Glenwick and the dangers of Cash Shells. Will she return?

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Glenwick had its shares suspended this week from AIM for failing to do a reverse takeover within the deadlines permitted by AIM. The regulations state that an AIM investment company must do an acquisition within 12 months of listing, i.e. 5th September 2016. This means Glenwick now has 6 months, i.e. until 5th March 2017 to complete an acquisition or get booted off AIM, if that happened it would mean a costly readmission or perhaps the more likely scenario, never to see daylight again.

What’s the story with Glenwick?

Glenwick was a popular stock on social media, heavily promoted by various traders on twitter in particular.  This promotion contributed its first suspension on 23rd May 2016, this was after news was leaked to many of the same traders of a potential acquisition imminent in Turkey. At this point the market cap reached a lofty £3.75m on a share price of 0.168p (i’ll go on to explain why this was so grossly overvalued later). But how did this news get leaked and who leaked it? Was this news deliberately leaked to increase the market capitalisation, hence making the inevitable equity raise required to complete the acquisition easier?

One of the many tweets on the day. ‘Twitter user’ (i’ll save their blushes)

Anyhow this leak, whether orchestrated or otherwise, it certainly backfired. The share returned from suspension on 22nd June after the acquisition failed and the share price quickly retraced, the price fell 64% to 0.06p on the first day with those suckered in to buying on the ‘leak’ being slaughtered. Since then the price has hovered around 0.06p as investors realised there was no chance of completing an acquisition before 5th September. The company was finally suspended at 0.065p, giving a market cap of £1.43m and locking in investors for up to 6 months.

Why are cash shells such a dangerous game? How should I value a cash shell?

In my view an AIM cash shell at fair value is worth £0.5m for having a listed vehicle + cash x 70%. The 30% discount on cash is due to some money being taken up on non value creating activities, i.e. plc costs and advisory fees for acquisitions. Right before the initial suspension on news of an acquisition in May, Glenwick had £1.1m of cash, so using my method this would give a valuation of £1.2m. This compared to a market capitalisation of £3.75m, a 300% premium to where I think it should have been trading.

A cash shell is one of the most speculative investments you can possibly make, you have no asset knowledge, you are simply putting all your faith in management to make a value enhancing deal for shareholders. If management have a history of value creation then you can add a premium to my fair value method above, maybe 20%-30% is acceptable. Glenwick though was trading at more than 300% of its fair value. How many managers have a history of creating this sort of value overnight? I don’t think I would even pay a 300% premium for a board comprising of Warren Buffet, Jim Mellon and Steve Jobs (RIP).

So will we see Glenwick Return? What deal will be done?

Glenwick appointed a couple of heavy hitters to the board shortly before suspension. Jaap Poll is an experienced oil and gas professional who has held CEO positions in small/medium exploration companies. Amanda Van Dyke was also appointed, Amanda is a well known Asset Manager in the city and no doubt has the connections which will come in useful.

(Slightly off topic but I have no idea how the corporate governance is working here, all the directors are non executives. Non executives are meant to be a check on the executives, but there are no executives? I’m also unsure how Amanda can act as a director at all, she works for Peterhouse who are one of the companies advisors in the capacity as broker. Surely Amanda is conflicted? I guess it is AIM though, so none of this really matters!)

Anyway, returning to the topic. I do believe we will see a Glenwick return, but time is running against them, the disposing counterparty to the deal will know that Glenwick is time constrained and thus they will have the upper hand. There is a big risk that the counterparty will simply push the deal towards the deadline to get the price they want, which could result in a poor value deal for Glenwick shareholders.

SELL – Target on return 0.055p

Obviously you can’t sell, as it’s suspended but to place a bet on where the price will come back at. At the price of suspension Glenwick was priced at a 20% premium to fair value, as mentioned I don’t expect a great deal here and at this end of the market I expect a small discount required to get capital raised on top. This explains my rationale but I hope for those locked in here that I am wrong. I doubly hope for those same investors that she comes back at all.