Value stripping at the finance auctions – SPK (MarketClusters)

In 2007, NewMedia SPARK (“SPARK”) made the following investee update:

“NewMedia Spark plc (SPARK), is pleased to announce an investment in MarketClusters Limited, a developer of the ‘StrategyWire’ intelligence platform enabling corporate and financial clients to accurately filter – and put into context – expert opinions created in Blogs or News feeds.  SPARK has joined other investors including a well-known group of individuals active in both technology investment and managing online information businesses. Jay Patel, a director of SPARK, will be joining the MarketClusters’ board.”

An extract from the same 2007 announcement describing the business of MarketClusters  goes:

“Founded by a former technology equities analyst with a US investment bank, MarketClusters provides customized market intelligence solutions for major corporate, SME, investment banking, venture capital and other advisory clients.

Our flagship product, StrategyWire, was launched in April 2006 and is a fully hosted intelligence solution, initially focused on the complex and converging Technology, Media and Telecoms (TMT) sectors.”

And a concluding paragraph on NewMedia SPARK from the same announcement reads:

“NewMedia SPARK is a quoted venture capital organisation based in central London focused on early stage investments in the technology, media and telecoms sectors. SPARK’s portfolio has a particular emphasis on digital media, software applications, technology and communications. As an investor, SPARK expects to add significant value to its investments through active support and strategic direction. SPARK is listed on London’s Alternative Investment Market.”

The above clips set the scene for the discussion of MarketClusters, a start-up company in which Spark Ventures Plc (SPK), on behalf of it’s AIM investors, acquired a 7% stake in 2006/07 for £351k, swiftly topping this up in 2007/08 by £299k to £650K and then by another £100k in 2008/09 to give a total investment of £750k.  In SPK’s 2008/09 annual report, there it was again, another WTF moment! After, investing £100k during the year, the investment in MarketClusters was devalued by £400k thereby reducing its 31st March 2009 year end valuation to £350k to face relegation the following reporting season to the infamous bargain basement of: Other investments (no single investment value greater than £500,000).  Worse still, there wasn’t even a courtesy comment to SPK’s shareholders about the reason for devaluating their £750k investment.

Being demoted to SPK’s rattle bag of investee companies labelled as ‘Others’ means a lack of transparency for shareholders on what these companies are actually worth.  Are they still worth the same amount that they departed the league table with or are they currently impaired and worthless?  These are questions that the management of SPK and their investment manager Spark Venture Management Holdings may choose to ignore due to the assumed immateriality of these lepers.  Employing a bit of lateral thinking, it may be a clever strategy to follow the SPK’s venture capitalist – the smart guy – representing the investment on the investee’s board of directors.  This may be an apt time to restate that Spark Ventures Plc is targeting 31st March 2015 to achieve an orderly realisation of its assets.  Over the last decade, SPK’s shareholders have lost pawns, knights and bishops and some have even thrown in the towel.  Only two possible scenarios remain: Checkmate for the shareholders or a community chest draw for the smart guys.  Therefore, a quick review of Mr Patel’s form, director of AIM quoted Spark  Ventures Plc until 2013 (shortly before exiting SPK’s largest remaining asset IMImobile by IPO) and director of unlisted Spark Venture Management Holdings, may give us an insight into the true value of MarketClusters.  An extract from SPK’s 2008/09 annual report tells us that:

“Jayesh Patel, Executive Director. Jay was part of the founding team at  SPARK and is currently responsible for  the investments in IMImobile, Skinkers, Unanimis, Complinet, MarketClusters, OpenX and gamblingcompliance. He was previously involved in Kobalt, Firebox, elata and mblox and has led a number of past exits. He was previously a Director of NewMedia Investors and held executive positions at UBS Warburg and BSkyB. He qualified as a Chartered Accountant with KPMG and holds degrees from INSEAD and the London School of Economics. Appointed to the Board on  30 January 2004.”

Smart guy! Now let’s turn our attention to the governance of Spark Ventures Plc’s shareholders funds by doing a quick reconnaissance of MarketClusters investment timeline in the SPK’s stable, key performance indicators, directors of the company, other insiders and major shareholders.

Period | % Stake | Last Year | Reval | Addition | Disposal | This Year
2006/07 | 7% | nil | nil | £351k [A] | nil | £351K
2007/08 | 11% | £351k | nil | £299k [A] | nil | £650k
2008/09 | 11% | £650k | (£400k) [R] | £100k [A] | nil | £350k
2009/10 | 11% | reported as ‘Other’ value <= £500
2010/11 | 11% | reported as ‘Other’ value <= £500
2011/12 | 11% | reported as ‘Other’ value <= £500
2012/13 | 11% | reported as ‘Other’ value <= £500
2013/14* | 11% | reported as ‘Other’ value <= £500

*2013/14 interim report as at 30th September 2013.

MarketClusters Limited takes advantage of reporting exemptions afforded UK small companies to omit figures for turnover from their annual reports.  A review of their net assets and cash position for the last 3 years shows significant deterioration of shareholders assets.  However, forming an opinion using these two performance indicators without sight of turnover and operating profit figures is meaningless.  Nevertheless, the investment seems to have the same expectation of providing a return on investment for SPK’s investors as finding flight MH370 in the Indian Ocean.

Performance indicator | 30/06/2013 | 30/06/2012 | 30/06/2011
Net assets/shareholders funds | (£59.5k) | £168.6k | £273k
Cash |£56k | £162.2k | £235.5k

What are the redeeming features of this investment?  The versatile, Mr JR Patel, since retired as a director from SPK, is on the board of MarketClusters as a non-executive director and the company is bullish about the future of their flagship products: EditorEye and StrategyEye.  Moving on to the insiders may also give us some insight on the potential value of MarketClusters to SPK’s investors.

MarketClusters directors and their shareholdings
Mr Rupert Nicholas Gregg | 43.19%
Mr Jeremy Charles Phillips | 10.69%
Mr Manoj Kumar Badale | 3.70%
Newmedia Spark Directors Limited (representing SPK)| 11.93%
Mr James Nugent Kennell | 2.42%

Other major shareholders
Dauphin Capital LP | 4.77%
Nicholas Mark Wykeham-Fiennes | 4.21%
Charles Stuart Mindenhall | 4.13%
Kean Hua Chung | 2.60%
Farringdon Consulting LLC | 1.63%

Extracting value from SPK’s investment in MarketClusters is as probable as finding flight MH370 in the Bermuda triangle.  Salvaging the £750k poured down the hatch is now totally in the hands of the illusionist JRP.

Oodutty

 

Value stripping at the finance auctions – SPK 2 (IMI(iii))

Today, 27th June 2014, IMImobile finally hatched from the incubator of Spark Ventures Plc (SPK) after more than a decade of meticulous nurturing which saw the India-domiciled technology start-up mature from a £300k investment to a £15m self-certified: leading global technology company providing software and services which help businesses capitalise on the growth in mobile communication.  This incumbent was truly the golden egg, so much so, that the AIM listed venture capitalist’s director in charge of protecting the shareholders’ clutch of investments retired to become its CEO as it took flight to chart it’s own destiny.

