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Tern – “Acquisition” RNS: er, actually….

By Nigel Somerville, the Deputy Sheriff of AIM | Thursday 9 June 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.

This morning AIM-listed investment company Tern (TERN) released an RNS entitled “Acquisition”. In fact the news was that the previously announced acquisition on Flexiant Ltd is all off, at least for now. This raises a few questions.

We were previously told that the acquisition was conditional on a few matters: due diligence, the approval of loan note holders in the parent company - Flexiant Corporation Ltd (in which Tern has a very small stake both as an equity holder as well as debt), the sale by Flexiant Ltd of its cloud orchestrator business and admission to trading on AIM of the proposed 8 million consideration shares to be issued by Tern.

This morning we are told that the conditions have not been met and as such the deal is off. However, all may not be lost as discussions are continuing so perhaps we will eventually see a new deal proposed.

So where was the stumbling block?

Of course, if it were the due diligence process that would perhaps place a question mark over the value of Tern’s existing investment into the parent.

On the other hand, it could be that the sale of the cloud orchestrator business has hit a snag – which also might be a worry for Tern’s investment into the parent.

Or perhaps it has something to do with the loan note holders refusing to play ball. Here we might note that according to Companies House there is a debenture giving security to “The Loan Note Holders” over the assets of the parent (which presumably includes the whole of Flexiant Limited). Has there been a problem with that? I wonder if there is a concern, therefore, over Tern’s investment into the parent here too.

As previously flagged, the accounts of the two Flexiant entities are a bit odd, in that the parent notes as a current asset a whopping great debt owed to it by the subsidiary. But in the accounts for the same period, the subsidiary notes the liability as being non-current. As a result both appear to have net current assets, which is handy for being viewed as a going concern. But it seems very odd to me.

To be fair, the investment into Flexiant Corp Ltd (the parent) is a relatively small affair for Tern, with the last accounts giving it a valuation of £269,270. In the light of Tern’s current market capitalisation of £10.6 million it is all rather small beer. What the company's shareholders will probably more interested in when we might see signs of big contracts at its flagship investment of Device Authority (formerly Cryptosoft).

But one does wonder where the deal fell down, and whether there is an implication for that £269,270 valuation.

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