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OK, provocative title.
CLNs are often nicknamed "death spiral" finance. That's because the mantra "they can only sell once" no longer applies when there are CLNs issued. If "the seller" is someone converting a loan into stock to sell, as long as they have more loan, they can get more stock to sell, so any rise gets sold into.
But not all CLNs are equal. Let's look at this package. It's a one-year loan facility, to be issued in tranches (now) between now and the end of June. Nice and Green can, at any time, convert that loan into shares at 7% discount. Or they can hold and it gets repaid at maturity. Unless the company repays first at 3% premium (thus searing potential for future conversions, saving 4%). There's no interest on the loan. Arrangement fee: 5%.
1. Nice and Green's intentions.
Why did they enter this deal? 3 options.
(i) To convert the loan to stock, to sell, to make a quick 7%.
(ii) To hold the loan as cash, to maturity, to profit from the arrangement fee.
(iii) To convert the loan to stock, to hold, as a way to invest in the business.
I believe it's (iii) because of two things.
(a) Look at their website and the way they operate. They research and hand-pick which businesses to invest in carefully. They've mostly invested in pharmas, with a few tech and other sectors. There are other CLN lending firms in the City that are a lender of last resort. No need to name names, but when they rock up you know it's bad news. Lending to businesses who can't get credit is just an easy way to make a few quid. That's not the flavour of N+G, from their publicly available material. You don't need to choose businesses with care if you're going to lend for a quick flip. All you need is a liquid market. So it seems they're not here for (i).
(b) The RNS on 14th April said this: "We are a long-term supporter of the business whose interests are fully aligned to the shareholder community and are genuinely excited about the growth opportunity which Napster affords us". That's not a legal undertaking that they'll convert and hold, but we'd not expect that. It's the closest they can come in a quotation at the bottom of an RNS. It clearly states their intentions.
2. The effect of the CLN terms on Napster
Napster needed short-term finance to get a new app released, to integrate the two former businesses, and to integrate the Melody and Napster branded services into one offering. What were their options for such finance?
(i) Place new shares. Typically, the brokerage house would charge about 5% arrangement fee, so they'd get £7.6m by placing £8m worth of shares. AIM placings can come at a deep discount. 10% is not uncommon. The result: Existing holders get heavily diluted.
(ii) Loan. They already have loan facilities in place, but taking out additional loans would probably be at a substantial rate of interest. It also formally increases the debt / asset ratio of the company.
(iii) The CLN plan we have.
The plan we have is not unlike (i) - new shares are issued at a discount to the current price to finance the company. However the discount is only 7%, which is much better than it could have been. The new shares go not to private investors who flip their shares for a quick profit, only to keep their warrants that create a further overhang to be sold into. Rather, they go to an institutional investor who's indicated they're a long-term supporter of the business. So it's like the very best of placings - sticky hands, low discount. What's more, if the company's cashflow increases to the point where they can repay the loan sooner, they have the option to do that, so the number of shares issued at 7% dilution is only as large as they actually need it to be, rather than placing new shares now for the full amount they may need.
The plan we have is also not unlike (ii) - tranches of a loan are made, under the initial terms at no more than 3 weekly intervals. Only there's the option for the holder to convert that loan to stock at favourable terms, so the size of the company's loan facility need not stay large.
All in all - they needed short-term finance to get them from the loss-making MVR days to the sunnier days ahead offering an integrated MVR-NAPS offering to a growing range of telcos etc - the largest online music library, coupled with immersive VR bringing live music into people's homes. Given they needed that, it seems to me they've found the ideal partner and the ideal way to fund it.
The fact that, technically, this is via a financial instrument known as a "convertible loan note" should not mean we conclude we're now in a death spiral. Not all CLNs are created equal. This package, is in fact, ideally suited for Napster at this point in its deep turn-around.
I’ve made a very similar point recently SlowlySlowly - very easy for some to jump on the decision with the negatives, but these types show lack of business experience and awareness. I hope the additional funds are to push the new app through quicker, perhaps in response to the ever-changing COVID news re live concerts. OR, maybe there are big big plans in waiting requiring the new app to be released sooner? This is not easy for those who haven’t taken profit and/or averaged down and I get the bitterness. It’s tough atm. It’s a waiting game and those who see the bigger picture will prosper. GLA
And that deep turn around will be as per the presentation , once Napster cover its costs its just a case of sharing our libraries ( NOS 5G already promoting Melody) , and the old library that is being promoted will look relevant . ok we will have to pay our fair share to the artists etc but no other costs , brilliant business model imo , Great post slowlyslowly you have captured all us LTH , good luck .
Rikki - I believe they knew exactly what they were doing. As I say, for short-term finance, this is an excellent setup. So tailored for what we need, they may well have planned all this during that suspension period.
