Value stripping at the finance auctions – SPK 3 (Quester (i))

This is the first in a series of posts that will attempt to make sense of the relationship between Querist and the Quester Group and Spark Ventures Plc.  Quester Venture Partnership is the last remnant of this relationship that still lurks around like a bad smell in SPK’s investment portfolio under “Other investments”.  Foraging for value by its very nature requires a strong constitution since the process can unearth some stomach churning discoveries that need to be surgically removed and the target disinfected to restrict contamination before value can be evaluated.

The first sighting of Querist Ltd and Quester Group was in the introduction to SPK’s 2006/07 annual report when it was announced that SPK had acquired Querist Ltd in May 2007 for a consideration of approximately £4m paid in cash and deferred consideration of £1m is payable in two instalments of £0.5m providing that certain revenue targets are met in future years.  Querist Ltd was described as the parent company of the Quester group of companies with funds under management of over £200m in the form of the Quester VCT’s, Quester Venture Partners and several University Technology Transfer funds with £175m of which are on long term or rolling contracts.

However, note 4 of the 2007/08 interim report drip-fed the fact that the total purchase price paid by SPARK is expected to be £5.6m, including £1m of deferred consideration payable in two instalments of £0.5m on 11 May 2008 and 11 May 2009 subject to earnings targets being met. The net assets of the business at the point of acquisition were £0.3m. The difference between the price paid and the fair value of the net assets acquired of £5.3m is represented by the value of the fund management contracts which have been included on the consolidated balance sheet as an intangible asset.  The bottom line:  the Quester transaction had relieved the AIM-list SPK shareholders of £5.3m in hard cash within 24 months without any providing any transparency of what the ‘certain revenue targets’ were or whether these targets were fully achieved.

At the time of the May 2007 acquisition, the composition of Querist Limited aka Quester Group companies was disclosed as comprising:

Querist Ltd, Quester Services Limited
Quester Capital Management Ltd (FSA regulated)
Quester Venture Participations Ltd
Quester Venture Managers Ltd
Quester Venture GP Ltd, and
Quester Academic GP Ltd

At this point, it may be informative to examine the management structure of Querist and SPK’s management from 2007 to present.

Directors of Querist Limited on acquisition by SPK in 2007
Mr Andrew David Norman Betton (11 May 2007 — Present)
Mr Thomas Teichman (11 May 2007 — Present)
Mr Andrew Bruce Carruthers (11 May 2007 — Present)
Mr Jayesh Ramesh Patel (11 May 2007 — 13 May 2014)

Directors of Spark Ventures Plc on Querist acquisition in 2007
Mr Andrew Bruce Carruthers (27 Sep 1999 — Present)
Mr David Potter (20 Mar 2002 — Present)
Mr Andrew David Norman Betton (27 Aug 2003 — Present)
Mr Charles Richard Berry (15 Sep 2004 — Present)
Mr Michael Keith Whitaker (27 Sep 1999 — 11 Dec 2013)
Mr Jayesh Ramesh Patel (30 Jan 2004 — 19 Feb 2013)

Fast forward to SPK’s 2009/10 annual report and a note is published pertaining to prior period errors for Querist Limited explaining that, as at 31 March 2008, the additional consideration payable to the sellers of Querist limited (£1 million) was not reflected in the company only statement of financial position at the time.   Further, the report waffled on about offsetting this £1.0 omission against the increase in the subsidiary company cost of £1.0 million and concluded that none these errors have had any effect on the Group results reported by SPARK Ventures plc in the current or prior years.  Happy days!

The hapless investors of AIM-listed Spark Ventures Plc (SPK), having been relieved of north of £5m in 2007 made up of £4m cash in May 2007 and a further £1m cash paid in equal instalments in May 2008 and May 2009 through the acquisition of Querist Ltd, was now being relieved of their £5m investment through an MBO on 9 October 2009 for a consideration of £1m made up of £0.8 million cash and £0.2 million for a 30% stake in SPARK Venture Management Holdings limited (SVMH).  SPK’s management, now also SVMH directors, also made the kind gesture of leaving SPK the former Querist subsidiary Quester Venture Gp Limited for £25k consideration in return for SPK selling Spark Investors Ltd to SVMH for £170k.  What nice chaps!

