Reverse takeovers
Article Date: Mar 23 2005Reversing is a quick and easy way onto AIM for ambitious entrepreneurs. But how do you reverse into an old shell and how can you set up a new one to pursue acquisitions?
To expand its horizons beyond Wales, Tinopolis took control in February of the remains of a quoted investment business that had decamped to Bermuda. As a specialist producer of TV programmes in Welsh, Tinopolis knew next to nothing about what its target, Acquisitor, used to do. What mattered was that it was now a £1 million shell listed on AIM.
For Arwel Rees, managing director of the Llanelli-based TV production company, it was an opportunity to gain a listing without going through an IPO.
It was not so much the speed of the deal that appealed to him, although the transaction only took three months. What excited him was the certainty of the result.
Lower your risks
‘The risk in any IPO is that you can go a long way down the line and have to pull it,’ he says. ‘With a transaction like ours, this risk is severely diminished.’
Tinopolis is now one of the big three production companies outside the M25, producing 600 hours of programmes a year with annual sales of £8 million. ‘We are as strong as we want to be in Welsh-speaking production and can grow organically. We are now looking for acquisitions outside our realm.
Listing on AIM gives us the ability to raise new funds at the right time and allows us to be at the heart of any future consolidation in the fast-changing TV production industry.’
At first sight, it might have appeared that Tinopolis was acquiring Acquisitor. In fact, it was a reverse takeover. Under the AIM rules, this occurs when a smaller AIM entity (in this case Acquisitor) buys a target larger than itself, requiring shareholders to be consulted about any changes in the nature and control of the business.
Acquisitor was open to taking this approach, says Rees, even though its original business was far removed from TV production. ‘As long as we had a business and a strategy that was reasonable, they were happy to move forward.’
The deal was worked out on the basis of 41p a share. For their pot of £1 million, Acquisitor shareholders took ten per cent of the enlarged company, which is now listed on AIM as Tinopolis.
After the deal, all of Acquisitor’s former shareholders remained involved, giving Tinopolis an immediate institutional base. So far, the switch from Bermuda to Wales is paying off, as the share price has moved up towards 50p.
In from the cold
Reversing onto AIM in this way can be quicker and cheaper than a conventional IPO, as you avoid many exhausting and difficult regulatory hurdles. You also save time in introducing yourself to fund managers and analysts, as your cash shell will already have done this for you, although you will still have to produce a public share document.
For international companies, it can be a particularly attractive option, as they would otherwise have to present themselves to the market cold. Among the 41 reverse takeovers on AIM last year was Content Film from the US, which took control of Winchester, a listed European distributor of films. In effect, it was a back door listing with a £9 million exchange of preference shares and a private placing of £8.5 million. The name of the enlarged group is now Content Film and there has been a change in board control.
In this case, the deal was brokered by the chairman of Content Film, who also sat on Winchester’s board. For those without such contacts, corporate finance advisers usually have a list of potential targets. Or you can just make a direct approach. Shells sitting on a pile of cash accumulating interest should be open to all manner of serious investment proposals.
Details and diligence
If you are thinking of reversing into a cash shell, Linda Main at KPMG Transaction Services advises that you need to check they are as clean as possible. ‘Make sure they have genuinely disposed of businesses for cash and that there are no nasty loss-makers still lurking. You don’t want any liabilities to come back to haunt you. Using a reverse takeover to list sounds attractive, but it can at times involve just as much work as an IPO.’
Reverse takeovers, she believes, are likely to be more attractive for new cash shells that are brought onto AIM with the express purpose of making acquisitions. ‘Sometimes investors are prepared to back the individuals to run a business.
‘It is easy to produce the information for a listing because the company hasn’t done anything. All you have to say is that your intention is to make acquisitions.
‘You then have the finance in place with cash on your balance sheet, so you don’t have to negotiate with banks or do a placing. It gives you certainty that the market won’t turn against you. Once you make the acquisition, you have to produce a new admission document and produce all the information on the target company as if it was floating in its own right.’
