No Pain No Gain: A bright future - but not for small shareholders

In the early 1990s, I wandered into one of those rousing, drink-fuelled investment presentations that were once such a major part of City life. Mine host was a company called Upton & Southern. Not for the first time, it had taken on a new lease of life and wanted the world, through private-client stockbrokers, to know about its transformation.

For a business with a long history of going nowhere, its new endeavours attracted considerable attention. It seemed there was a chance that another retail star had been born. Ever the mug, I invested a few bob in what appeared an exciting but risky venture.

U&S turned out to be a disaster. I have remained with the shares, although it became clear they were destined to join the stock market's bedraggled army of walking wounded. Now, with a price stuck in the sub-penny-dreadful category - it has almost disappeared at 0.065p a share - it would have cost me to sell. I decided the shares could be used, if needed, as a tax loss.

But any sale decision has now been made for me. Once again U&S, now sporting the rather grander title of Constellation Corporation, is showing signs of life. And in the process I - and other small shareholders - are being eliminated.

Constellation has announced its best trading performance for some years - albeit a mere £46,000 profit. And the chairman, John Bartle, underlining the change in fortune, talks about progress continuing and prospects looking brighter than for "some considerable time".

Accompanying the trading improvement is the dreaded capital reorganisation. Mind you, Constellation certainly needed to take some action. Whether it is justified in killing off so many shareholders is a moot point.

Like many penny dreadfuls it has a multitude of shareholders - around 6,000. Many hold less than 5,000 shares. And they are the casualties of what is a dramatic consolidation, with 5,000 shares being contracted into 50. Those with fewer than 5,000 are excluded. Their shares will be sold. Should their holdings realise £3 or more, they will get a cheque. Anything less, then it's the company's cash.

I suspect all small shareholders, particularly those attracted to smallcaps, have experienced the heartbreak of a company going belly-up. Their entire investment is annihilated. This time they have the experience of losing out although their investment has not gone bust; indeed, it is holding out the tantalising promise that things can only get better.

Providing the kiss of life is a company called Garner International, a headhunter created by the current chief executive, Andrew Garner. He sold to what was then U&S eight years ago.

Before then, retailing was the name of the game. I first encountered the company, then known as E Upton & Son, in the 1970s, when it ran department stores. The Southern part of the title stemmed from a failed venture into property. Years later, it emerged as an ambitious retailer and hit the takeover trail. It suffered a spectacular failure when it acquired the Reject chain of shops. There were also attempts to revitalise the department stores.

In 2000, an Asian recruitment business was acquired, the stores were sold and, not for the first time, a cash-raising exercise was undertaken. But if shareholders hoped that recruiting would allow Constellation to overcome its lacklustre record, they were mistaken. Headhunting ran into problems; more losses materialised.

The brutal consolidation is accompanied by a £132,500 placing with a director and one other and the swapping of loans, including one from Garner, into equity. The chief executive ends up with a 29.7 per cent stake. To round off this attempt to draw a veil over a disastrous past, the Constellation name is being ditched in favour of Garner.

Constellation had to bite the bullet. Its share register is an expensive nightmare. But did it have to be so ruthless to small shareholders, many of whom had supported it through thick and thin (mainly thin)? Surely, it could have given them the opportunity to increase their shareholdings through a placing, enabling them to enjoy the bright future now predicted?

Such an exercise may be more expensive. But then, shareholders cannot be blamed for the failures of successive managements. Small investors are unpopular in the City. They are easy targets and do not have the muscle to kick up a fuss. To add insult to injury, producing investments profits this tax year could be difficult. So they may have nothing to offset the Constellation loss.

cash@independent.co.uk