Leaving aside the glaring omissions concerning the CEO in the AIM Schedule 1 that’s required by AIM Schedule 2 sections (g) and (h) disclosure rules, the IPO was a welcomed success after the recent spate of damp squibs on both sides of the Atlantic.  The new AIM-listed company, IMImobile plc (IMO) closed it’s first day’s trading at £1.33 up over 10% from an entry price of £1.20.  However, the main question for this post is whether there’s potential value to be stripped from this investment by SPK.

Today’s announcement by SPK confirmed, as noted in the AIM Schedule 1 document, that post IPO, SPK will still have the second largest stake in IMO.   The announcement estimated SPK’s residual stake at 17% with a shareholding of 10.75m shares after receiving net proceeds of £3.2m from today’s share disposal.  There are slight discrepancies between the RNS and the AIM Schedule 1 disclosures which seem to indicate that Spark India still owns 22.8% after disposing 5.8%.  A simple explanation for this may be that Spark India is not a wholly owned i.e. 100% subsidiary of Spark Ventures Plc.  The disposal of 2.95m shares yielded £3.55m at £1.20 a share but the SPK announcement quoted net receipts of £3.2m.  This is fine, since Spark Venture Management Holdings (SVMH) is entitled to a 20% of profit incentive for successful realisation of the IMO investment.  Assuming that SVMH cannot claim incentives for the growth in IMO’s share price post IPO, then 13.73m shares @ £1.20 gives an exit value of £16,476,053.  Take away the latest reported valuation of £14.8m – a figure repeated so often in SPK’s shareholder announcements that I feel like Pavlov’s dog – and we get £1,676,053 as the profit on exit.  Twenty per cent of this juicy profit gives £335.2K which is the difference between SPK’s announcement figure of £3.2m and the sale proceeds from 2.95m shares disposed of on IPO for £3.55m.  The table below shows the AIM Schedule 1 disclosure values for SPK India shares and percentage holdings used in this post’s calculations.

Spark India Limited Holding in IMImobile
Pre IPO on 27th June 2014	13,720,044
% Equity	28.60%
Post IPO	10,765,859
% Equity	22.80%
Shares offered at IPO	2,954,185
IPO price	£1.20
Anticipated receipts	£3,545,022

Before saying farewell to SPK’s investment in IMImobile, let’s get the lowdown on IMImobile operations in Europe,  IMImoble Europe Limited, which is a subsidiary of IMImobile Vas Limited.  The key performance indicators for IMImobile Europe are given below.

KPI | 2012/2013 | 2011/2012 | 2010/2011
Staff | 80 [+344%] |18 [+64%] | 11 [0%]
Turnover | £19.3m* [+472%] | £3.4m [+51%] | £2.2m [+140%]
Gross margin | £9.4m [+580%] | £1.9m [+82%] | £794k [+104%]
Operating profit | £2.2m [+359%] | £479k [+107%] | (£7.1m) [-592%]
Net assets | £6.7m [+426%] | £1.3m [+157%] | £493k [+158%]
Cash | £1.7m |0 | £432k [+849%]

*Note 2 to the 2012/13 accounts for the financial year ended 31st March 2013 mentions that the company received pass-through revenues of £22.8m which was not recognised as turnover.  This appears to confirm that IMImobile is in rude health with no head winds in sight!  So, in theory, nothing should devalue such an investment.

IMImobile Europe – Directors and related party disclosures for 2012/13 (refer to 2012/13 accounts, note 20)
Mr Jayesh Ramesh Patel | £116,000 interest free loan [2012 £nil]
Mr Michael David Sean Jefferies | £10,706 interest free loan [2012 £nil]
Mr Timothy Newmarch | £52,871 interest free loan [2012 £nil]
Spark Ventures plc | £343,333 director fees and rental charges [2012 £30,000]

Mr Jayesh Patel retired as a director of Spark Ventures plc on 19th February 2013 and is a director of Spark Venture Management Holdings Limited (SVMH) in which he holds 33% of the ordinary share capital.

As discussed in previous posts, foraging is a forensic art where natural instincts are aroused by crude attempts at classical conditioning like the repeated mentioning of IMImobile’s £14.8m valuation in SPK’s announcements.  It’s a WTF moment!  SPK’s 2012/13 annual report for the period ending 31st March 2013, valued their IMImobile stake at £16.2m.  This all looks fine since, for the same accounting year ended 31st March 2013,  IMImobile Europe Limited reported turnover of £19.3m and operating profit of £2.2m, representing increases of 472% and 359%, respectively.  Further, the AIM Schedule 1 IPO filing did not mention any exceptional trading conditions impacting the company’s net assets since their last filed accounts of 31st March 2013.

Therefore, what were the factors that influenced SPK’s downward revaluation of it’s IMImobile stake from £16.2m in their 2012/13 annual report to £14.8 in their 2013/14 interim report?  Maintaining the 2012/13 year end valuation of £16.2m through to IPO would have generated a profit of £300k based on the exit value of £16.5m.  Revising the valuation downwards to £14.8m has generated an exit profit of £1.7m.  SVMH, whose directors are also connected with both SPK and IMImobile, agreed to an incentive payment of 20% of the profit achieved on successful exit of SPK’s IMImobile investment.  Let’s consider two hypothetical scenarios for SVMH in achieving a successful exit for their client’s investment: (a) maintain the 2012/13 valuation of £16.2m and generate income of £60k (20% of £300k) or (b) revalue the investment in the 6-monthly interim report to £14.8m and generate income of £335k (20% of £1.7m).  Constraint: scenario (a) is in SPK’s shareholders’ interest.  There was a similar WTF moment in the SPK (mBlox) post.

Let’s now review the main event, the potential value of this investment to SPK.  With £3.2m in the bank and another 10.76m shares left to dispose of, after the lock-up period of 12 months,  we could be looking either way on this.  SPK’s management has valued the remaining 10.75m shares at £1.20 per share or £12.9m – strange that the remaining IMO shares is the only figure that reconciles between SPK’s announcement and the AIM Schedule 1 disclosure document.  With the SVMH incentives already paid, this means that today’s valuation is £3.2 + £12.9m = £16.1m.  Oh dear, here we go again, this is almost the same as the 2012/13 valuation before the £14.8 pavlovian carrot.  Nevertheless, the upsides are that the shares can continue to motor towards £2 or even £3 due to shortage of supply (64% not in public hands) and/or a predator snap up IMO to complement their mobile technology business.  Downsides are the inverse.

Oodutty

Value stripping at the finance auctions – TVCH

It was no surprise to read the regulatory announcement on 3rd June 2014 that TVC Holdings were planning to delist from AIM and ESM at the end of July 2014  In the months leading up to this announcement TVCH were busy cashing in their chips.  Firstly, they disposed on Shenick Networks Systems for 6.4m euros in February.  Secondly, at the end of February, they sold just over 40% of their stake in UTV for £18.m thus recouping their original investment and leaving a residual of 9.64m shares or a 10% stake valued at approx. £24m in UTV.  Lastly, not content with such a spectacular ROI for UTV, they performed a clinical scalping job on Dalata Hotel Group’s IPO by subscribing for approx. 11m shares costing 15m euros and liquidating the lot for 30.4m euros during the first day of trading.

