Flotation

Delisting: the great escape?

Jun 08 issue
 

When you’re not getting the love you need from the markets, there comes a time when you have to look elsewhere. Marc Barber reports on the increasing number of companies opting to delist.

When the Alternative Investment Market (AIM) works well, there’s no denying it can provide a sturdy platform for growth.

Take Synergy Healthcare. It floated on AIM with a £12.5 million market cap seven years ago and has evolved into an international sterilisation and infection control specialist that is set to join the Official List. For the latest year-end, its revenues increased 47.5 per cent to £225 million and the market cap is around £425 million.

Likewise, Domino’s Pizza has moved from AIM to the Official List after the company grew its turnover by 23 per cent to £296 million for the most recent year-end. The market cap is just over £345 million.

Unfortunately, the story is very different for most of the companies listed on AIM, which are valued at less than £20 million. All too often shares lack liquidity and it’s not unusual for a company to have a market cap lower than its balance sheet value. For these concerns, AIM has turned into a form of purgatory. A business can neither go forward or backwards but is paying around £250,000 a year in adviser fees for the privilege of being listed.

The credit crisis has compounded market woes. Only 34 companies joined the junior exchange in 2008, raising £537.14 million, compared to 77 companies raising over
£2.1 billion for the same period in 2007. Secondary fundraisings are way down too, with £1.5 billion raised between January and May this year, compared to £4.3 billion for the first five months of 2007.

Ken Pratt, the managing director of operations and finance for Imagesound, a supplier of in-store music, radio and TV services to shops and hotels, was part of the team who delisted the company from AIM in May. ‘AIM was failing us,’ he says. ‘We floated specifically to raise equity. The company was profitable and we wanted equity to come in and then to match that with bank debt to enable us to go forward with our expansion.’

It wasn’t happening. The defining moment came last summer: ‘We approached our nomad – this was before the banking crisis – and their appetite for raising equity was sort of there but couldn’t be guaranteed. As a result, we went and lost a very good deal – perhaps a life changing deal – because the equity couldn’t be brought in.’

Breaking free
From start to finish, it took about three months to delist from the market. To delist from the LSE, 75 per cent of shareholders have to approve the proposal (as opposed to 100 per cent when going fully private). Pratt says that 70 per cent of Imagesound’s shares were held by 15 people, so it was straightforward to know what direction the company could take.

‘It’s not a buy-out. All we have done is delist. The shares are still out on the open market; they are now traded on a match bargain basis by Brewin Dolphin over in Manchester. In fact I went and bought 16,000 shares the other day.’

The costs are not as prohibitive as might be imagined, argues Tim Stocks, head of the financial institutions and markets group at law firm Taylor Wessing. He estimates that for a company with a market cap of £50 million, the costs of going totally private would be around ten per cent of that public valuation.

The ‘take private-lite’ option is considerably cheaper than going fully private as fewer advisers are needed. ‘Without any technical bells or whistles, I think you should be able to deliver this all up, including the advisory fees, for in the region of £200,000,’ he says. ‘But you’re dropping between £80,000 to £150,000 straight to the bottom line anyway [in advisers’ fees]. You’ll get payback in the first year.’

While these costs may sound forbidding for the smallest AIM companies, Stocks suggests the biggest hurdle is gaining that crucial shareholder approval. ‘While you might not be able to provide a total exit for shareholders, you could say: “Well look, I appreciate you didn’t come into this with a view to being a shareholder in a delisted company, but here’s some money now for you to come out at this point or, if you want, you can stay in.”’

If it is possible to gain that shareholder approval, then delisting can give a CEO the chance to wrest back control of the company and reincentivise employees. For institutional investors too, delisting can present a more logical way to get a return on the capital – such as through a trade sale.

Gaining an exact picture of the number of companies leaving the market under AIM Rule 41 can be difficult, but it has increased this year. Twenty companies left the market – as opposed to moving to the Main Market or being acquired – during the first five months of 2007, compared to double that number so far in 2008.

Bull or bear?
Jamie Brooks, a fund manager for Gartmore, says he has actively supported companies in their efforts to delist. ‘The market, when it’s a bull market, is great for a buy and build strategy. But if the market dries up and the shares are so undervalued you can’t use them to make acquisitions because nobody wants the shares, or it’s not easy to issue shares to raise money, then I think you have to consider whether the market is right for you. From our side, we are encouraging people to look at the right strategy.’

For Peter Wilkinson, CEO of IT and communications specialist InTechnology, AIM had served its purpose. ‘We went to market in 2000 when we needed to raise money. We raised it and built the business, generating positive cash flow so there was no need to raise any more.’

In addition to this, the company sold its distribution arm in December 2006. ‘We were comfortable about selling that off as it paid all our debt. Now we’re sitting here debt free, with cash in the bank for a highly cash generative, profitable business,’ says the Yorkshireman, who notes that he owned 60 per cent of the company so gaining shareholder approval wasn’t difficult.

However, Wilkinson also argues that his majority shareholding proved contentious with the City, and that the company was too innovative for the conservative tastes of investors. ‘The market definitely doesn’t like a majority shareholder running the business, which I think was a major problem.’ By this, he means that even if there was demand for the shares, they would not have been traded. ‘We felt they were half the value they should’ve been and we didn’t need to raise any money as we had £11 million to £12 million in the bank’.

He continues: ‘For a number of reasons, we didn’t fit the market. It’s a difficult business to forecast so that was an issue and therefore we were already missing our numbers. We do launch some innovative bits of technology. You don’t know whether you are going to sell 10,000 or 100,000. The City doesn’t like surprises, either nice ones or nasty ones to be honest.’

Wilkinson has pedigree when it comes to building innovative companies. He sold Planet On Line to Energis for £85 million and Sports Internet to BSkyB for over £300 million. For good measure, he has made a mint from being the architect of internet service Freeserve.

His ambition doesn’t seem to have diminished with age. ‘I’m going to make a phenomenal success of InTechnology like I have with other businesses in the past,’ he says.

Imagesound’s Pratt has a similarly liberated air about him. ‘We’ve saved money on marketing, a nomad, PR and we don’t have to do a full-blown annual report. Most importantly, when we were listed, every presentation we put through our institutional share base we had to post up onto our web page courtesy of Rule 26 of AIM.

‘That meant all our competitors could see immediately who we were dealing with and what kind of margins we were making. The first thing I did when we delisted was pull certain things off the web page, although we still insist on operating to the standards of a plc.’

As for Wilkinson, he can concentrate on growing the company without any distractions. ‘We don’t have to do presentations and sit with analysts who don’t understand the business, or go around trying to persuade people to buy shares when there aren’t any to buy anyway.’

Pratt stresses there was no falling out with the City and they wouldn’t rule out taking the public route in the future. ‘I would consider listing again but we need to be a lot larger. We’re on an EBITDA [Earnings Before Income Tax Depreciation and Amortisation] of around £3.5 million and you really need to be knocking on £10 million.’

Wilkinson doesn’t rule anything out either. ‘There was no fall out and there’s nothing to say we wouldn’t go back to the City in a year or two years and refloat the business.’

For the meantime though, being away from the public glare of AIM suits both men just fine.