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Leni Gas Cuba – update on that Canadian take-over: rum’n’cokes all round

By Nigel Somerville | Sunday 29 May 2016

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.

On Friday - ahead of the bank holiday weekend - at no-one-is-watching o’clock (natch) ISDX-listed Leni Gas Cuba (CUBA) updated twice on its proposed take-over by Canadian TSX-V listed Knowlton Capital Inc. There is much to mull over there, but we have also recently had interim numbers from Knowlton and the implications for those caught in the lobster-pot of CUBA are horrific – anyone who handed over more than the 0.01p that David Lenigas paid for the bulk of his shares, that is.

On 12 May Knowlton released (unaudited) interims to 31 March 2016. They showed net current assets and net assets of C$338,708 (about £178,000). That number included a C$50,000 loan to Mogul Ventures, with which a corporate action was recently binned. EDIT: we are now told that this debt (plus interest at 10%) is now due (the repayment date had previously been extended to April of this year) and that Knowlton intends to pursue repayment from Mogul Ventures. That doesn't sounds very promising, but since I'm a nice guy I'll assume that the cash will eventually turn up.  

Shares in Knowlton have been suspended on the TSX-V since May 2014. Whilst the suspension price was 10c (Canadian), which accorded a market capitalisation of C$3.67 million (call that around £!.9 million) the most recent share transactions I can find relate to warrant exercises at 5c Canadian (call that 2.5p), which arose from placings and convertible loan issues with a similar price-tag on the resulting shares. Perhaps that £1.9 million is nearer to £1 million.

Either way, it looks rich for a non-trading company which has had its shares suspended for two years, with net assets of around £178,000 as at 31 March 2016 - oh, and with a going concern qualification in its last full year accounts.

With Knowlton taking out CUBA surely there will be a tasty premium?

The thing is that this is a reverse take-over, so CUBA shareholders will have the dubious privilege of swapping worthless paper in one POS for worthless paper in another, ending up with the majority of the share capital. Not only is it a reverse take-over in terms of the confetti, we are told that the management team will consist of the current management team of CUBA, although the boardroom will be 3 Knowlton directors, 2 from CUBA and one other.

We are also told that CUBA shareholders will end up with 84.43% of the company. I am sure that the board and shareholders of Knowlton are no mugs and will want their pound of flesh for seeing the deal through.

Far be it from me to question the wisdom of the insiders at Knowlton - let’s consider the Leni-maths here: 15.57% of the combined entity goes to Knowlton shareholders who have just been told they are worth about £178,000 (including that C$50,000 outstanding debt, plus interest). That implies a valuation of CUBA as it stands of just £965,000 – a bit of a far cry from the market capitalisation on ISDX of £6.7 million.

That works out at about 0.2p per CUBA share, as against Friday's close of 1.35p (according to ISDX). One might imagine that anyone paying 1p or 2p a share (or the sorry few who ponied up at 5p on IPO) when they got in will all be feeling rather sore.

Of course, David Lenigas – who paid just 0.01p for the bulk of his shares – won’t be quite so upset.

For the life of me, I struggle to see why he made such a deal about how:

The TSX-V is a leading exchange in North America for growth companies, and this transaction should provide a platform for improved depth and liquidity of the Company's share.

Am I missing something here?

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