A Sherlock Holmes light bulb moment was triggered by TVCH’s spate of drawdown moves.  What were the motives driving these transactions?  Could it be the intense competition from crowd-funding platforms providing capital to start-ups or the current bull market inflating the prices of quoted investment opportunities?  Or, what about pure self interest? It was during the UK national masochism weekend of reading about billionaires and multi-millionaires in The Sunday Times Rich List that a familiar name was spotted amongst the league of rich Irishmen.  Sure enough, it was the chairman of TVCH, Mr. Shane Reihill with a tidy haul of between £20m – £30m, including his 30% TVCH stake.  Considering the vagaries of the stock market, the certainty of another recession in the future and the self-interest of management issuing share options or placing large parcels of shares with institutions, why not consolidate TVCH’s unrealised gains into hard cash and avoid any impending hazards, including potential relegation from the Irish rich league.  Maybe, this is not how Sherlock approached matters, so a more structured and objective approach is needed to assess whether there’s value to be stripped from TVCH.

The timetable for distributing 90% of capital to shareholders and delisting from AIM and ESM is shown below.

EGM announcement Tue 03-Jun-14
Ex-div date for distribution Wed 02-Jul-14
Record date for distribution Fri 04-Jul-14
Distribution date Mon 14-Jul-14
Last AIM dealing date Fri 25-Jul-14

The basic value analysis below shows that the current share price is trading at a discount of £0.12 to NAV, as at 30th June 2014.

Shares in issue 95,501,846 (includes share options exercised on 30th June 2014, less treasury shares cancelled)
Share price £0.72
Market Capitalisation £68,761,329
NAV ps £0.84 / EUR 1.04
Premium/(Discount) (£0.12)

TVCH’s reported NAV as at 31st March 2014 was 1.10 euros per share and this valuation included UTV shares of 9.64m valued at £2.37 per share to give £22.85m or 27.5m euros, using an exchange rate of £0.83 to 1 euro.  In addition, shareholders funds have suffered dilution as result of the exercise of share options on 30 June 2014.  Therefore, in order to bring the NAV in line with the current issued share capital, GBP/EUR exchange rate and UTV share price, the NAV has been recalculated below using an exchange rate of £0.81 and a UTV share price of £2.06.

Estimated Value of TVCH Assets – excluding costs of capital distribution and delisting

Assets	BV (EUR)	BV (GBP)	BV ps (cent)	BV ps (p)
UTV shares	24,517,210	£19,858,940	25.6720	20.7943
Other non-current assets	1,280,000	£1,036,800	1.3403	1.0856
Anticipated UTV dividends Jul-14	1,012,228	£819,904	1.0599	0.8585
Net current assets	(£675,000)	(£546,750)	(0.7068)	(0.5725)
Cash at bank	67,269,000	£54,487,890	70.4374	57.0543
CR2 Limited (24.4% holding)	5,623,000	£4,554,630	5.8878	4.7692
Net Asset Value	99,026,437	£80,211,414	103.6906	83.9894

The planned 90% return of capital to shareholders is in the form of 0.66 euros in cash and 0.10 UTV share for every TVCH share.  Scenario 1 below, estimates an optimistic outcome for UK shareholders of £0.74 per share because of the interplay of exchange rate and UTV share price movement.  This gives an implied share price of £0.74 / 90% or £0.82.  Therefore, if the current share price of £0.72 holds cum-div, shareholders are getting 82p for very 72p invested.  As such, there is great value stripping opportunity in TVCH shares.

Scenario 1 – Optimistic outcome

Capital distribution (90%)	Unit	Price	GBP
Cash	0.66	£0.81	£0.535
UTV shares	0.10	£2.06	£0.206
			£0.741

The interplay of GBP/EUR exchange rate and UTV share price on 14 July 2014, the date of transfer, could result in either further upside or some downside effects.  Scenario 2 considers a ‘most likely’ situation on 14 July of an exchange rate of £0.80 and a UTV share price of £2.00. This calculates an implied share price of £0.81 based on a 90% distribution of £0.728.

Scenario 2 – Most likely outcome

Capital distribution (90%)	Unit	Price	GBP
Cash	0.66 euro	£0.80	£0.528
UTV shares	0.10 share	£2.00	£0.200
Per TVCH share			£0.728

Scenario 3, the pessimistic outcome, predicts an exchange rate of £0.75 and a UTV share price of £1.95.  This produces an implied share price of £0.77 based on a 90% distribution of £0.69 which is still good value when compared with the cum div share price at 72p.

Scenario 3 – Pessimistic outcome

Capital distribution (90%)	Unit	Price	GBP
Cash	0.66	£0.75	£0.495
UTV shares	0.10	£1.95	£0.195
			£0.690

Using the estimation technique of {Optimistic + (4 x Most Likely) + Pessimistic} / 6 gives {74p + 292p + 69p} / 6 or 72.5p as the probable price for TVCH which is not far off the closing price of 72p.  The key value consideration is that the 90% distribution, even at the pessimistic outcome of 69p, gives an implied share price of 77p which is not only higher than the current share price but a decent 9.1% discount to the NAV of 84p.  The potential downsides are: the unquoted shares realising less than book value; running costs of winding down coming in substantially more than planned and the difficulty of disposing TVCH shares after delisting.  The upsides are the inverse.  However, with the chairman and other senior directors rushing to exercise options on 30th June 2014, TVCH 2014 may turn out to be a good vintage.

Oodutty

 

Value stripping at the finance auctions – SPK (Firebox)

This post will continue to forage around the investments labelled ‘Others’ in the Spark Ventures Plc (SPK) portfolio of investee companies to sniff out potential value stripping opportunities. The full list of these ‘rejects’ considered to be worth a total of £600k, as per SPK’s 2013/14 interim report, are Mblox, Firebox, Crocus, Symbio AB, Market clusters and Quester Venture Partnership. The latter, Quester Venture Partnership, is a limited partnership which is closely aligned to the Querist labyrinth discussed in SPK 2 (IMI(i)) and will no doubt be tricky to navigate but is guaranteed to be satisfying.  In the frame this time will be Firebox.com to which SPK has assigned a zero value for it 28% stake.

According to SPK’s 2006/07 annual report:

“Firebox is one of the UK’s leading multichannel retailers and specialises in identifying the latest trends in consumer products and uses its expertise in retail, distribution and marketing to bring the latest gadgets, games and gift ideas to market ahead of mainstream retailers.

Established in 1999, and backed by SPARK as a start-up, Firebox.com is a multi-channel operation incorporating a website, traditional mail-order catalogue and telephone call centre. The company sources products from around the world in order to identify the ‘next big thing’. Many major high street retailers watch Firebox to identify products that will go on to become successful in the mass market.