As unpalatable as it may be, it’s important to note that as part of the MBO, Spark Venture Management Ltd (a subsidiary of Querist Ltd), was awarded an investment management contract to manage the investments of Spark Ventures Plc and to provide administrative services to it. This is in addition to D shares awarded by the AIM-listed SPK management to recognise the sterling contribution made by it’s management (Mr Andrew Carruthers, Mr Jay Patel, Mr Tom Teichman and Mr Andrew Betton) in brokering and disabusing SPK investors of their £5m investment in Quester Group. The key question for us at this point is what value is left to be stripped from Quester Venture Gp Limited, a company gifted to SPK for £25k by the generous management team.

Majority shareholders of SVMH after MBO of Querist in 2009
Spark Ventures Plc ~ 30%
Mr Andrew Carruthers ~ 23.33%
Mr Jay Patel ~ 23.33%
Mr Tom Teichman ~ 15.56%
Mr Andrew Betton ~ 7.78%

In conclusion, it’s fair to say that, in addition to directors fees and salaries, 2009/10 was the year that the AIM-list Spark Venture Plc almost bled to death while being leached of professional fees of £436; professional fees in connection with MBO, return of capital and corporate finance advice of £535k; management fee of Quester Venture partnership of £456k and management and secretarial fee of Spark Ventures plc of £258k. This cash haul of over £1.5m was probably enough to pay SPK for the £0.8m cash purchase price of Querist and its subsidiaries with its own money. Further, it doesn’t take a genius to figure out that sooner or later the hapless investors of AIM-listed SPK will be further disabused of that their 30% stake in SVMH prior to the exit of its mature investment portfolio. A first stab at estimating the potential value to be stripped from Quester Venture Partnership gives a result of zilch plus nada.

Oodutty

 

Value stripping at the finance auctions – The Ottoman Fund (OTM)

The Ottoman Fund (OTM) Limited is a closed-ended, investment company that was created in December 2005 with the objective of providing shareholders with long term capital appreciation from investments in the Turkish property market through an AIM listed vehicle.  The fund’s declared strategy was to focus on new-build residential properties in major cities and coastal destinations popular with both local and tourist markets.  The AIM floatation raised £150m through the placing of 150m shares of £1 each with subscribers.

The initial beneficiary of the floatation proceeds were four apartment blocks in Alanya measuring approximately 15,000 square meters with a scheduled completion date of 2006 and a price tag of EUR 11.2m.  Alanya was described in the floatation documents as one of the most popular coastal resort areas patronized by the Germans, Dutch and Austrians buyers.  In 2006, the company invested $34.4m in 167,000 square metres of seafront development land on the Bodrum peninsula located 50km from Bodrum airport.  This was followed by the acquisition of 99 parcels of Riva land for $110m in September 2006.  A further investment was made in Kazikli before the shareholder announcement on 1st November 2007 that “the Board of the Ottoman Fund announced that the Company’s real estate projects (located in Alanya, Golturkbuku/Bodrum, Kazikli and Riva) were to be progressively realised in a managed way over eighteen to twenty-four months.”   This announcement caused Oodutty forager’s radar to lock onto OTM as a potential value stripping target.

It can be said that throughout its existence, the management of OTM can be credited with not holding back when it came to explaining the hurdles and issues of managing their Turkish assets whether it be geopolitical, lackadaisical property maintenance and management, currency exchange or other operational risks.  Further, since inception, the company’s reported property valuations have been based on the opinions of two independent appraisers, Savills and TSKB and more recently BNP Paribas and TSKB. So, given that all the right boxes appear to have been ticked, is there still value left to be stripped out of OTM?

In April 2011, the company had disposed of its Kazikli investment and more recently, in May 2014, the remaining Riva land parcels were disposed of for a total consideration of $32,210,482.67 which approximated to the Company’s latest reported book value for the investment.  A distribution of the Riva land proceeds plus proceeds from its subsidiary in Turkey is expected to be distributed in August 2014.

