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Crisis in the credit markets, risk aversion among investors, and a tough trading environment add up to challenging times for AIM-quoted companies and their advisers. GrowthBusiness looks behind the numbers.

Few would deny that AIM is battling an almost impossible fundraising climate. Just 70 new companies joined the market last year, less than a third of those that listed in 2007. In the first two months of this year, one company has joined. Meanwhile, more companies than ever are delisting, resulting in the first annual net loss of companies on the market in its 14-year history.

But that doesn’t tell the full story. Of the 227 companies which had their shares delisted from AIM in 2008, the biggest single component – with 69 companies in all – did so because they merged with each other or were acquired. When you factor in reverse takeovers (in which the vendor usually ends up with a controlling stake in the listed acquirer), the total is 79. While not all of these deals were lucrative for exiting shareholders, to equate delisting with failure is clearly simplistic.

‘It is a fantastic time for acquisitions,’ says Alex Snow, CEO of financial services group and AIM adviser Evolution. ‘There are companies [on AIM] on low single-digit profit-earnings multiples, with enterprise values of about zero.

‘You could be buying at a 50 or 60 per cent discount to the cost of setting the thing up, and if that’s not interesting I don’t know what is.’

Bargain buys
Takeovers came in many shapes and sizes. In one of the larger deals in AIM’s history, Italian oil giant ENI bought First Calgary Petroleum, a Canadian resources group with abundant natural gas reserves in Algeria, for the equivalent of £494 million, a near-100 per cent premium over the shares’ previous troughs though only a fraction of the highs reached during the peak of the resources boom in 2005.

On a more modest scale, Cambridge-based CeNes Pharmaceuticals, which had lost money and stock market favour developing a post-operative pain drug, welcomed a bid worth £11 million from Paion, a German specialist in therapeutic treatments. Paion offered paper so that CeNes shareholders would finish with shares quoted on Frankfurt’s stock exchange.

There are sadder stories behind other delistings. Among the 44 AIM companies that left the market last year because of insolvency or liquidation is Myhome International, the once high-flying home services and motor franchising group. Steered by entrepreneurial chief executive Russell O’Connell, the company had breached some banking covenants and went into administration in September, blaming the consumer slowdown for its woes.

Going private
Another 33 companies delisted at their own request, many of them to cut costs. Kitchen distributor Waterline, for example, decided the £200,000-a-year price tag for maintaining its listing was no longer justifiable after its share price dived 95 per cent since its initial public offering (IPO) in 2005. The company’s CEO, Mike Lawrence, feels the experience of being listed on AIM was a waste of time and money. ‘We should never have [joined the market] in the first place but we were talked into it by some of the second-hand car dealers who run the City,’ he says, adding that the company’s final share price of close to 3p disguised a net asset value for the company of nearer 50p.

Lawrence adds that all the shareholders in Waterline as a public entity have remained with the company now it has left AIM. They include two institutions, Rathbone and Slaters, who hold 21 per cent of Waterline between them and have each appointed a mentor to assist Lawrence with strategy in the absence of non-executive directors.

Tim Stocks, a partner at city law firm Taylor Wessing, believes there are many AIM companies in a similar position to Waterline and that the real spike in the number of delistings is yet to come.

‘The thing that is holding the market back is management teams wanting to get more clarity on next year’s numbers,’ he states. ‘Once they get more certain about the prospects of their businesses then the level of [voluntary] delistings will pick up.’

Expensive business
For truly cash-strapped companies, the irony is that it can be hard to find the money to delist. ‘What seems to be happening is that a lot of the smaller companies are just cancelling their nominated adviser, which naturally leads to a delisting,’ says Stocks. ‘That’s not totally satisfactory but it’s a big trend.’

In other cases, it’s the nomads who ditch their clients. ‘That’s where a nomad might have fallen out with a company or feel like it hasn’t been given a full picture of what’s going on,’ says Stocks.

Lawrence says delisting Waterline cost £19,000 including legal and broker fees (in contrast to the £500,000 he spent on taking the company public). Stocks quotes a typical cost of £100,000 for what he calls a ‘take private-lite’ arrangement, while going fully private can cost much more than that. If you can’t get 75 per cent of your shareholder base (by value) to agree to the delisting, you’ll be faced with a costly and complicated battle.

Downward trend
Unlike the uptick in delistings, the fall in new issues last year continues a trend that is already established. The number of new issues peaked in 2005, and the value of funds raised by those companies reached its apex in 2006. Bringing new companies to market in the current climate is not a job for the faint-hearted.

‘There are a couple of [prospective] AIM IPOs we’ve been looking at over the past couple of months,’ says Mark Taylor, a partner at AIM solicitor Dorsey & Whitney. ‘One of them got quite a long way down the line and then it didn’t happen.’ He adds that there is a ‘pipeline of good-quality applicants’, but ‘it just isn’t their time’.

When it comes to secondary fundraisings, the total money raised has also fallen, but by less than that secured by new issues. In the year to January 2009 established AIM companies raised £164.2 million, half the figure for the year before. Some of this is accounted for by existing investors bailing companies out, Taylor states – ‘people who believe the business case is strong and are prepared to put in some capital just to preserve their position’.

Awkward age
While it has seen remarkable spurts of growth since its launch in 1995, AIM is entering its difficult teenage years. Waterline’s Lawrence says that unfavourable tax changes and an increasing regulatory burden mean that ‘a lot of the attractions have gone’ from being listed on the market. Taylor’s view is that the market has, in a sense, been a victim of its own undoubted success over the years.

‘AIM was designed for growth companies, but as it has boomed as the size of company coming to the market has got larger and larger,’ he says. ‘Hopefully, it will return to becoming a market for good quality companies that are looking for growth capital.’

Alex Snow of Evolution reckons the problem lies not so much with AIM as with the global economy. ‘This is a liquidity and a capital phenomenon and AIM is smack bang in the middle of it. If you walk round Singapore you won’t find anyone wanting to put money in early-stage growth opportunities.’

For Snow, AIM ‘is not going away – it’s too established’ but ‘it will have to morph and adapt in order to become a more reasonable platform within today’s environment’.

Dorsey & Whitney provides legal advice to clients in the UK, US, Asia, Canada and Europe and regularly advises companies and banks on IPOs and secondary issues.