Firebox.com has been profitable since late 2001 and has grown very rapidly. Turnover for the year to January 2007 was £9.8m, 20% up on the previous year, and the company saw the benefits of its infrastructure investment in the previous year to more than double its operating margins. The company has more than 600,000 registered newsletter subscribers and had more than seven million visits to its website during 2006.

In addition, Firebox soft launched a US version of its website in November 2006. This beta site has enjoyed impressive early results: the first two weeks after launch saw more orders taken in the US than for the whole of the previous year. The US market represents a significant growth opportunity for Firebox over the next few years due to the size of the market (approximately six times larger than the UK) and the lack of direct US based competitors in this sector. Firebox.com is currently launching its service fully in the US with a new distribution facility and local customer service team.

As a result of these developments, we have increased the value of our stake in Firebox to £1.4m to reflect the growth prospects of the business and the improvement in margins. Firebox is based in London and employs 43 staff.”

Firebox.com is led by the able entrepreneur Mr Michael Acton Smith who also leads Mind Candy with it’s global brand of Moshi Monsters. So what has gone so badly wrong with Firebox.com to relegate it to SPK’s bargain basement of odds and sods worth a total of £600k. In its 2008/09 report, SPK reviewed Mr Smith’s duo of companies with the words:

“Mind Candy launched ‘Moshi Monsters’ (www.moshimonsters.com) a major new subscription based puzzle game for children. It has experienced exceptional growth  in recent months gaining over 3 million registrations since November 2008, with a current growth rate of 25% per month, and a worldwide distribution of users. This performance is well ahead of budget and has taken the company through to cash flow breakeven for the first time since start-up in 2004.

In the context of these positive developments, the downward adjustment of the valuation of our holding in Firebox (www.firebox.com) by £0.7m is a modest setback and reflects falling margins and valuations in the retail sector generally. Despite this margin pressure, Firebox has maintained its revenue levels at £11.5m and has maintained good stock turnover.”

A tour of SPK’s annual reports from 2002/03 to 2013/14 reveals the following Firebox valuations:

SPK’s holdings in Firebox.com | annual valuation | revaluation
2002/03 | 29.4% | £648K | +£578K
2003/04 | 29.4% | £648k | n/a
2004/05 | 29.4% | £1,450k | +£802k
2005/06 | 29.4% | £1,040k |-£410k
2006/07 | 29.4% | £1,430k |+£390k
2007/08 | 29% | £1,430k | n/a
2008/09 | 29% | £730k |-£700k
2009/10*| 24% | £1,850k |+£1,100
2010/11 | 24% | £1,800 |-£50
2011/12 | 24% | £975k |-£825k
2012/13 | 26% | £250K |-£725k
2013/14* | 26% | £0k |-£250k

* These represent WTF events. In 2009/10, SPK revised the valuation of its 24% stake in Firebox.com to £1.85m based on sales multiples at a time when Firebox sales was £11.5m, thereby giving Firebox an enterprise value of £7.71m. Then SPK’s management fell into a deep amnesic state from 2010/11 to 2013/14 valuing the investee company at £7.5m (£1.8m/24%) for 2010/11 on £14.5m sales, £4.1m (£975k/24%) for 2011/12 on £12.1m sales and finally as ziltch (£0.0K/26%) on £9.1m sales in 2013/14!

A quick check on the officers and shareholders of Firebox.com at 31st March 2013 shows SPK’s stake as 28.14% and not 26% as reported for the last 2 years.

Directors and officers of Firebox.com
Mr Michael Acton Smith | Director, Chief Executive Officer
Mr Thomas James Boardman | Director, Chief Technical Officer
Ms Alison Sakai | Company Secretary, Accountant

Significant shareholders of Firebox.com
Michael Smith | 29.62% | Ordinary
Tom Boardman | 29.62% | Ordinary
Newmedia Spark Plc | 28.14% | Ordinary
Channel 5 Broadcasting Ltd | 5.03% | Ordinary
Christian Robinson | 4.50% | Ordinary
Dcd International Limited | 1.13% | Ordinary

What about the tough retail environment mentioned by SPK in their 2008/09 annual report when reflecting on Firebox.com’s performance?  A review of Firebox.com’s operating environment for their year ended 31st March 2011 to 31st March 2013 reveals an average year-on-year decline of approx. 20% compared with increase of 14.% between 2009/10 to 2010/11.  However, gross profit margin over the same period has remained in excess of 30% and even improved to 37.5% in 2012/13.  Operating profit took a hit in 2013 due to what appears like major spending on infrastructure upgrade after a 255.7% profit turnaround in 2012.

Firebox.com Financials	2013	2012	2011
Staff	50	57	57
Turnover	£9,136,312	£12,121,079	£14,475,220
Gross profit	£3,424,245	£4,153,128	£5,305,394
Gross margin	37.5%	34.3%	36.7%
Operating profit	(£1,024,100)	£727,951	£204,630
Net assets / Shareholders funds	£1,545,815	£2,222,017	£2,810,247
Cash	£1,098,574	£1,493,972	£2,903,058
Cash : Shareholders funds	71.1%	67.2%	103.3%

Without even factoring in Firebox.com’s leadership and future growth plans, the net assets / shareholders funds currently stands at £1.55m and represented by 71.1% cash.  SPK’s 28.12% share of net assets is potentially £434.7k on a forced sale rather than their 2013/14 interim report estimate of £0.  As far as value stripping goes, this presents a potential opportunity of 0.11p (£434.7k / 418,850,000 shares) uplift on the NAV per share.

As alluded to in SPK (mBlox), the worse case scenario for investors is SPK selling off the ‘Others’ bargain basement investee companies to Spark Venture Management Holdings for a paltry £600k.

Oodutty

Value stripping at the finance auctions – SPK (mBlox)

Altruism does not fuel yachts.  As a forager, I never look for value amongst the glitzy headlines, flowery chairman and CEO statements or illuminated facts and figures.  I prefer to rummage around the opaque, obscure and understated items in the published reports and other regulatory disclosures. The Tianamen Square nightmare scenario for investors, which is not inconceivable, would be if SPK’s management sells off the bargain basement investments labelled ‘Others’ to Spark Venture Management Holding Ltd (SVMH) for £600k, as valued in the 2013/14 interim report.

mBlox is one of the ‘Others’ whose value has been recently reported by SPK as not being greater than £500k and, as such, this investee company is worthy of attention. mBlox describes itself as the largest Application to Person (A2P) mobile messaging provider in the world specializing in the unique demands of large-scale mobile messaging programs.  Who should be believed, the trumpeter or Cinderella’s stepmother?

SPK was involved in the early funding rounds when mBlox was still a UK start-up with the ambitious plans to be the global leader in mobile messaging technology before the company headquartered in the US to realised its vision. So why did this ambitious investee company find itself in SPK’s bargain basement. Let’s examine the journey from early funding target to bargain basement reject by reviewing SPK’s annual reports from 2003/04 to 2013/14 alongside mBlox annual revenue and funding history to date.