OTM’s basic value Analysis

Shares in issue	134,764,709
Market Capitalisation	£37,734,119
Share price (18-Jul-14)	£0.2800
£ Premium/(Discount)	(£0.2260)
% Premium/(Discount)	(44.66%)
Reported NAV (28-Feb-2014)	£0.5060

As shown in the basic value analysis above, the current OTM share price of 28p is trading at a 44.66% discount to the reported NAV of 50.60p which is equivalent to paying 28p for every 50.60p of OTM assets.  However, the reported NAV needs to be updated to account for the 8 May 2014 capital distribution to shareholders of 20p per share and the proceeds from the final disposal of Riva land equivalent to 14p per share received on 15 May 2014.  Further, on 25 July 2014, the company announced that Bodrum was realised for $28.5m which crystallises a 12.5p contribution to the NAV.  The revised NAV calculation is now estimated below as 33.38p using an exchange rate of £1 = $1.70.  Without factoring any potential net proceeds from the impending capital reduction at OTM’s Turkish subsidiary, the revised NAV changes the share price discount to NAV to 5.38p or 16.13%.

Investment	BV (USD)	BV (GBP)	BV ps (cent)	BV ps (p)
Realised
Cash and cash equivalents (Feb’14)	$64,300,742	£37,877,440	47.7133	28.1063
Capital distribution (08-May-14)	($45,835,200)	(£27,000,000)	(34.0113)	(20.0349)
Riva proceeds (15-May-14)	$32,200,000	£18,967,955	23.8935	14.0749
Bodrum proceeds (25-Jul-14)	$28,500,000	£16,788,407	21.1480	12.4576
Realised total	$79,165,542	£46,633,802	58.7435	34.6039
Unrealised
Alanya	$3,416,500	£2,012,547	2.5352	1.4934
Net Receivables/(Payables)	($6,205,234)	(£3,655,298)	(4.6045)	(2.7124)
Unrealised total	($2,788,734)	(£1,642,751)	(2.0693)	(1.2190)
Total revised NAV	$76,376,808	£44,991,051	56.6742	33.3849

The revised NAV of 33.38p above is split between a realised element of 34.6p and an unrealised element of approximately (1.22p).  The negative unrealised element is the result of offsetting net payables of (£3.7m) against the Alanya investment book value of £2.0m.

In conclusion, there is a fair chance that Alanya may be realised for its current book value, based on the Riva land and Bodrum precedence.  A further upside may result from the impending capital reduction at the Turkish subsidiary generating positive cash flows.  However, the downsides are: (a) the Alanya plot being realised for less than book value, and (b) a strengthening of sterling resulting in exchange losses on transactions executed in Turkey.  Based on the previously reported difficulties with the Alanya investment, the estimated 16.13% discount to NAV may serve as a well needed buffer to protect any potential value stripping operation.  Nevertheless, even if one assumes nil return from Alanya, investors are paying 28p for every 33.38p of value.

Oodutty

Chinese walls separating credit from savings and investments

OODUTTY

Is it just me or are there others who feel they are being legged-over by retail banks and financial institutions that offer both credit facilities and saving and investment products?

Don’t get me wrong, I have a soft spot for the big investment banks since they’ve provided me with an above-average income for over two decades.  However, I’ve recently been chatting with Frank, an old friend of mine, who is now running an ethical peer-to-peer lending business and he has helped to open my eyes to what goes on in retail banking.

After questioning Frank about the type of clients that his business is attracting, I was not surprised to learn that in reaching their decisions to refuse credit to some of Frank’s clients, the major high street banks and lending institutions had employed the services of the UK credit reference agencies – Experian, Equifax and Callcredit.  These credit reference agencies are now basically licenced to print money since…

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Hazards of publicly quoted venture capital and private equity operations

OODUTTY

Wouldn’t it be great if you were an early investor in technology start-ups that are now the new internet titans, such as, Google and Facebook.

Maybe, the new generation of crowd funding platforms will provide the ordinary investor with a chance to bag a few millions!

Have you ever wondered why the only multi-millionaires and billionaires that are created from IPO’s are the entrepreneurs and the Venture Capital (VC) or Private Equity (PE) groups?

And what about those small investors in early start-ups like family, friends and small angel investors? How have they done?  Are they still working 9 – 5 to earn a living?

With the incursion of crowd funding operations into the venture capital and commercial lending space, this may be an opportune time to examine the hazards and rewards to the small investor from participating in such high risk investments.

