By Ben Turney | Monday 22 June 2015
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I took a temporary vow of silence last week concerning New World Oil & Gas (NEW). We should learn soon enough whether my faith in the regulatory authorities was misplaced, but there is one issue I am compelled to speak out on; the sickening and unconscionable fees New World has agreed to pay Cornhill Capital in relation to the highly controversial open offer.
On June 11, New World announced its plan to raise £3.5million at 0.09p through an open offer and placing. It was bad enough that New World’s board ignored prevailing market demand for its stock, when it set this unacceptably low price. It was even worse that New World’s board also decided to forgo the opportunity to offer existing shareholders more favourable terms, to give them a chance to benefit properly. However, perhaps the most difficult aspect to stomach has been how much New World’s board has decided to pay Cornhill for its role.
Based on information contained in New World’s circular, Cornhill could stand to earn as much as £1.15million from this wretched deal.
As I explained in this article, two weeks ago, New World should have sacked Cornhill for its role in creating the forward selling fiasco. This directly caused the chaotic settlement situation in New World’s stock, cost New World over half its precious cash reserve (leaving it in a “precarious” financial position, as it admits in its open offer circular) and resulted in the prolonged suspension of the company from trading on the London Stock Exchange. That Cornhill now could stand to benefit to the tune of £1.15million from the deeply mispriced open offer heaps insult onto grievous injury.
How reliable is this £1.15million estimate?
Let’s begin with how much cash Cornhill could expect to earn as reward for a job not-so-well done.
New World’s anticipated net proceeds from the placing and open offer are only £2.8million. Given that the open offer is meant to be worth £3.5million, this begs the obvious question what will the £700,000 be spent on?
The answer is not on fees.
No, careful inspection of the circular reveals that Cornhill could well take the overwhelming majority of its fees in share payments. We can only speculate as to why Cornhill might have such an overwhelming desire for New World stock, but this leaves unanswered what will happen to the £700,000 cash.
For some logic-defying reason, New World’s board has agreed to pay Cornhill’s “out-of-pocket expenses and disbursements incurred in connection with the Placing”. This includes “the fees and expenses of Cornhill Capital’s legal advisers and any other professional advisers retained on either the Company’s or Cornhill Capital’s behalf” since its “engagement”. Given that this engagement has been backdated to April 20, it is entirely possible that this could cover costs incurred as a result of the original failed placement. The legal fees alone could have run to hundreds of thousands of pounds.
According to its RNS on April 29, New World had just over £600,000 in cash. This figure now stands at £290,000, so the company has already spent over £300,000 thanks to the forward selling fiasco. Are we seriously meant to believe that it has directly incurred another £700,000 in “expenses relating to the EGM”?
If New World hasn’t directly incurred such costs then the logical conclusion is that its advisors have. It could well be those that it has agreed to pay. I plan to ask the company for comment on this, so let’s see what response I get.
While I continue to hold my breath, let’s consider the fees we know Cornhill definitely expects to earn. These are as sordid as they are unpalatable:
It is bad enough that New World has backdated this arrangement with Cornhill, in light of its role as one of the main architects of the forward selling fiasco, but issuing equity at this price goes so far beyond the pale, it is impossible to see how this arrangement can be at all commercially justifiable.
I often wonder if I am on the wrong side of the fence in this AIM game. How can Cornhill’s appalling performance acting on behalf of New World in the last two months possibly deserve such rich reward?
Shame on all involved.
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