SPK’s mBlox annual equity holding | annual valuation | mBlox annual revenue | mBlox funding rounds
2003/04 | 1.6% | £268k | mBlox 12/03 revenue $n/a | 06/03 round B funding – $8.1m – angel investors
2004/05 | 1.6% | £268k | mBlox 12/04 revenue $n/a | 07/04 round C funding – $11.2m – venture capital
2005/06 | 0.5% | £500k | mBlox 12/05 revenue $n/a | 03/06 round D funding – $25.0m – venture capital
2006/07 | 0.5% | £n/a | mBlox 12/06 revenue $62.5m | n/a – no VC dilution event
2007/08 | 1.0% | £500k | mBlox 12/07 revenue $87.5m | 12/07 round E funding – $22.5m – venture capital
2008/09 | 1.0% | £500k | mBlox 12/08 revenue $100.0m| n/a – no VC dilution event
2009/10 | 1.0% | £250k | mBlox 12/09 revenue $111.0m| n/a – no VC dilution event
2010/11 | 1.0% | £500k | mBlox 12/10 revenue $115.0m| n/a – no VC dilution event
2011/12 | 1.0% | £n/a | mBlox 12/11 revenue $118.0m| 06/11 round F funding – $25.0m – venture capital
2012/13 | 1.0% | £n/a | mBlox 12/12 revenue $121.0m| n/a – no VC dilution event
2013/14 | 1.0% | £n/a* | mBlox 12/13 revenue $138.5m| 04/13 debt funding – $14m – VC partner

* SPK annual report not available for 2013/14 at the time of writing.

A quick browse through the table above shows that mBlox’s disclosed revenue has increased by $76m over an 8-year period from $62.5m to $138.5m, a decent 121.6%. Further, mBlox has received term loans and equity warrants (possibly dilutive) from the Business Development Corporation of America (BDCA) and the relevance of this is the fact that the lender makes an assessment of the borrower’s net asset value which in mBlox’s case varied between $250m – $350m. mBlox is also rated by some financial commentators in the US as being in the top 10 of mature VC-backed technology companies rattling the cage for exit either in the form of IPO or trade sale.

Since it’s initial investment in 2003/04, SPK’s has valued its 1% stake in mBlox between £250k and £500k, thereby giving mBlox an enterprise value (EV) in the range of £25m – £50m or $42.5m – $85m, using an exchange rate of £1 = $1.70. If one assumes that SPK’s valuation basis is prudent, this gives a median value of $63.75m which could serve as a ‘pessimistic’ EV for mBlox. Without sight of mBlox profit figures, the 31st December 2013 year-end revenue of $138.5m could be adopted as a ‘most likely’ EV.  And an ‘optimistic’ EV of $300m can be assumed from the BDCA’s net asset estimates for mBlox.  With these 3 estimates, a revised EV for mBlox could be calculated as {1 x pessimistic + 4 x most likely + 1 x optimistic} / 6 or {$63.75m + $554m + $300} / 6 giving a resultant EV of $152.96m or £89.98m.  Therefore, SPK’s 1% stake in mBlox could be restated as approx. £900k or a NAV per share of 0.22p compared with an implied NAV per share ranging from 0.06p to 0.12p, based on 418,850,000 shares in issue, as per SPK’s 2013/14 interim report.

In summary, there’s a fair chance that mBlox is conservatively valued in SPK’s books. However, a true value for this investee company can only be determined by SPK’s sale of its 1% stake to an existing VC investor or realised via IPO or trade sale prior to 31st March 2015.

Oodutty

Value stripping at the finance auctions – SPK 2 (myDeco)

In this post, I am going to review Spark Ventures Plc’s (SPK) 8% holding in it’s investee company myDeco which was valued at £100k as at 30th September 2013.

Presently, the home-page of myDeco’s website myDeco.com has been replaced with the home-page of Made.com which, on the face of it, appears as though the business and its intellectual property have been acquired by the owners of Made.com.  It was just over 7 years ago that SPK ploughed £1.855m into myDeco as the new high-flying start-up venture by entrepreneur and partner at Profounders Capital, Brent Hoberman.  This initial investment quickly lost £355k when it was valued at £1.5m in SPK’s 2008/09 annual report and then 6 years later the value sunk to £100k in the 2013/14 interim report.  I recently noticed an online video produced around 2010 in which the co-founder of Made.com, Ning Li, praised Mr Hoberman for his generosity in allowing Made.com to operate from the premises of myDeco.  At this point, it’s not apparent what the benefits are to Spark Ventures Plc shareholders of the myDeco / Made.com tie up.

So let’s examine the insiders of myDeco and Made.com.

Directors of By Design UK Limited (aka myDeco)
Mr Brent Hoberman
Ms Martha Lane Fox
Newmedia Spark Directors Limited
Sofinnova Partners S A S
Eventure Fonds 2 GmbH & Co Kg

Shareholders of By Design UK Limited (aka myDeco)
Sofinnova Capital Vi Fcpr | 30.03%
Dotcom Invetment Holdings Inc | 13.63%
Eventure Fonds 2 GmbH & Co Kg | 13.48%
Spark Ventures Plc | 7.98%
Yoo Holdings Ltd | 4.41%
Dld Ventures GmbH | 3.28%
Mr David Kelly | 2.99%
Scobie Ward | 2.99%
Mr Brent Shawzin Hoberman | 2.80%
Mr George Robinson | 1.39%
Amadeus Iii Affiliates Fund Lp | 1.18%
Mr Marc Worth | 1.11%
Arts Alliance Digital Ventures Iv Ltd | 1.05%
Trustees of Kc Atkins A & M Settlement | < 1%

As at 31st December 2012, By Design UK Limited had net assets £5.2m, however, based on SPK’s valuation of it’s 8% stake at £100k this would imply a revised enterprise valuation of £1.25m for this investee company at 30th September 2013.  Further, SPK and Mr Hoberman et al share an outstanding legal charge over 637,509 shares in Made.com Design Ltd, as shown below.

Created:28 Jun 2012
Registered:17 Jul 2012
Type:LEGAL SHARE CHARGE
Persons Entitled:BRENT HOBERMAN, SPARK VENTURES PLC, SOFINNOVA PARTNERS SAS AND EVENTURE FONDS 2 GMBH & CO KG
Further Information:637,509 Shares In Made.Com Design Limited See Image For Full Details

An examination of records at Companies House shows that By Design UK Ltd (aka myDeco) owns 43.22% of Made.com Design Ltd’s ordinary share capital. This, in part, may help to explain the altruistic behaviour of myDeco in sacrificing it’s operating model to divert its own web traffic to Made.com.

