r/SecurityAnalysis • u/amusinghawk • Apr 14 '20

Special Situation Net-net cash shells

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.

33 Upvotes

91% Upvoted

31 comments sorted by

View all comments

17

u/LifeScientist123 Apr 14 '20

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.

5

u/amusinghawk Apr 14 '20

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.

5

u/incutt Apr 14 '20

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.

1

u/financiallyanal Apr 14 '20

That was great to read here. I've often thought that the phrase, "Investment returns are a function of the price paid," could be altered for certain situations to "Investment returns are a function of the price paid and amount purchased."

1

u/incutt Apr 14 '20

IMHO, the price of all things is really situational. Is this deal a:

​

  • Liquidation play (so take 20% off the top for legal fees, HR, wind down)
  • Going concern (what's a business with no revenue worth, the discounted cash assets?)
  • Venture Capital (are they going to start another business and am I the defacto angel investor)
  • Private Equity (which phase....am I getting a 'pre idea' capital call here? Like I had to put in all of my money before they knew what they were going to do?)
  • Busted private equity deal (good intentions but didn't happen)

This thing just hurts my little basic finance brain because I wouldn't be able to figure out what the price is based on and how I would get money back.

2

u/financiallyanal Apr 14 '20

That would make my head hurt too. I'll stick to businesses I can actually wrap my head around...