via a cash shell are generally looking for similar benefits to those companies that choose to list on a stock market via an IPO. These include:

• Access to an immediate tranche of funding
• A platform which enables them to raise further funding following the stock market
• An opportunity to significantly increase the value of the company
• A trading facility for the company’s shares
• Enhanced profile and credibility of the company by having a stock market listing

The certainty of cash

The certainty of cash in the cash shell removes the risk of undertaking a capital raising during the IPO process. By contrast, companies using the more traditional route have no such guarantee.

What is the value of a cash shell?

Cash shells have a market capital value which is usually based on the amount of cash they have on their balance sheet plus a premium which reflects their listed status.

In considering the value of a cash shell it’s important to review each of the following;

• The amount of cash in the shell that is immediately available
• The quality of the existing shareholder base in the cash shell
• The relevant experience of the cash shell’s board (assuming one or more board member is retained post the reverse transaction)
• If a legacy cash shell, the business sector that the cash shell operated in
• Any tax benefits that may be received from tax losses in the cash shell
• The merits of the cash shell route v traditional stock market listing

How to reverse into a cash shell

Consider your own business and in particular your growth strategy. It’s helpful to have a professionally written business plan that includes financial projections. This should demonstrate how the cash in the shell will be allocated and the potential future revenues that may result.

>See also: Why a business plan is for the lifecycle – not just for start-ups

There are always more private companies looking for cash shells than there are cash shells available, so it’s useful to work with a specialist cash shell advisor. They can put together a compelling case for your company and introduce appropriate cash shells to you.

Whilst the cash shell has a visible market value, your company does not. Therefore, one of the most important areas of the transaction will be agreeing a valuation for your company with the cash shell. As with most business transactions, some compromise may need to reached which satisfies both the cash shell and the private company. A Heads of Terms Agreement for the reverse takeover will be agreed between the cash shell company and your company paving the way for the transaction to proceed.

The cash shell company will seek approval from its shareholders for the acquisition of your company. Work will commence on preparing a re-admission document to be submitted to the stock market. Financial and legal due diligence tasks will be undertaken on your company. Once completed, a re-admission document is submitted to the relevant stock market and once approved, the transaction can be finalised and the new entity is formally listed on a stock market with relevant funding made available.

John Holland is managing director of Holland Bendelow.

Related: Cash shells on London’s markets