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Is Onzima's placing the most expensive ever?

By Gary Newman | Tuesday 18 April 2017

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.

Shareholders of Onzima Ventures (ONZ) will be breathing a sigh of relief following confirmation of the acquisition of the remaining 51% of private company N4 Pharma, and meaning that the new entity will relist on AIM. This won’t have come as a massive surprise as the company announced this proposed acquisition back in January, but some still seemed nervous as the announcement went right down to the wire in terms of Onzima either announcing such a deal (which constitutes a reverse takeover) or being booted off of AIM.

The acquisition will be satisfied by the issue of 4.51 million new shares to Nigel Theobald – equivalent to about £315,000 – plus a further 4.59 million deferred shares, which will be issued should the share price exceed 15p for ten consecutive business days within two years of admission.

The company will be changing its name to N4 Pharma (N4P) and Nigel Theobald will become the CEO of the new company, and will hold around 17% of the shares in issue – the bulk of those coming from the original deal for the 49% stake in N4 back in March 2016, which was settled by a payment of £41,000 and over 24.2 million shares.

Now, I’m yet to be convinced by the value of N4 Pharma - given that it has been going since 2014 and states that it reformulates existing drugs and vaccines to improve performance. This is supposed to be far quicker than formulating a new drug from scratch, in terms of getting approval and onto the market – and currently Sildenafil, basically Viagra, is its most advanced product.

But what I can’t understand is that, given the size of the market for Viagra and similar products, and the players involved in it, how some tiny private company with little in the way of funding could come up with an improved product, or even if it did manage to, then how come an AIM minnow like Onzima, which didn’t even operate in that sector, was the only company to show any interest. Surely if there was a large amount of potential and value then one of the bigger pharmaceutical companies would have shown an interest – even if it was just to buy it in order to stop competition for its own products!

It’s still early days on this front though, and only time will reveal whether there is any actual value in any potential products. In terms of the acquisition, we also have to consider the fact that there was an outstanding £309,000 loan in place to N4 Pharma, which I am guessing will now be written off in the accounts.

You would hope that some of that loan was spent on further progress with N4’s research, but given that at the end of March 2016 it had net current liabilities of nearly £90,000 – more likely £125,000 given that some of its net current assets was in the form of debtors - plus whatever else it spent on general running and admin costs in the last 12 months, it certainly won’t all have gone on research.

So if the loan was written off you could argue that Onzima has effectively paid £624,000 for a 51% stake in a company that had net liabilities as at its last filed accounts, and one which I doubt would have been in much of a stronger position now, with its only real assets on paper being whatever cash remained from the money it was loaned.

Lastly I want to take a look at the placing which was announced at the same time as the acquisition, and something with this looks very wrong to me, and I wouldn’t be surprised if there was more going on than meets the eye.

The rumours doing the rounds was that the company was looking to raise £3 million by way of a placing, but when the RNS came it revealed that it had in fact raised £1.5 million – that was at a price of 7p, or 1.75p in old money as basically a 4:1 share consolidation is to take place. So either the rumours were wrong, which is always possible, or the company failed to raise the amount it originally intended to.

What really stands out from the placing details is that this only results in net funds of £1.05 million, which suggests that £450,000 went on fees associated with the placing – the RNS clearly states that this is the amount raised net of expenses. Obviously I would expect costs in relation to the new company commencing trading, but wouldn’t expect those to be included in costs associated with a placing.

Now that seems to be an awfully high amount in fees, and although I realise that brokers do tend to take advantage of these smaller companies in terms of charging higher fees, I certainly wouldn’t expect it to be any more than £200,000. So why such a large figure?

Personally I’ve never taken part in any placings or the like so am not sure exactly what rules are in place, but from what I can see there is nothing to stop the brokers offering the placing shares to clients at a discount – as long as the company receives the funds it should do under the terms of the placing.

Each placee also received a warrant at 8.5p, so you can bet your life that when this share resumes trading the game will be to try and drive the share price higher than that level, so as to trigger the warrants. Plus of course to cash in on the shares purchased during the placing.

If N4 Pharma does open around the placing price when it recommences trading then that will give it a market cap of around £3.18 million, which seems high given what it actually has currently – it does still have some investments in other companies but these certainly aren’t worth huge amounts, and at the last accounts were valued at £175,000. Certainly if you look at the Onzima balance sheet up to the end of June 2016 it certainly doesn’t appear to be attributing much value to the 49% investment in N4 Pharma at that time.

This has always been a popular share with PIs, plus you have placees who are looking for a quick profit, so there is a good chance that it will get pushed higher when it commences trading again, but I would be very careful buying at what I consider to be an inflated share price, even if it is only trading at the placing price.

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