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New World – A case study in catastrophic shareholder value destruction on AIM

By Nigel Somerville, The Deputy Sheriff of AIM | Wednesday 17 June 2015

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

In my last piece on the latest twists in the ongoing shambles I looked at the apparent mis-match between what New World Oil and Gas (NEW) was saying, and the Market Notice issued by the London Stock Exchange. Ben Turney has since published this incredible article – I hope that he made sure that the board of New World had been offered a chat with the Priest and blindfolds all round before releasing the trap door. And if that was not enough, there are today’s revelations that placees of the failed placing were not informed of the required shareholders approvals. Meanwhile, a look at shareholder value.

We are told by New World that the open offer and placing package will deliver gross proceeds of £3.5m to the company. But we are also told that net of costs it will raise just £2.8m, meaning that costs are a whopping £700k – fully 20% of the gross proceeds – and greater than the market capitalisation of the company before this whole sorry saga commenced at the end of April. Even for AIM this is stultifying. What on earth could have cost that much? It is not as though the Company has produced a prospectus (cough, yet.)

In section four of the Open Offer document, subsection six (on p56), we are given some details of the Engagement Letter between New World and Cornhill dating from 1 June and amended on 10 June ‘pursuant to which Cornhill Capital was retained to assume the duties of broker and placing agent to the Company’. At this point I should note that on p7 Cornhill is listed as ‘Placing Agent and Broker’, but that Beaumont Cornish (up until now both Nomad and Broker) is only listed as Nomad. So has Beaumont Cornish resigned or been sacked as Broker? Just to confuse, the AIM rule 26 section of New World’s website still lists Beaumont Cornish as the (only) Broker. Given that Beaumont Cornish remains (at least pro tem) Nomad, I would have thought an RNS should have been issued on this.

Back to those fees, as detailed on p56 of the Offer Document. We are told that Cornhill will receive 3.75% of the proceeds of the open offer and clawback (effectively, underwriting) placing as a fee -£131k. But the costs of this transaction are £700k. So where is the rest going? The company states that ‘it has agreed to pay all out-of-pocket expenses and disbursements incurred in connection with Cornhill capital’s engagement (including, but not limited to 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)’. So has Cornhill has stumped up New World’s legal costs, to be repaid out of the placing/offer? Why? And the implied total is of the order of £569K - quite some bill!

Why would Cornhill put up the cash for New World’s bills? Perhaps a look at the cash in the bank as stated on p16, as at 8 June, will answer that one: £290k. Before this fiasco, we had thought the cash balance was around £600k (see below) – but it seems that there has been hefty expenditure on sorting out the mess created by the placing that wasn’t placed. I would suggest that the reason Cornhill appears to have been paying New World’s bills is because New World didn’t have the cash. Somewhat disingenuously, P15 of the offer document states that the net proceeds (£2.8m out of the gross £3.5m raised) assume full subscription under the Placing and Open Offer and ‘after expenses relating to the EGM’. Well it was related all right, but it seems to me that the expenses were more related to the fact that someone messed up in gargantuan fashion.

In the light of that, consider this: New World has stated that if the settlement issues cannot be resolved with the result that suspension of trading is not lifted, not only will the company find itself booted off AIM in mid-November, but ‘the Company may be faced with no alternative but to commence winding-up of the Company.’ That strikes me as most odd: if they have no alternative to commencement of wind-up, why might that be? Lack of cash? Insolvency? How might a company which has just raised £3.5m become insolvent? Could it be that there is a tad more uncertainty over the fundraising than we might assume? We are told that the whole thing is subject to the Placing conditions (which are not fully disclosed) not being breached, as well as being conditional on admission to trading by the end of July. Questions, questions….

Thus far we might conclude that, roughly speaking, New World has racked up legal bills from this whole fiasco which exceed its market capitalisation immediately prior to the original (abortive) Placing announcement. But there is even more shareholder value destruction to report: on P56 of the offer document we find that Cornhill is in line to pick up a hefty pile of additional shares from warrants to subscribe for 5% of the shares issued in the offer and placing. With 3,888,873,028 shares to be issued in the offer/placing, that amounts to 194m shares. The document is not specific as to the exercise price – I think 0.09p is implied, but not actually stated directly.

In addition, Cornhill is to be paid an annual retainer of £30k (with effect from 20 April 2015, despite what we were told about the effective date of appointment) ‘in consideration of….acting as broker to the Company following Admission’ which can be paid as 65,454,545 shares at the election of either Cornhill or the company. If Cornhill is handed 65m shares instead of a £30k fee - £36k if we include VAT - that implies that the shares are being issued at 0.055p per share, ie the issue price of the aborted placing. That leaves me wondering again about the warrant exercise price.