Crowd funding platforms typically screen investors so that…

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

OpenX describes itself as a global leader in digital and mobile advertising technology with the vision to unleash the full economic potential of digital media companies.  It seems like every VC-backed technology company with a few years growth under their shell is “a global leader” of this or that technology.  The company was one of the highlights of Spark Ventures 2012/13 annual report before being downgraded by 50% six months later in their 2013/14 interim report as being tricky to realise for its book value before 31st March 2015.  How does a global technology leader lose half its spark before hatching to stand on it’s own feet?  With survival of the fittest ruled out at the first hurdle, is this the corporate dimension of the nature – nurture debate or is OpenX another journeyman upstart.  This post will attempt to make sense of this investment in order to ascertain whether there’s value to be stripped from SPK’s investment portfolio.

What parameters define these self-proclaimed global technology leaders remain a mystery since most will eventually list on junior markets such as AIM for under £100m.  So, is it revenue – most cannot even scale the £100m bar, operating profit – most are loss-makers, global customer reach – most only operate transatlantic, scalability – most are old-school people and/or unit cost driven, collaboration with industry titans  – the real innovators have already been snapped up for billions?  Or is it just the deep pockets of the venture capitalist that run the incubators?

In their 2007/08 annual report, SPK waffled on about OpenX being spun out of Unanimis – another investee company at the time.  However, it was not until the publication of their 2008/09 annual report that OpenX magically appeared with a brought forward balance from 2007/08 of £1m.  Therefore, this is a good point to review Unanimis and OpenX timeline in the Spark Ventures incubator.

Unanimis timeline in Spark Ventures investment portfolio

Year-end	Stake	Prior Year	Addition	Disposal	Revaluation	Current Year
2007/08	11%		2,102k			2,102k
2008/09	12%	2,102k	25k		1,000k	3,127k
2009/10	12%	3,127k		(3,127k)*		Nil

*SPK realised their investment in Unanimis for £3.13m in 2008/09, published for the period ending 31st March 2009.

OpenX timeline in Spark Ventures investment portfolio

Year	Stake	Prior Year	Addition	Disposal	Revaluation	Current Year
2007/08	*
2008/09	4%	1,000k				1,000k
2009/10	4%	1,000k	200k		100k	1,300k
2010/11	3%	1,300k			1,200k	2,500k
2011/12	3%	2,500k				2,500k
2012/13	2%	2,500k			2,500k	5,000k
2013/14 (i)	2%	5,000k			(2,500k)	2,500k

* OpenX was mentioned in SPK’s 2007/08 annual report but no detail was published in the investment portfolio valuation table.

(i) Interim results as at 30th September 2013

As mentioned in the introduction, SPK devalued their investment in OpenX by 50% from £5m to £2.5m in their unaudited interim results as at 30th September 2013 after increasing the valuation by the same amount six months before from £2.5m to £5.0m.  Luckily for the auditors, they cannot be blamed for ignoring such schizophrenic valuations.  OpenX financial yearend falls conveniently at the end of June and therefore their performance should be available for both interim and final reports published by SPK,  Therefore, a quick review of OpenX’s financial performance is provided below.

OpenX KPI’s as at 30 June	Jun-09	Jun-10	Jun-11	Jun-12
No of employees	50	52	85	144
Turnover	£664k	£9,952k	£23,733k	£23,147k
Gross margin	(£23k)	£2,010k	£6,486k	£19,726k
Operating profit	(£5,676k)	(£3,307k)	(£5,989k)	(£1,238k)
Net assets/shareholders funds	£8,721k	£5,612k	£13,286k	£18,072k
Cash	£8,334k	£1,762k	£8,378k	£3,603k

Delving further into the year-on-year metrics, it can be said that OpenX has performed exceedingly well between 2009 and 2012.  They have grown their revenue, gross margin and operating profit, as well as, protecting their shareholders’ funds.  Obviously, the figures below don’t highlight non-financial variables, such as, headwinds that bubbled up between 31st March 2013 and 30th September 2013 which are privy to the management of OpenX and SPK and may explain why other investors are unwilling to pay full whack to purchase this global technology leader from SPK.

