Sirius Meeting Result, Intu Announcement and Share Plc Results

Yesterday shareholders in Sirius Minerals (SXX) voted for the proposed scheme of arrangement. Whether the votes actually represented the considered views of shareholders as regards the Court vote is questionable as most were not on the register and hence would not have been counted as individual members. However, this was a typical example of what happens when a company runs out of money and there is the immediate threat of administration – the winner is likely to be any other company that is willing to put up the cash to mount a rescue which in this case was Anglo American. Shareholders will not lose everything in this case as is what often happens but the many private shareholders who invested after optimistic promotions of the venture will still feel disgruntled no doubt.

I did not attend the meeting as I was never a shareholder in the company, but there are good reports in the Guardian and Daily Telegraph this morning. ShareSoc who have been running a supportive campaign for Sirius investors will no doubt be publishing a report on the meeting soon.

I never invest in mining companies that are still building a mine rather than actually in production because they always tend to run out of cash and require more investment to finish the development. The folks who make money are those that step in at that point because there are often few bidders to take it forward. In the case of Sirius billions of pounds are required and the project is high risk and always has been, even if the eventual outcome could be very profitable. So you can see exactly why current investors did not have much choice and may have been wise to vote for the takeover. The only possible alternative was some support from the Government such as loan guarantees but they chose not to do so. Why should they though when the Anglo deal will protect jobs and ensure the mine is developed? At least they will be taking the risk, not the Government.

In a previous blog post I suggested that investing in property companies might prove a good defensive strategy against the coronavirus epidemic. That was on the basis that they have reasonably secure long-term leases. But property companies that are exposed to the retail sector are probably not a good bet, I should have said. This morning Intu Properties (INTU) gave an “Update on strategy to fix the balance sheet” which is a direct way of stating what needs to be done.

The share price is down 28% today at the time of writing, and that is after a long decline since 2006. It’s actually fallen by 99% since then!  The company has concluded that an equity share raise is not viable.

The business reports some positive news but in essence the company has too high debts with a debt to asset ratio of 68% after the latest property revaluations downwards. It has £190 million of borrowings due for repayment in the next year and other liabilities of £93 million also due. The company is to “broaden its conversations with stakeholders” but it looks to be a grim outlook for ordinary shareholders. A debt for equity swap is one possibility which often dilutes previous shareholders out of sight.

Share Plc (SHRE) who run The Share Centre announced their preliminary results this morning. You can see why the company recently agreed a takeover bid. Revenue was up 7% but losses rose to £133,000. Not that this is a great amount but it shows how competitive the stockbroking sector is currently with new entrants now offering free share trading. Consolidation is clearly the name of the game so as to increase scale and therefore it’s not surprising that an offer was accepted.

Stockbrokers now have high fixed costs due to the costs of developing and maintaining their IT systems and increased regulations and compliance have also added more costs. With few barriers to entry and not much market differentiation the future for smaller players does not look good.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Share Centre Takeover and Holding Unlisted Shares

This morning it was announced that the Share Centre (Share Plc: SHRE) were recommending a takeover bid from Antler Holdco, the holding company of Interactive Investor and the ii Group. This has two very negative consequences for private investors:

  1. The Share Centre is one of the favourite platforms for many private investors with an efficient and low-cost trading service and also a simple system to enable one to vote the shares you hold in their nominee accounts. There may well be some rationalistion of systems so the downside is that Share Centre clients may have to learn a new software platform.
  1. The other negative is for holders of Share Plc shares, which many clients of the Share Centre probably are because there is a discount on trading costs if you held shares. The share price has risen this morning, perhaps on the hope of a counter-bid, but the terms of the offer appear very unattractive. The offer is for 4.1 pence in cash, but the equivalent of 90% of the offer value is in shares in ii (that’s assuming you accept their valuation). The ii business is an unlisted company incorporated in Guernsey and is majority owned by J.C.Flowers IV L.P.
  1. The new ii shares to be issued as part of the offer will be definitely unlisted and hence holders of Share Plc shares will have no idea of when or how they will be able to sell them and they will lack almost all protection from being minority shareholders. Any investor who understands the legal position of holding unlisted securities with no shareholder agreement in place will realise this is a very invidious position to be in and I suggest shareholders will need to seriously consider whether they should sell the Share Plc shares in the market while they can. If in doubt take legal or other professional advice on the matter!
  1. Could the takeover bid be defeated? That seems very unlikely as they already have 70% of acceptances via irrevocable undertakings, including the holdings of Gavin Oldham and his family who was the founder. Winning a required 75% vote of shareholders (by number of shareholders) to defeat it at the Court Meeting (this is a Scheme of Arrangement proposal) would be very tricky as with many shareholders in nominee accounts they might only be counted as holding the “one share” held by the nominee operator as a pooled account. And that share would be in the power of the Share Centre and its management. Many people hate takeover bids via schemes of arrangement as they undermine the normal democratic process that applies to more normal takeovers.