The company can elect to pay Cornhill its 3.75% commission fees as shares, at the offer/placing issue price which implies another 146m – or, rather, 175m  (after VAT) shares could be handed over, making for a total of 434m shares which could be heading to Cornhill. We are told, on P15 that in fact Cornhill could be issued with up to 454m shares, so I’ve obviously missed another 20m shares somewhere. But the point is that this total represents almost two thirds of the existing number of shares before this shambles kicked off.

So as far as I can see, the company appears to have spent more than its market capitalisation on the abortive placing, EGM fiasco and legal and other bills just to get to where it is today, and in the process it can (on top of everything else) hand over two thirds of the previous number of shares in issue to its broker. Sheesh! Talk about the destruction of shareholder value.

Talking of which, let’s do some maths. On 29 April 2015, in the RNS detailing the abortive placing, New World stated that the (now failed) funding round would raise net proceeds to £1,387,500m, leaving with the company with approximately £2m in cash. So that implies that the company had cash of £612,500 before the board went into corporate hara-kiri mode – around 0.087p of cash per share. Given the lamentable performance of the Board since New World arrived on AIM, I will ascribe zero value to the exploration assets (such as they are). The listing is probably worth, say, 400k as a reversal target. So we might consider the net worth as being about a million quid – or 0.14p per share.

Now let’s look at what happens if this placing/offer is not torpedoed first: cash of £290k (as at publication of offer document), net proceeds of £2.8m. Knock of a few bits of director salaries accrued and we have cash of about £3m. Let’s add on that £400k for the listing and assume zero worth for the exploration assets. So total assets of about £3.4m – but there will by then 4.59bn shares in issue, which brings net assets to 0.074p per share.

In other words, even if the offer goes ahead and all those warrants/rights/entitlements which could go to Cornhill are ignored, shareholders have seen their net worth halved.

Small beer, of course, compared to the fake sheikh incident (1m Euro down the swannee), where the $4.8m the company got from the abortive Neil Petroleum deal went, and what has happened to the £6.3m raised from the last placing, two years ago – in part taken up by the board borrowing the cash they subscribed from the company, and of which even now more than £300k remains outstanding, according to the offer document.

I closed my last article on this by stating that it was unquestionable that the board has to go…. if it survives the public hanging dished out by Ben Turney yesterday, not to mention today’s revelations about the aborted placing. If the offer/placing currently on the menu falls apart then I’d say a wipe-out is on the cards.

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    Great insight, Nigel – and beautifully written.

    The “legal” costs look too high to be true and the whole bodge-up looks suspiciously like a plan to settle as many shares as possible on Cornhill — presumably so that they can mitigate their own naked short exposure.

  2. This has got to be a candidate for the AIM value destruction contest surely? and Conroy gold as well ? So much choice ………………….. Actually , thinking about things , it would be good if share prophets had an alternative “fair trade” Aim index list , for example :- This index would comprise of only those AIM companies judged to be :-
    1) thought to have a genuine eventual profit motive and intention one day to pay dividends .
    2) reasonable director renumeration, fees and options proportionate to progress made
    3) regular and accurate reporting via RNS
    4) no fibs lies or fraud under current exec board members management period in office
    5) no reporting via twitter and other informal media
    6) Above to be judged by a panel of six SP writers chaired by Tom , Ben or Nigel
    7) list reviewed quarterly by judging panel
    8) The list would NOT indicate judges wish to invest in said company , merely that the company is judged to adhere to the criteria above and the AIM RULES .
    9) The SP reader himself to decide if a company is a good investment fit for them personally by own research of SP writers articles . The list is simply an “are they a good boy at school” list .

    this would be simply a list of all AIM companies known to meet the above criteria in so far as the judges are aware , to the best of their knowledge and expertise . No liability attached to the judges . Companies can ask why they are not on the list but have no rights to alter their status of ON or OFF the list . The emphasis would be to improve their inadequacies to gain “reputation listing” with SP. The reader charged £2 per month by DD for access to the list 24/7 to check they are not investing in a “problem child” who does not adhere to the basic rules .

  3. nigel somerville

    D&D – thank you for your kind comments. Yes, the whole thing looks to be a bodge so as to fall between so many stools which is why the offer document is so long. I do not (yet) know whether Cornhill and its’ clients are victims or villains, but one thing is for sure: the shorts will win hands down almost regardless of outcome.

    Wild – you qualify inclusion on the list so much that I rather fear that the list would be short to the point of negligible! As such I am happy to sit on the panel to consider whether to include ANY companies at all!

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