How to float on AIM
Article Date: Sep 14 2006
Timing and pricing
Naturally, any company looking to float will want to do so at the best time; when business is going well but an injection of cash could take it further. Unfortunately, the stock market has its own momentum, driven by interest rates, overall corporate trends, the health and mood of key investors and external factors, such as oil prices or war scares. In a raging bull market, indifferent, badly-run or even dishonest companies can sometimes raise millions. In a bear market, thoroughly sound, well-run businesses can fail to raise a penny.
You may have to accept a distinctly lower valuation than you think fair, or postpone your float plans for another time, or even drop the idea and seek another route. Most advisers agree you should not try to take the last penny out of the market. If you leave scope for your shares to rise after your float, the market will like you. That could make it easier to raise money later on and to fight off unwelcome takeover bids. Raising money privately before you float, at a big discount to your eventual float price, is becoming increasingly popular. You get the money and the backers hope for a quick ‘uplift’ in value — but it can backfire.
Warr says ImmuPharma received pre-float backing from hedge fund managers Crispin Odey and Rory Powe. He says many pre-float funders, ‘want an annualised return of 50 per cent-plus’, but warns, ‘you can upset investors supporting the float if you give too much away to the pre-floaters’ — especially if they don’t agree not to sell their shares for a minimum period.
Recently, Lonrho Africa floated uranium hopeful Brinkley Mining, raising £16 million at 50p. One institutional investor had come in before the float at 20p and promptly sold out, leaving the shares depressed and Brinkley friendless.
Costs
AIM float costs can vary. Those who have done it say an overall six to seven per cent of what you raise is a normal range, with the broker’s commission taking some four to five per cent or more. ImmuPharma’s Warr says a company valued at £30 million will probably have to pay upwards of £100,000 for accountants, the same for lawyers and rather more for Nomads. With public relations and other incidentals added, this produces a fixed cost of £400,000.
Some advisers will agree to take some — never all — of their payment as a ‘success’ fee if the float succeeds. Some will take all or part of their fee in shares. But costs do not end with listing. Once on AIM, Warr says you will probably find yourself paying £30,000 a year for lawyers, accountants, PR advisers and the rest combined, and between £20,000 and £40,000 each for your Nomad and broker. Ged Mason sums up his feelings on the subject of floating: ‘It was definitely worthwhile but I’m not sure I’d like to do it again.’
How to take the cash shell route
One way of floating on AIM is to find a ‘shell’. This is a company already quoted on the market that either has no continuing business or assets, apart from some remaining cash, or has been specially created as a quoted vehicle to pursue investment opportunities.
The shell company has what you want, an AIM quote, and, in some cases, cash as well. The shell route can thus save time and, in some cases, give you access to a new group of investors.
The standard procedure in this instance is for the shell company to issue shares to your company in what is formally defined as a ‘reverse takeover’, giving your company control and, if the AIM authorities approve, a share listing. Usually, the old shareholders of the shell company would be left with a small minority holding.
You would then change the name of the company, either to that of your original company or another one.
Floating through a company that has turned itself into a cash shell – after losing its way in some other business – requires careful checking first. Some can prove less ‘clean’ than you hoped and saddle you with disgruntled minority shareholders, potential creditors, joint venture partners, customers and other unwanted baggage.
Last year, AIM tightened the rules on shells, or ‘investment companies’, many of which had been floated by entrepreneurial figures such as Stephen Dean, Leo Knifton and Nicholas Greenstone. Under the new regime, any shell that joined AIM before April 2005 and raised less than £3 million had two choices.
By 1 April this year, it either had to make a reverse takeover that qualified as such under AIM rules or ‘satisfy’ the AIM authorities that it had otherwise implemented its stated investing strategy. As a result, 38 out of 120 quoted shells exited from AIM, some later returned after doing deals and 87 are now quoted.
ImmuPharma floated on AIM this way in January, when General Industries, created by entrepreneur Richard Wollenberg as a cash shell to acquire a cash-hungry business poised to float, bought it for shares.
That deal gave ImmuPharma’s owners 86.7 per cent of General Industries. It was accompanied by a £2 million share placing.
It is not always plain sailing. Gerry Orbell, who listed Sound Oil as a cash shell looking for exploration deals, recalls, ‘We had to go through the diligence and all the rest of it to get listed as a financial company, as cash shells are.
‘Then, when we found a deal, in Indonesia and Bangladesh, we had to move to the resources list and go through the whole process all over again, with a competent person’s report on the projects involved. I had to spend 40 per cent of my time with financial advisers.
Business XL present an afternoon seminar "How to float on AIM" where industry experts guide you on the route to a successful and fruitful flotation. For details of dates and locations, click here.