Just to give readers some understanding of the problem of holding unlisted shares, I received some bad news this morning. I have been holding some shares in an unlisted company for 20 years. I was one of the founder investors as part of an EIS scheme and although I have sold some of the shares to other investors over the years I hoped to finally get out as it has been somewhat of a rocky road. That looked like it might happen after the business received an offer a couple of months ago but the bad news today is that the deal of off.

I’ll have to live in hope a bit longer it seems.

P.S. The offer document actually says that the Share Centre clients will be migrated to the Interactive Investor Services platform. Let us hope it goes smoothly.

Note that some investors might have held Share Plc shares as clients of the company so that they could easily monitor the financial position of their broker. That is somewhat critical because of the danger of holding shares in any broker that gets into financial difficulties where your shares are held in nominee accounts. That will no longer be easily possible after this takeover.

Note also that  I am advised that at the court meeting for a Scheme of Arrangement 75% of SHARES need to be voted in favour for the scheme for it to pass AND a simple majority of SHAREHOLDERS.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Share Plc Offer and Improving Corporate Reporting

There was a surprise announcement this morning of a possible offer for Share Plc (SHRE) who run the Share Centre. That is a very popular platform with private investors because it is low cost and administratively efficient but also because it is one of the few investment platforms that makes it easy to vote your shares held in nominee accounts such as ISAs. Takeovers of investment platforms are never popular with customers because it means having to learn one’s way around a new web/IT system and charges may also change. More consolidation of platforms will also reduce competition in this sector.

The offer is from Interactive Investor but it looks like they may have some difficulty even if founder Gavin Oldham supports it. He, his family and associated trusts held 69% of the share in December 2018 but there was also 18% held by staff and customers.

Yesterday I attended a roundtable at the Financial Reporting Council (FRC) to discuss the “Future of Corporate Reporting”. It was mainly attended by experienced private investors who I won’t name individually. But there was a consensus on many of the issues discussed. I will highlight some of the interesting points that arose:

  • There was widespread concern about the size of Annual Reports and the excessive “padding” and use of “boiler-plate” content. It was clear that most of the investors attending skipped large sections of most Annual Reports.
  • One even went so far to say that he always went to the accounts filed by a company at Companies House which often differed from that in the Annual Report and also contained more information. This is surely an issue that should be looked at by the FRC. It is surely not acceptable that there should be any difference.
  • There was a general view that commentary by the Chairman or CEO tended to be over-optimistic and that risk reporting was full of platitudes while ignoring the really big risks that a company faced. The Macando oil-well disaster at BP and the recent problems at Boeing with the 787Max were mentioned as examples.
  • Other particular issues raised were the valuation of intangibles on the balance sheet, the long-standing complaint that IFRS standards were inconsistent with Company Law (but the FRC has limited input to IFRS standards), the lack of disclosure of long-term debt terms, and the failure to disclose banking covenants.
  • There were also complaints about private investors being excluded from receiving some information disclosed to analysts by companies, and refusal for attendance at company presentation events. The lack of an equivalent rule to that in the USA (Regulation FD on Fair Disclosure) was a major problem.
  • As regards excessive size of Annual Reports, the FRC staff suggested that splitting up the Annual Report into sections might assist although I said that did not really solve the problem of excessive size and irrelevant content.
  • Reporting of ESG factors was discussed but this seemed to be a difficult area due to the lack of standards and the ability of companies to only present positive information.
  • The FRC does undertake quality reviews on large company audits and perhaps a scoring system for Annual Reports could be introduced to raise standards. But it is all too easy at present for company directors to throw masses of superfluous information into the Annual Report to distract investors from the really important facts. I suggested that there be a word or page limit on sections of the Annual Report to ensure that only key information was communicated. For example, do we really need 30+ pages of Remuneration Report as we are now getting at some companies? Where companies wished to provide more detailed information, that could perhaps be given on their web site.

In summary this was a useful meeting to raise the concerns of experienced and knowledgeable investors. Let us hope that the FRC will take up some of these issues.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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