The rise of cash shells

New research from GrowthBusiness shows that the number of UK cash shells is climbing. We speak to new entrants to the market and those that have recently closed deals to find out what’s driving shells’ increasing popularity.

The amount of money available in cash shells is swelling, offering burgeoning businesses the platform to explore further growth on the capital markets.

Research from GrowthBusiness shows that since our cash shells study began back in 2004, the amount of cash in London-listed shells has tripled from £77.3 million to £237.9 million.

This rise in idle funds comes despite regulatory changes announced back in 2006 which made life increasingly difficult for inactive shells to remain listed. Amendments to AIM rules now mean that cash shells must raise at least £3 million and have to make an acquisition within 18 months.

Our Cash Shells Directory 2012 reveals that there are now 64 shells holding £237.9 million quoted on AIM, PLUS and the Main Market, up from 59 worth £229.5 million in last year’s report.

While this is down on the amount posted in 2010 when £241.1 million was accounted for, a large slice of that pie can be put down to the £102.8 million held by one company, Sherborne Investors.

AIM is now home to 34 shells, with £229.8 million in the coffers, and an average of £6.8 million in the bank per shell. Shells on PLUS rose from 24 to 27 but saw holdings drop from £7.9 million to £7.5 million.

On the Main Market, cash shell activity has not matched that of AIM and PLUS and only three now remain holding a collective £600,000.

Marcus Stuttard, head of AIM, says that one of the key reasons that the junior market implemented the 2006 regulations was to give shareholders more of a voice.

‘Having a requirement in for companies to publish and seek shareholder consent for the investing strategy is an example of investors being able to have a voice and make sure that companies aren’t just sitting there as shells dormant on the market,’ he explains.

The package of changes that has been brought in during the lead up to, and aftermath of, the economic crisis, means that cash shells have had to raise their game over the past six years.

‘Generally we have had fewer dormant companies of cash shells on the market,’ Stuttard says.

‘Having said that, shells are a very legitimate way of a company either coming to the market to execute something like a buy-and-build strategy, or give shareholders and management teams some flexibility, so that if a business strategy isn’t going in the right direction, it can turn itself into an investing company rather than just be forced off the market.’

New beginnings

There are 15 new cash shells included in this year’s report, eight on AIM and seven on PLUS.

One of the AIM debutants is industry veteran Algy Cluff’s new North Sea-focused shell Cluff Natural Resources, which arrived on the junior market back in May and raised £3.75 million on admission.

Resources entrepreneur Cluff has four decades of experience in the natural resources market and has headed up ventures investing in everything from oil to gold.

In April Cluff stepped away from Cluff Gold, a business he formed in 2007. His most recent fundraising, which saw Cluff Natural Resources achieve its fundraising target, was one which he says was done in an ‘incredibly difficult’ time.

However, fortunately for Cluff and his new natural resources vehicle the process was heavily oversubscribed and could have raised two or three times money.

Cluff says, ‘We decided not to [raise more money] as we didn’t need it need and didn’t want to be too heavily diluted.’

One element of the process which Cluff says has changed drastically is the expense associated with listing on AIM. The £400,000 it cost Cluff Natural Resources to join the market is described by Cluff as ‘staggering’.

In an interesting display of commitment to get operations moving quickly, Cluff is prepared to take a pay cut if a purchase is not made within six months. In this situation, his £120,000 a year salary would fall to £80,000. Conversely, if he pulls off a deal, his annual pay will rise to £200,000.

The cash shell announced on admission that it intended to announce a corporate deal in the North Sea in the autumn, and Cluff reveals that the timetable is still very much on track.

Time for change

The structure of cash shells means that, as Stuttard highlights, management teams and shareholders can decide to sell off businesses not performing to a desired standard and branch off in a different direction.

Rubicon Diversified Investments began life as a cash shell with a software focus but found that its product was heavily hit by the recession.

Richard Blakesley, non-executive director at Rubicon, says when the venture came to AIM in 2006 and raised a small amount of money it grew well initially. However, in selling software to the loan market it got ‘heavily credit crunched’, and the board took the decision to sell off the operating business.

Blakesley adds, ‘My fellow director Robert Burnham and I set about looking for an interesting deal which could put some value back into our shareholder’s pockets.’

In a drastic change of tack Rubicon has now entered the aviation market and has linked up with airline entrepreneur and EasyJet founder Stelios Haji-Ioannou to launch a new budget African airline.

Rubicon began by signing an agreement to license easyGroup’s Fastjet brand, then followed it up by raising over £9 million in December 2011 to allow it to acquire African airline Fly540 from Lonrho.

Haji-Iouannou has now taken a 5 per cent stake and provided six months of consultancy services as Rubicon produced a feasibility study for launching a budget African airline.

Edward Winter, who joined as CEO earlier in July, says that with the help of Haji-Iouannou in the aviation field and majority shareholder Lonrho’s knowledge of Africa, the ‘opportunity is huge’. The business is targeting Ghana, Kenya, Tanzania and Angola.

As far as AIM providing the aviation venture the legs its needs to succeed, Blakesley is honest in his views. ‘As a personal view, AIM goes through cycles. At its best it is a little over-exuberant and at its worst it is down in the dumps.

‘We as Rubicon have seen over the years what can potentially happen with a small business which isn’t attracting much investor attention. The largest companies on AIM do absolutely fine, there is an ongoing question about smaller companies on AIM.’

However, a smaller company on AIM is not what Rubicon aims to be, with Winter saying that if it can tap into a 3 per cent share of the 100 million odd population that it is targeting then it has the potential to be a billion dollar business.

The stories of Cluff and Rubicon illustrate that AIM’s cash shells are a very diverse bunch, but what both have in common is their determination to move forward and do a deal. While there are still shells on the market that are dormant in every sense of the word, there are plenty that offer a gateway to a new world of opportunity.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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Cash shells