As for N+G waiting until the end of June to convert: We don't know their plans. They have the full 12 months of the facility to convert, and can do it whenever they wish. I do know that they don't get to ring the London Stock Exchange and ask for the share price to be 2p on a certain date so that they can come in at 1.86p. Share prices are driven by supply and demand, and by lots of other factors. They will judge their entry points. Like the rest of us, they can wait hoping for a lower entry, knowing they may miss the entry as the price roars higher or the company repays the loan. Or they can convert now, knowing they may miss a lower entry later. At only 7% discount, with no indication their conversion leads to selling, I'm not too worried when they do it.
EVRH/Melodyvr/Napster have now invested 70 million into this business model over the last 4 years , you would take a punt that the commercial investors are in on this long term investment !!!!! And i would like to believe the intent written by all the partners on the RNS and thats most wanting to build a fairer business for the industry , of course they all could be greedy, only in for profit but if that is the case they will be looking at the later/bigger picture which is long term and not in a couple of months ?
We have a market cap of circa £50-60m. We have £40m in funding for the app, plus the money to pay for the RTO. There is a reason Davis Group have the charges on their loans. It is actually quite incredible for a company with such a low Mcap to have been able to secure the funding they have to date! So I can stomach a bit of dilution and a low sp for now, but my expectations on the new app and launch plans are very high
Of course, they're all in it for profit.
But it's not a zero-sum game. Find a business model that properly rewards artists, you find a business model that is sustainable and will also properly profit the companies who make the music available to consumers.
As you say, the question is whether they're after a long-term or short-term profit. The shortest-term profit is a quick 7% flip. Without warrants, and with what we know of N+G, that seems unlikely as I argued in my OP. If they're in it for a profit, they still achieve that by investing at these lows and riding the share price up. Whether they sell mid-term (few months) or longer term - well, that's just like any other large institutional holder. There's an overhang created by the fact they have to sell some day.
Lets hope they see a share price of 10 at the end of the year which must be doable when the App lands , just a wild guess :) which takes their investment to 20 million approx and in line with their RNS intent statement , so that 7% does not stack up in my opinion .
Some big numbers flying about today on both buy and sell side!
Certainly more interesting board than this time yesterday.
Slowly
'There's an overhang created by the fact they have to sell some day'.
We all will, one way or another
N & G will have been advised by Equitory. We are both their clients.
Apologies for banging on about this as I have been for the last couple of days. But IMO the company is being groomed with M & A in mind. In other words, at some point, Equitory will be looking for a suitor for us. On that basis N & G would want to hold on to all the shares they get.
Cheers, Albert.
I agree about Equitory.
But back to N+G: That was my point exactly. Once we've dismissed the idea that they're in this for the shortest term profit (hold for 5 minutes or half a London session), it becomes pointless asking whether they're in it for the medium or long term. At that point, they're like any other long-term holder who's invested based on the long-term investment case here.
Albert
100% agree breath of fresh air today . lets get to May settle us all down :)
Yes Lord.
If it's frazzled nerves you want, invest in Melody/Napster.
It shows we care though.
Good luck for the rest of the season. (I'll have a word with Hoogleboogle. see if he'll let you win the last one).
Albert
have you noticed most LTH have kept the faith which is what i will need 5 easy games but Chelsea first :)
My May prediction for the media campaign is SH and AM last seen on a tropical island they have bought sitting in gold plated thrones wearing diamond crusted lightweight vr glasses watching us idiots on ISLE and laughing :)
Should have put thongs !!
this will be at 1.96 tomorrow. can see a 11% drop by 10am
In the opinion of the noisy Gob!!
Glad I got out of this when it re-listed. Shameful to see how far down it has come. Only happy people in past few years are those who bought in May 2019 and sold in June/July 2019. Can't believe I thought a small company with no real direction and endless name changing could even succeed in VR. If it hits off google amazon or apple are going to be all over it so fast this will be left dead in the water.
Oh god,
This sounds like another Rikki
nice to pop in for a chat !!!!!!!
"Apologies for banging on about this"
No need to apologise. Just stop repeatedly posting this completely fictional narrative you've created in your own head and are now presenting as self-evident fact. We get it, you think that an independent Investor Relations company will 'prime us for a takeover'. We can all make our minds up as to how credible we think that claim is.
i don't get why they need millions to re-do the app.
as far as i can tell it's basically just going to be the napster app, with melodys videos added to it. all the code for the melody videos is done already. it works on the melody app. why do they need millions and eight to ten months to re do it all again?
they need to just dump the whole melodyvr disaster and promote the hell out of napster.
I don’t think the app will cost £millions to build - prob £100-£125k (at most). The biggest expenditure will be advertising and marketing, plus licensing / hosting costs. That’s why I’m expecting (or let’s say ‘hoping’ to satisfy the negative posters) a huge campaign when this thing takes off.
Software Infrastructure design, writing system requirements and refactoring existing code and code writing will cost more the 100’s of thousands along side the integration into partners systems if they are going to produce a multi-faceted platform, combining the existing code of each legacy system would be a disaster in my view! A 20 - 30 week project in my experience is normal for an intense program, they have a very experienced team and experienced stakeholders as a shareholder in Wandisco! They realise there won’t be a 2nd bite at the cherry, this is a critical APP for us as shareholders! IMO GLA