OpenX – YoY KPI movement	Jun-09	Jun-10	Jun-11	Jun-12
No of employees		4.0%	63.5%	69.4%
Turnover	1,691.1%	1,398.9%	138.5%	(2.5%)
Gross margin	183.2%	(9,023.6%)	222.7%	204.1%
Operating profit	(59.2%)	41.7%	(81.1%)	79.3%
Net assets/shareholders funds	23.0%	(35.7%)	136.7%	36.0%
Cash	17.2%	(78.9%)	375.4%	(57.0%)

An examination of OpenX disclosed shareholdings reveals that Spark Ventures is in good company, especially since the other investors include some fairly high net worth corporations.  The shareholdings also reveal that SPK is holding 17% of the ordinary or owners shares which usually bear the lion share of risk but enjoy the greatest rewards.  Preferred shares normally rank higher in the event of a liquidation and may convert to ordinary shares in certain events such as trade sale or IPO.  However, without reviewing the company’s Articles of Association, it’s difficult to determine what are the specific rights that attach to each class of shares.  Nevertheless, it’s still confusing to note that SPK’s annual report gives a shareholding of 2% which is not in keeping with either its ordinary or overall shareholding when considered pari passu with the preferred stock.

OpenX shareholders	Ordinary shares	Preferred A-E shares	Total	% Total	% Ord. shares	% Pref. shares
Vadim Telyatnikov	8,905.6k		8,905.6k	5.23%	23.87%
James Scott Switzer	6,756.7k		6,756.7k	3.96%	18.11%
New Media Spark	6,383.4k		6,383.4k	3.75%	17.11%
Capita Trustees Ltd	5,325.5k		5,325.5k	3.12%	14.27%
Unanimis Consultancy Ltd	4,992.1k		4,992.1k	2.93%	13.38%
Guy Holding LLc	4,945.5k		4,945.5k	2.90%	13.26%
Accel		3,358.3k	3,358.3k	1.97%		2.52%
Accel Ix Lp		36,308.6k	36,308.6k	21.30%		27.27%
Dag Ventures Iv-Qp LP		14,599.6k	14,599.6k	8.57%		10.97%
Index Ventures Iv (Jersey) LP		41,573.3k	41,573.3k	24.39%		31.23%
Mangrove Ii Investment Sarl		11,375.0k	11,375.0k	6.67%		8.54%
Mitsui & Co Venture Partners Iii		4,117.7k	4,117.7k	2.42%		3.09%
SAP Ventures Fund I LP		12,890.3k	12,890.3k	7.56%		9.68%
Svic No 22 New Technology Business Investment Li		8,899.2k	8,899.2k	5.22%		6.68%
Total	37,308.8k	133,121.9k	170,430.7k	100.00%	100.00%	100.00%

Moving on to the sweet end of the post, OpenX’s 2012 revenue figure of £23.1 million occurred in SPK’s reporting period ending 31st March 2013 where it reported its 2% stake as being valued at £5m.  This gives OpenX an implied enterprise value of £250m and an implied turnover multiple of 10.8.  The dramatic devaluation of OpenX’s investment by 50% would imply an enterprise value of £125m and therefore a turnover decay to £11.57m (£125m / 10.8).  This is not to say that SPK may not have used a earnings valuation basis.  However, this would be tricky since earnings have been negative for the period under consideration.

In conclusion, it would be fair to dump SPK’s 2013/14 unaudited interim valuation of OpenX and revert back to the 2012/13 valuation of £5m based on the operating performance of this investment which could potentially generate a 1.2p contribution to SPK NAV instead of the 0.6p implied in their September interim statement.  Adding OpenX’s contribution on to the revised NAV calculations of 4.2p for IMImobile whose share price has increased by over 10% since IPO, Mind Candy’s 1.0p, Firebox’s 0.11p, mBlox 0.21p etc. we start to see some value stripping potential building up on the current share price averaging 5.12p.  This is before reviewing the value potential of the other SPK investee companies: DEM Solutions, Gambling Compliance, Academia and ‘Others’ including Crocus, Symbio AB, Market clusters and a can of worms Quester Venture Partnership.