Made.com shareholders (Ordinary shares)
Ning Lucas Gabriel Li | 44.97%
By Design (UK) Ltd | 43.22%
Julien Callede | 6.21%
Chloe Macintosh | 3.83%
Andy Skipper | < 1%
Win Kwok | < 1%
Carson Roen | < 1%

Made.com shareholders (Preferred A shares)
Jaina Capital Ltd | 2,308,000.00 Preferred A
Profounders Capital Lp | 1,615,000.00 Preferred A
Portelet Investments Ltd | 1,615,000.00 Preferred A
Chloe Macintosh | 231,000 Preferred A

Made.com shareholders (Preferred B shares)
Level Equity | 3,069,180.00 Preferred B
Enfield Investment Holdings Corp | 552,453.00 Preferred B
Profounders Capital Lp | 398,994.00 Preferred B
Wyandanch Partners | 245,535.00 Preferred B
Kite Venture Partners I Ltd | 61,384.00 Preferred B

Made.com shareholders (Preferred B2 shares)
Jaina Capital Ltd | 249,500.00 Preferred B2
Level Equity | 748,502.00 Preferred B2
Profounders Capital Lp | 249,500.00 Preferred B2
Philippe Chainieux | 99,800.00 Preferred B2

In conclusion, Spark Ventures Plc (SPK) through it’s investee company myDeco, owns 8% of 43.22% or 3.5% of Made.com’s ordinary share capital.  This sounds very impressive until one examines the preference shareholders who rank ahead of the ordinary shareholders in the repayment of capital.  The real fall guy appears to be myDeco and by association SPK shareholders who seem to be unwittingly propping up the priority preference shareholders of Made.com.  Again, I remain unconvinced about the benefits to myDeco and Spark Ventures Plc shareholders from myDeco’s altruism in sacrificing it’s own web operations to divert its visitors to Made.com.  Undoubtedly, Spark Venture Management Holdings Ltd is meticulously managing this investment since there’s an incentive of 12.5% of any profit on a successful exit before 31st March 2015.

Oodutty

Value stripping at the finance auctions – SPK 2 (IMI(ii))

Foraging and forensics

Foraging for value requires a forensic approach to guarantee survival without being snared and disabused of ones bounty.  As such, processing data intelligence gathered from reconnaissance is key to survival.  Listening to the voices of the jungle is necessary to side-step predatory moves implemented long before the checkmate event.  Here’s a bit of feedback that I received from my recent post SPK 2 (IMI(i)).

“After reviewing the SPARK group structure and considering that IMImobile is one of the largest and longest held investment in SPK’s portfolio, was it in the shareholders interest to dispose of SPK’s 30% interest in SVMH on 27th February 2013 for £250k just before exiting the some of most strategic and valuable investee companies?  Having SVMH as a subsidiary would have ensured that SPK received not only the proceeds from its share of exits but also a share of the investment management fees from SVMH.”

The reader above was commenting on the following public announcements in relation to the ownership structure of SVMH reproduced below.

RNS Number : 7380Y
Spark Ventures PLC
27 February 2013

Sale of SPARK Venture Management Holdings Limited

SPARK is pleased to report that it has sold its 30% stake in SPARK Venture Management Holdings Ltd (“SVMH”) back to SVMH for cash proceeds of £250,000 (the “Sale”). The proceeds of the Sale represent a 25% premium to the book value of SPARK’s stake in SVMH, and will be used to part fund the overheads of SPARK whilst it continues with its strategy of a managed realisation of its portfolio of investments.

SVMH is the ultimate parent company of SPARK Venture Management Limited (“SVML”), the Company’s investment manager. SPARK acquired the stake at the time of the management buyout of SVMH in October 2009. Following the Sale, the voting rights of SVMH are fully owned by its investment managers, of whom Andrew Carruthers and Andrew Betton are directors of SPARK. The other owners of SVMH are Jay Patel and Tom Teichman – both former directors of SPARK.

Directors of Spark Venture Management Holdings Ltd (SVMH) | % Equity
Mr Andrew Bruce Carruthers | 33.33%
Mr Thomas Teichman | 22.23%
Mr Jayesh Ramesh Patel | 33.33%
Mr Andrew David Norman Betton | 11.13%

In response to the reader, my only advice is that it was up to the majority shareholders of the listed vehicle Spark Ventures Plc (SPK) to object and defeat such a motion when and if it was put to a vote at general meeting.  However, since the directors of SPK have been given executive powers to manage the day to day activities of the business by a majority of shareholders at annual general meetings, objecting to the directors actions after the event is probably ineffective.  At this stage it’s probably worth looking at the majority shareholders of the listed vehicle SPK.  According to information on the company’s website, the major shareholders and their holdings at the 31 July 2013 are listed below.  Note that currently the shares in issue is approx. 418,850,000 rather than the reported 450,000,000 so the percentage interests are likely to be different.

M&G Investment Management | 86,257,053 | 21.00%
Majedie Asset Management | 39,966,724 | 9.73%
Michael Whitaker | 22,832,153 | 5.56%
Thomas Teichman | 16,434,138 | 4.00%
Lobbenberg Family | 16,350,000 | 3.98%
Herderson Global Investors | 16,312,500 | 3.97%
River & Mercantile Asset Management | 15,163,466 | 3.69%
Ennismore Fund Management | 14,293,950 | 3.48%
RWC Partners | 13,508,631 | 3.29%
Ingot Capital Management | 13,020,000 | 3.17%

What’s interesting about the list of major shareholders is that these institutions are managing the pension funds and savings of ordinary investors – the ones who are definitely not in the ‘have yachts’ class.

This is probably a good point to recap on our value stripping position and take a rain check until after the IMImobile IPO on 24th June 2014.  It was noted in SPK 2 that after taking account of fees and incentives to SVMH, the NAV was estimated as 4.79p which is cutting it fine to extract value at this stage based on share price of 5.0p.  However, we still have a few good investee companies left in the SPK portfolio like Mind Candy the creator of Moshi Monsters and myDeco whose website is directing visitors to Made.com (acute forensics is needed here!), so it’s important not to lose sight of the bigger picture.  There’s also the outsider mBlox, which like IMImobile has been one of the earliest surviving SPK investments, coincidentally both investee companies are in similar industries and have shared the involvement of the versatile Mr Jay Patel.  I have deliberately omitted the investee company Skinkers since at the moment I’m confused about it’s current ownership.

Oodutty

Note: The writer may have or take future positions in the some of the companies written about in the blog.

Value stripping at the finance auctions – SPK 2 (IMI (i))

As stated at the end of SPK 2, in this post I will be looking at the forthcoming IMImobile IPO scheduled for 24th June 2014 to assess whether there’s enough potential upside arising from the IMImobile IPO to continue with SPK as a value stripping target.  I also referred to the information disclosed by IMImoble to AIM on their Schedule 1 submission document dated 13th June 2014 at 10:51.  Below is an extract from Schedule 1.

IMImobile AIM Schedule 1 extract

FULL NAMES AND HOLDINGS OF SIGNIFICANT SHAREHOLDERS EXPRESSED AS A PERCENTAGE OF THE ISSUED SHARE CAPITAL, BEFORE AND AFTER ADMISSION (underlining the first name by which each is known or including any other name by which each is known):

Pre-Admission (Note 1) Post Admission Shareholder Number % Number % Viswantha Reddy Alluri 12,355,254 25.8% TBC TBC Jayesh Ramesh Patel 2,632,500 5.5% TBC TBC Shyramprasad Subramanya Bhat 2,144,874 4.5% TBC TBC Spark India Limited (Note 2) 13,720,044 28.6% TBC TBC First Mark India Marutisu IV Ltd 7,805,127 16.3% TBC TBC Sequoia  Capital India Holdings III 6,521,739 13.6% TBC TBC

Before going any further, I would like to take a look at the SPARK insiders, especially since this is a complex web of interrelated companies and some connected relationships are not apparent from reading the AIM Schedule 1 submission, see link in previous paragraph and also previous post – SPK 2.

