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

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