Oodutty

 

Value stripping at the finance auctions – SPK 2 (Mind Candy)

This post discusses Mind Candy, one of the highlights of Spark Ventures Plc’s portfolio of investee companies.  Mind Candy, with it’s Moshi Monsters creations has ambitions to be a global leader in multi-media gaming, film, entertainment and franchising products aimed at children under 18.  The company is lead by Michael Acton Smith, an entrepreneur with a vision to nurture his Moshi Monsters creation to rival other classic die-hards like Disney’s Mickey Mouse and the Nintendo’s Super Mario Brothers.  Mr Smith is to London’s Shoreditch Tech City what Bob Geldof was to the Boomtown Rats, a frontman with attitude.  Attitude that triggers memories of the conversation between Lt. Vic Androzzi and Sgt. Tom Hannon in the 1971 film Shaft starring Richard Roundtree when Tom said to Vic, “that boy’s got a lot of mouth on him”, to which Vic replied, “the boy’s man enough to back it up, too”.

If we’re looking for value in the cult of personality then Michael A Smith has it all.  He was honoured with an OBE in the 2014 New Year Honours for services to the creative industries and has led Mind Candy into the £100 million club after Spark Ventures Plc (SPK) sold half their 5% stake for £3.1m in 2011. However, Mr Smith believes his company is worth at least a billion dollars!  And who can argue with his valuation when King Digital Entertainment, the creator of Candy Crush, floated in March 2014 for over $5 billion.  After a post-IPO wobble for the first three months, King Digital shares are trading slightly above its IPO price, so is now the time for Mind Candy to float for that $1 billion price tag?  It’s time to examine what the smart guys at Spark Ventures Plc and their investment manager Spark Venture Management Holdings Limited (SVMH) aka Spark Venture Management Ltd, Querist Ltd, Quester Services, New Media Spark Directors, Spark Advisory Partners Limited, etc. think about Mr Smith’s Moshi Monsters.  Three years after SPK disposal of their 2.5% stake for £3.1m and with Mr Smith growing in confidence and cash, is it unreasonable to expect a minimum of £3.1m for SPK’s remaining 2.5% stake?

Table 1 – Mind Candy’s timeline in SPK’s investment portfolio

Year	Stake	Prior Year	Addition	Disposal	Revaluation	Current Year
2004/05	5%		50k			50k
2005/06	5%	50k				50k
2006/07	5%	50k	282k		248k	580k
2007/08	5%	580k				580k
2008/09	5%	580k	26k			606k
2009/10	5%	606k	47k		67k	720k
2010/11	5%	720k			5,280k	6,000k
2011/12	2.5%	6,000k		(3,000k)	153k	3,153k
2012/13	2.5%	3,153k				3,153k
2013/14*	2.5%	3,153k			(1,576k)	1,577k

*SPK’s interim results as at 30th September 2013.

Table 2 – Mind Candy performance indicators (excluding US operations)

Mind Candy KPI’s (£millions)	Dec-08	Dec-09	Dec-10	Dec-11	Dec-12
No of employees	22	20	33	70	137
Turnover	£0.0	£1.9	£7.6	£28.9	£46.9
Gross margin	(£0.2)	£1.5	£5.9	£23.4	£36.9
Operating profit	(£1.1)	(£0.3)	£0.3	£9.8	£10.1
Net assets/shareholders funds	(£4.2)	(£4.4)	£2.9	£16.6	£25.0
Cash	£0.1	£1.5	£1.5	£11.6	£18.9
Turnover per employee	£0.0	£0.1	£0.2	£0.4	£0.3
Gross margin %		76.7%	78.2%	80.7%	78.7%
Operating profit %			4.5%	33.9%	21.4%
Return on capital employed			12.0%	59.1%	40.2%
Cash to net assets			51.7%	69.9%	75.5%

Another WFT moment

So what’s happening here? Oh yes, another WFT moment elicited by SPK’s 2013/14 interim results for the six months ending 30 September 2013.  Without waiting for the ink to dry on Mind Candy’s rip roaring 62% increase in turnover and 2.4% earnings increase as at 31st December 2012 which was lodged with Companies House on 27th September 2013, SPK devalued their 2.5% stake in Mind Candy by almost half from £3.1m to £1.6m.  This is a double WTF moment and a slap in the face with a wet fish for their investors since extracts from SPK’s preliminary announcement to their 31st March 2013 results posted on 25th July 2013, highlighed:

•           £6.6m profit for the year, making 4th consecutive profitable year. Profit due to unrealised investment gains (£9.0m) being greater than operating losses.
•           Unrealised Investment gains due primarily to Kobalt, OpenX, IMI and Aspex.
•           IMI’s valuation increase due to 14% EBITDA growth but using a slightly lower multiple.
•           Continued strong revenue growth in major portfolio companies (IMI, Kobalt, Notonthehighstreet, OpenX and Mind Candy).
•           Processes under way to sell most of remaining portfolio.