Directors of Spark Venture Capital Plc (SPK)
Mr Jayesh Ramesh Patel (retired 9 Feb 2013)
Mr Andrew Bruce Carruthers
Mr David Potter
Mr Andrew David Norman Betton
Mr Charles Richard Berry
Ms Helen Rachelle Sinclair

Directors of Spark Venture Management Ltd (SVML)
Dr Charles Jonathan Gee
Mr Thomas Teichman
Mr Jayesh Ramesh Patel
Mr Andrew Bruce Carruthers
Mr Andrew David Norman Betton
Mr Anthony David Duffy

Directors of Spark Venture Management Holdings Ltd (SVMH) | % Equity
Mr Andrew Bruce Carruthers | 33.33%
Mr Thomas Teichman | 22.23%
Mr Jayesh Ramesh Patel | 33.33%
Mr Andrew David Norman Betton | 11.13%

Directors of Querist Ltd – 100% Subsidiary of SVMH
Mr Andrew David Norman Betton
Mr Andrew Bruce Carruthers
Mr Thomas Teichman
Mr Andrew David Norman Betton
Mr Jayesh Ramesh Patel (retired 13 May 2014)

Directors of Spark Advisory Partners Ltd (SAPL)  – 100% Subsidiary of SAL
Mr Andrew David Norman Betton
Mr Neil Richard Baldwin
Mr Sean Christopher Wyndham-Quin
Mr Mark David Brady
Mr Matthew James Davis
Ms Miriam Valerie Greenwood
Mr Jayesh Ramesh Patel (retired 18 Nov 2013)

Directors of Spark Aph Ltd (SAL) | % Equity
Ms Miriam Valerie Greenwood | 18%
Mr Andrew David Norman Betton
Mr Neil Richard Baldwin | 18%
Mr Sean Christopher Wyndham-Quin | 18%
Mr Matthew James Davis | 18%
Mr Mark David Brady | 18%
Mr Jayesh Ramesh Patel (retired 18 Nov 2013)
Significant shareholder of Spark Aph Ltd (SAL) | % Equity
Querist | 10%

I’m beginning to feel like I’ve been transported to a Tiananmen Square flag raising ceremony with a strange smell brewing in the air.  Should I be worried?  The IPO is scheduled for the 24th June 2014 and there’s only one group of winners.  Judge for yourself!  Nevertheless, I will continue to see what value can be stripped from this carrion.

Oodutty

Value stripping at the finance auctions – SPK 2

As summarised at the end of SPK 1, the next steps here will be to review the reported valuation of the individual investee companies and subsidiaries owned by SPK and then to attempt a revision of the net asset and enterprise values based on any post balance sheet events.  My technique will adopt as baseline the 2013/14 interim report which relates to the period ending 30th September 2013.  In SPK 1, the basic analysis showed a potential 2p (rounded) value or profit per share which was calculated as being the difference between the adjusted NAV of 6.9p and the share price as at 13th June 2014 of 5.0p.  A look at the list of SPK’s portfolio companies in the first table below shows investments of £20.3 million reported as material, while the second table shows the ‘Others’ reported by SPK as £600k in value.  Since no individual valuation figures were provided for the ‘Others’, I have calculated the NAV for these as 0.21p being £600k divided by the shares in issue of 418,850,000.

Material investments: valuation | NAV | % Equity
IMImobile:  £14,800,000 | 3.53p | 27.0%
Mind candy:  £1,600,000 |0.38p | 2.5%
Mydeco:  £100,000 | 0.024p | 8.0%
DEM Solutions:  £1,300,000 | 0.31p | 24.0%
Gambling Compliance: £1,500,000 | 0.36p | 28.0%
Academia:  £1,000,000 | 0.24p | 10.0%
Material investment total:  £20,300,000 | 4.85p

Non-material investments: valuation | NAV | % Equity
Mblox (acquired 2004)  | £0 0.00p | 0.5%
Firebox:  ?valuation | 0.00p | 26.0%
Crocus:  ?valuation| 0.00p | ?%
Symbio AB: ?valuation | 0.00p | ?%
Market clusters: ?valuation | 0.00p | ?%
Quester Venture P’ship: ?valuation | 0.00p |?%
Non-material investment total: £600,000 | 0.14p
TOTAL ENTERPISE VALUE: £20,900,000 | 4.99p

In SPK 1, our basic analysis showed a juicy 2.0p discount per share when the 5.0p share price was compared to the NAV of 6.9p.  After taking into account post balance sheet events including disposals, the NAV has now shrunk to 4.99p which represents a zero share price discount to NAV, effective 13th June 2014.  The question is, will this breakeven situation get progressively better or worse as we get closer to the target realisation date of 31st March 2015.

On 4 April 2014, SPK issued a circular to shareholders proposing a new management agreement for the payment to Spark Venture Management (SVML) management fees of £400,000 and incentive payments of 20% of profit for disposing of their largest investment IMImobile and 12.5% of profit for disposing all other investments.  Using the reported Gain / Loss published in the 2013/14 interim report, I have calculated the impact of SVML incentives and fees to be approximately £2,900,000 or 0.21p per share, as per table below, ignoring the non-material investments.  Therefore, adjusting the 4.99p NAV just calculated for the impact of SVML fees and incentives, the revised NAV is now 4.79p.  The current listed share price of 5.0p is now trading at a premium to the recalculated NAV of 4.79p.

Material investee companies: Gain/(Loss) | SVML incentives | NAV
IMImobile: £1,800,000 | £360,000 | 0.09p
Mind candy: £2,000,000 | £250,000 | 0.06p
Mydeco: (£1,500,000) | (£187,500) | (0.05p)
DEM Solutions: (£400,000) | (£50,000) | (0.01p)
Gambling Compliance: £400,000 | £50,000 | 0.01p
Academia: £200,000 | £25,000 | 0.01p
SVML Incentives: £2,500,000 | £447,500 | 0.11p
SVML Management Fees £400,000 | 0.10p
SVML total deductions: £2,900,000 | 0.21p

In SPK 2 – IMI, I will look at the forthcoming IMImobile IPO scheduled for 24th June 2014 to assess whether there’s enough potential upside arising from the IMImobile IPO to continue with SPK as a value stripping target.  However, before closing this post, I would like to leave readers to ponder over the information disclosed by IMImoble to AIM on their Schedule 1 submission document dated 13th June 2014 at 10:51.  Incidentally, this information was not announced to shareholders at the time of writing.

