Playing the shell game can make (or cost) you a fortune

The new lower price climate for commodities is certainly separating the weak from the chaff on London’s junior stock market. AIM, which has traditionally been a hotbed for natural resources companies with lofty – and generally expensive – ambitions, has seen funding dry up for riskier investments. The major producers have slashed exploration budgets, banks have reined in lending, and private investors are less willing to take a punt on fundraisings, aware that they will probably lead to repeated dilution without reward.

The change in mindset from investors has forced miners and oil and gas firms to sell off assets at knockdown prices, and the listed entities, or shells, left behind – often flush with cash – are being snapped up by entrepreneurs looking for a quick and easy way to take a company public.

Taking on a shell saves on traditional listing costs, as well as the advisory fees normally doled out to brokers, lawyers and PR firms, as there is a lighter workload than with a normal IPO. That means these companies never completely disappear, but instead regenerate – often on several occasions – to extract some value for the remaining shareholders.

And there are some pretty high-profile names making a killing from taking on down-and-out shells. The property tycoon Nick Candy is a regular investor in shells that move into the tech sector. His best-known investment to date is the AIM-listed Audioboom, the audio clips platform which hosts a weekly podcast with the comedian Russell Brand.

This is a good example of the different life stages that shells go through. Audioboom started life in 2005 as the Off-Plan Fund, which provided financing to housebuilders. The property downturn triggered by the global financial meltdown in 2008 forced a change of direction. A move into the waste-to-energy sector followed, and it became Cholet Investments. The company was unable to secure a suitable acquisition in waste, so it acquired the environmental innovation group One Delta, which also flopped. Searching for new opportunities, it opted to buy Audioboo, which became Audioboom, from radio content producer UBC Media.

The restructuring specialist Rodger Sargent played a major part in the reverse takeover – where a smaller company takes over a larger one. Mr Sargent and the former Leeds United boss Chris Akers, his long-term business partner, are big players in the shell game. Their first and biggest success story was Sports Internet Group, which they sold to Sky in 2000 for £301m, at the height of the dotcom boom.

Their latest venture is Satellite Solutions Worldwide, another company that started life as a shell called Cleeve Capital. Another Nick Candy-backed venture, it has also just bought Gigaclear to target UK homes without access to fast broadband, and Sat2Way to do the same for France.

So how do they make money on shells? Mr Sargent explains: “We have a joke that we would never invest in a company that has ROI [return on investment] in it because we’re not looking at percentage returns, we’re looking at multiple returns.”

So it’s all about capital gains – so much so that neither partner takes a salary for his efforts. “I’ve always been much more interested in turning one into 10 than turning 10 into 20. It’s the same movement but the percentage return for shareholders is far greater,” Mr Sargent says.

Most of their success is based on reputation. When they swoop on a company, a horde of private investors follows. Once a company grows to a certain size – that magical 10 number – Mr Sargent tends to step down from the board and move on to different projects.

The oil tycoon David Lenigas operates in the same manner, having recently stepped down from UK Oil and Gas, better known as the operator of the “Gatwick Gusher” in Surrey. He turned the cash shell into a business worth £60m in less than two years.

The current environment for natural resources means shells are more or less the only way to take a mining or oil company public. But they are not just about start-ups needing to tap the market for funds to grow the business. They are becoming an increasingly popular tool for larger companies.

For instance, BCA Marketplace, the used car trader which owns webuyanycar.com, floated last year as Haversham Holdings and bought the BCA business a few months later for about £1.2bn. It is backed by Marywn Value Investors, another serial shell investor which helped take the Peppa Pig creator Entertainment One public.

Marwyn has also just floated Zegona, which snapped up Spain’s Telecable for €640m (£470m), and Gloo Networks, which is on the hunt for digital media assets worth up to £1bn. Marywn effectively uses shells as a way of operating a private equity model in the public arena. It stumps up the initial cash, then rounds up investors who are aware they will soon need to fork out more to fund acquisitions.

Of course not all shells are success stories. The financier Nat Rothschild created shells to bring Genel Energy and Bumi, now Asia Resource Minerals, to the main market. The former’s value has plummeted since floating amid lower oil prices and the latter spent more than $1.5bn on its 75 per cent stake in Berau Coal and a further £900m for a quarter of Bumi plc. The company was sold this year for just £135m.

And of course, there is Quindell. Rob Terry reversed the company into Mission Capital in May 2011 so he could go on the acquisition trail.

Quindell’s value surged to close to £3bn before its share price tanked amid a series of scandals, culminating in a criminal investigation by the SFO – the outcome of which is still to be decided.