Spark Ventures 2012/13 end of year valuation implied an enterprise value of £124m (£3.1m / 2.5%) on Mind Candy’s turnover of £28.9m equivalent to a turnover multiple of 4.3 or an earnings multiple of 12.6 (£124m / £9.8m).  In their ‘who cares a fuck, no one’s really checking’ complacent attitude six month later, they reduced Mind Candy’s implied valuation to £63.1m (£1.6m / 2.5%), a whopping 50% fall contrasting with Mind Candy’s 62% hike in turnover.  Timeout! So, what is the true implied value?  Firstly, assuming SPK is using an earnings multiple approach to valuation, Mind Candy’s earnings from 2011 to 2012 showed a slight uptick from £9.8m to £10.1m so using the same earnings multiple of 12.6 determined on disposal of SPK’s 2.5% stake in 2011 gives a valuation of £127m.  This compares favourably with Mind Candy’s enterprise value in 2011 of £124m.  Alternatively, assuming a turnover multiple basis for SPK’s valuation, the implied valuation for Mind Candy in 2012/13 is £201m (£46.9m x 4.3) which moves in lockstep with the 62% increase in turnover at the end of December 2012.  So how did Spark Ventures arrive at an enterprise value of £63.1m to estimate their 2.5% stake Mind Candy being  equal to £1.6m?

Let’s ignore the dodgy valuation for now and focus on whether there is value to be stripped from SPK’s investment in Mind Candy.  Adopting the median valuation of £164m {(£127m + £201) / 2}, SPK’s 2.5% stake can be estimated as £4.1m before investment management fees of 12.5%.  It’s now beginning to make sense then.  The investment manager is Spark Venture Management!  The estimated profit to SPK shareholders on exiting Mind Candy investment using the implied valuation of £4.1m less the interim value of the investment of £1.6m is £2.5m whilst the estimated profit on exit using SPK’s 2012/13 valuation, which is more in line with Mind Candy’s operating performance in 2012, is approximately £1m.  Here’s the snake oil trick: admittedly, a shareholders announcement highlighting a profit of £2.5m and stressing multiples of the latest valuation is bound to please the punters.  However, the investment management incentives of 12.5% on £2.5m is £312.5k versus £125K for reporting a profit of £1m.

In conclusion, it’s fair to say that Mind Candy’s downgrade prior to it’s imminent exit from SPK’s investment portfolio is not an isolated event.  The IMImobile investment suffered the same fate after appearing as a shooting star in the 2012/13 (see preliminary announcement highlights above) at a value of £16.2m before being down valued by £1.6m in the 2013/14 interim statement and exited on 27th June 2014 at £16m+ net of SVM incentives fees of £300k+.   Holy Moses, that’s almost the same incentive fees estimated above for Mind Candy. Who knows what the real reason for these down values are?  Suffice it to say that with dynamic leadership at the helm of Mind Candy and it’s re-registration as a US holding company should place it in a good position to rival Candy Crush’s owner King Digital valuation or at least be accepted as a member of the $1billion club.

So, what’s the value that can be stripped from SPK’s investment in Mind Candy?  The estimated valuation of £4.1m divided by 418,850,000 shares gives a NAV per share of 1p.  This is excellent, since IMImobile, post IPO, has an improved NAV per share of 4.24p to add to the 1p estimate for Mind Candy to give a NAV per share of 5.24p for just these two companies.  Then there are the other members of SPK’s interim valuation victims club which will be reviewed in later posts.   The larger the devaluation suffered by the ‘highlighted’ 2013/14 interim valuation victims club, along with ‘Others’ in the SPK’s bargain basement of investments less than £500k, the greater the gross rewards for SPK investors before investment management and incentive fees, of course.

Oodutty