IMImobile – AIM Schedule 1 IPO Filing

FULL NAMES AND HOLDINGS OF SIGNIFICANT SHAREHOLDERS EXPRESSED AS A PERCENTAGE OF THE ISSUED SHARE CAPITAL, BEFORE AND AFTER ADMISSION (underlining the first name by which each is known or including any other name by which each is known):

Pre-Admission (Note 1) Post Admission Shareholder Number % Number % Viswantha Reddy Alluri            12,355,254 25.8% TBC TBC Jayesh Ramesh Patel 2,632,500 5.5% TBC TBC Shyramprasad Subramanya Bhat 2,144,874 4.5% TBC TBC Spark India Limited (Note 2) 13,720,044 28.6% TBC TBC First Mark India Marutisu IV Ltd 7,805,127 16.3% TBC TBC Sequoia  Capital India Holdings III 6,521,739 13.6% TBC TBC Note 1: All pre-admission numbers relate to shareholdings in IMI Mobile PVT Limited.  As part of the Admission certain of these shares will be exchanged for shares in IMImobile plc, certain of these shares will be sold for cash to IMImobile plc and certain of these shares owned by Viswanatha Reddy Alluri and Shyamprasad Subramanya Bhat will remain shares in IMI Mobile PVT Limited as a result of foreign exchange regulations and for tax reasons.  These shares will be governed by relationship agreement between IMImobile PLC and Viswanatha Reddy Alluri and Shyamprasad Subramanya Bhat designed to ensure that such shares have, whilst held at the PVT level, the same rights and obligations as shares in IMImobile PLC.  Further details of these transactions are disclosed in the Admission Document. Note 2: SPARK Advisory Partners Limited (“SAPL”) is engaged by IMImobile as financial adviser and Nominated Adviser, details of which are given in Part IV of the Admission Document.  For the avoidance of doubt, whilst SAPL shares the SPARK name with SPARK India Limited (“SIL”) (which is an investor of IMImobile as referred to above) and SIL’s parent SPARK Ventures plc, its management, ownership and operation are wholly independent of both companies.     There are connections between SAPL and the other SPARK companies through SAPL’s 10% shareholder Querist Limited.  Querist Limited is wholly owned by SPARK Venture Management Holdings Limited (“SVMH”).  Through one of SVMH’s other group companies, SVMH has the benefit of a management agreement with SPARK Ventures plc under which SVMH may receive additional payments following successful realisations of SPARK Ventures plc’s investments, including IMImobile.  Further, Mr Andrew Betton is a director of SVMH, Querist Limited, SPARK Ventures plc, SIL and a non-executive director of SAPL.  Mr Betton is not involved in the Nominated Adviser function at SAPL and sits on the board of SAPL only as a representative of Querist Limited.  Mr Betton is also a shareholder in SVMH, and so may benefit from the additional payments that SVMH may receive as described above, should they be distributed to SVMH shareholders.  Mr Betton does not benefit from any successful realisation of SPARK Ventures plc’s investments by virtue of his contract of employment with SVMH.  Further details are provided in Part IV of the Admission Document.

Oodutty

 

Value stripping at the finance auctions – SPK 1

Today, 13th June 2014, I received some good news.  After weeks of waiting, I discovered during my daily news review of companies on my watch list that Spark Ventures Plc (SPK) had published a regulatory update informing investors of it’s largest investee company IMImobile’s intention to seek admission of it shares to trading on AIM.  I swiftly followed this up by logging onto the London Stock Exchange website to review the filing documents lodged by IMImobile and which contain their intention to list on the exchange.  Well, I wasn’t impressed since IMImobile’s regulatory filing was dated 12th June 2014 and timed at 07:00 a full 24 hours before the SPK’s announcement.  I could speculate on the hazards of such time lags and the unusual trading pattern in the week leading up to the 12th June but these are some of the inherent risks to be aware of and which are better dealt with by the salaried regulators. I will focus on whether SPK is a value stripping target.

Art versus Science

At this point it’s worth noting some of my influences.  I don’t follow any particular theory but I have cherry-picked ideas from the legendary financial market operators.

Firstly, Jesse Livermore as brilliantly reported by Edwin Leferve in Reminiscences of a stock operator, first published in 1923. “Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  But it is only after a stock operator has firmly grasped this that he can make big money.  It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”

Then, secondly, the great Benjamin Graham’s book, first published in 1973, The Intelligent Investor in which he explains investment vs. speculation: “An investment operation is one which upon thorough analysis, promises safety of principle and adequate return.  Operations not meeting these requirements are speculative.” Further, his core principles include “The future value of every investment is a function of its present price.  The higher the price you pay the lower the return” and “The secret of financial success is inside yourself: 1. be a critical thinker and 2. invest with patience and confidence”.

To me, value stripping combines the art of Jesse Livermore in knowing how and when to bid and scalp and the science of Graham in seeking out, analysing, measuring and extracting value.

Target identification

How did SPK come across my built-in forager’s radar?  Well, I have a habit of following exceptional dividends declared by listed companies since a dividend of 40 to 50 percent or more is one sign that a capital distribution strategy may be in play.  Naturally, when I noticed SPK paying a 4.5p dividend on a 9.0p share price, I homed in and started my research into the company and it’s remaining portfolio of investee companies to see whether they represented good potential for value stripping.

Research

In August 2009, SPK announced it’s intention to alter the Company’s investing strategy so that no more investments would be made into new businesses and that existing investments would be sold, when appropriate, with a view to all existing investments being realised over the period to 31 March 2014.  In March 2014, the target realisation date was extended for 12 months to the allow SPK to realise its remaining investments over the period to 31 March 2015.  Since the start of this journey is June 2014, I will not dwell on how much SPK has returned to its shareholders to date but how much value still remains to be stripped.

Basic value analysis

Basic analysis – Spark Ventures Plc (SPK)	13-Jun-14
Shares in issue	418,850,000
Today’s share price (mid-price)	£0.0500
Market Capitalisation	£20,942,500
Net Asset Value (NAV) per share reported 11.4p less 4.5p distributed	£0.0689
Adjusted Enterprise Value (NAV x shares in issue)	£28,858,765
Premium/(Discount): share price less NAV	(£0.0189)

So far, it looks like SPK share price of 5.0p is trading at a discount to it’s net asset value of 6.9p giving an estimated 2p (£0.0189) of value to be stripped out of SPK.  The potential upsides include a) all the investee companies and subsidiaries being realised for sums above their book values, and b) quick disposal of investments leaving a cash shell that might be sold off for residual value.  Balance these upsides, against the potential downsides of the disposal proceeds from investments being less than book values and the litigation risk surrounding a founder-director.

In SPK 2, the next steps include a valuation of the individual investee companies and subsidiaries owned by SPK and the application of the estimation technique of 1 x Optimistic plus 1 x Pessimistic plus 4 x Most likely all divided by 6.  We could spice it up with some levels of confidence parameters but let’s keep it simple.  This should give us a better feel for whether the estimated 2p value is pie in the sky or pie on the table. The process is not dissimilar to the auction preview before the bidding process begins.

Oodutty