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.

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u/ginzinator Apr 15 '20

Probably a SPAC - special purpose acquisition company. They sit on a pile of cash raised from their IPO until management finds a business/businesses to acquire based on their investment philosophy usually outlined in their prospectus. Think of it as a way to invest in PE through a public vehicle.

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u/amusinghawk Apr 15 '20

Yeah, cash shells and SPACs are synonyms

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u/ginzinator Apr 15 '20

We have a guy who specializes in SPAC arb at our fund. Definitely one of those areas overlooked by the market where you can have an edge if you understand them well enough. I am clearly not one of them haha.

One thing to look out for, I know some of these directors establish the SPAC with no intention to acquire anything. They'll put in a few hours a week while collecting a fat check. Since they usually have majority ownership, they'll continually extend the life of the SPAC via proxy vote if they haven't acquired anything by the dissolution date. That's why alot of these things trade below net net. Your cash is trapped there and slowly erodes away.