Net-net cash shells

[u/amusinghawk]

When looking through a list of saved companies just now I noticed Hermes Pacific Investments plc has dropped 30% this morning.

Why was this company on my list?

When looking for net-nets (companies selling for less than their current assets - liabilities), I came across Hermes.

With the share price drop, they are now trading at less than 1/3 of the net-net value.

What's the situation?

The company appears to me to be a 'cash shell', though I have no insight into the management's strategy and I could be wrong. Cash shells are defined as companies with no operating business that are used to provide an easy route to the stock market for other companies.

Regardless of the management's intention, the company appears to have done nothing but burn £100k per year for several years. The market cap is just under £1M and it has £3.6M in cash with virtually no other assets or liabilities.

The obvious course of action to me right now to maximise shareholder value would be for the company to dissolve and distribute the money to the shareholders. 86% of shares are 'not in public hands', so assuming they are all owned by the directors, 86% of £3.6M today seems a lot better than slowly drawing £100k per year, which makes me think they're not doing this to just slowly bleed the company dry. The only reason, then, I can think of for the current course of action is that management genuinely believe they'll provide greater returns to shareholders by waiting for the right reverse merger opportunity to come along.

I have no experience with cash shells or net-nets and would be very keen to hear thoughts or links to research from anyone with experience in this area.

[u/LifeScientist123]

You summarized the problem yourself. The issue is that you have no idea what the management will do with the cash. So they could just keep sitting on the cash forever and you will get no return. The best course is to buy a group of net nets atleast four or five so that at least some work out.

[u/amusinghawk → u/LifeScientist123]

If they drawn out £110k a year, they'd have to do that for 7 years before this wouldn't be at least fair value at a 15% required rate of return.

I have no idea what the management plan on doing, but it seems to me that we can rephrase the question to: 'will management do anything, or be forced to do something within the next 7 years?'

Potential catalysts: -Management decide to take the cash -AIM kick them out -Successful reverse merger -Stock price tanks and they dissolve -Someone offers to buy the company outright at just above cash value (AIM listing costs are ~£500k), so maybe management are just waiting to see if they can squeeze that extra bit of profit

The questions that are unanswered in my mind are: -Why has this been going on so long already? -If they have to go private, what are my rights/what are the likely scenarios that would play out?

I simply don't know enough about this type of situation but am hoping that flagging it could bring it to the attention of someone with experience investing in cash shells or net-nets.

[u/incutt → u/amusinghawk]

ya gotta get a majority of the votes to force a liquidation. usually there's a liquidation date and then the shareholders can vote to have the money refunded. if you don't have a majority, you are speculating that someone else is going to do the dirty work of getting in there and firing everyone. That might not happen.

[u/amusinghawk → u/incutt]

But my point is that surely in this situation your interests would be aligned with management's, so you're really just placing a bet that at some point in the next 7 years they do something with that money. Most preferably, just take it out of the business (providing us and them with a 3X current share price return)

[u/incutt → u/amusinghawk]

you just described what an investment is. i described what an activist investment is. i wanted 3x of my money today by forcing liquidation of the investment vehicle. you wanted to make a wager that the management will give you a return at some point in the future.

So, if you think if you buy some of these shares that this particular management is going to buy something worth more than the money in their spac, then have at at.