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What abacus are you using for this maths? Both Ince and Arden holders are underwater on this deal. Read my previous posts. The maths is simple. Arden holders are holing a circa 30+% loss and Ince holders have bought a company which has just lost £2.5m of recurring revenue, given no NOMAD license (the deal is itself mad). Staff turnover was at 35% in January of 2022 in Arden. LinkedIn shows that in the last 4 months a further 3 staff have left. I have compared the staff from the IWB website of Arden's team with LinkedIn and other IWB captures and since January 2020, they have lost over 50% of their staff. So Ince have bought (by dilution) a company which:
1. Has lost over 50% of their staff. (knowledge and relationships).
2. Has lost over 33% of revenue and all sticky recurring revenue given NOMAD loss.
3. Retains a corporate finance function. Which INCE already have a much larger version of.
4. Will be unable to attract quality staff due to reputation
5. Wil be unable to attract micro cap clients (their remit) due to NOMAD loss
6. Massive incremental reputation damage (already loss making with high turnover of staff and negative retained earnings)
7. Terrible operating leverage given market making function which is very expensive to run, software, compliance and audit which Ince does not have so will not be able to replicate / manage costs.
Thanks for the explanation of revenue collection. The £9m net debt is taken from the semi-annual. Your analysis could be reworked to suggest that whilst Ince's 'true' cash liability situation is better than it first appears, their own internal metrics for performance of acquired businesses are not being met. Share options in management performance or the deferred liability mechanism as you lay out are 'affordable' due to the underlying productivity before it. The acquired businesses and Arden in the near future are not affordable today vis a vis the net debt position, share price performance, earnings growth, investor sentiment and peer group performance. Again, I suggest this is down to poor judgement in their acquisitions.
Arden will do very well to act as anything other than a negative cash flow drag on the group. To reiterate again quickly:
1. Over 50% of clients (£2m+ of recurring revenue gone) go in next few months due to loss of NOMAD.
2. Proportional loss of transaction pipeline.
3. Reputation damage.
4. High fixed costs
5. Historic loss making as expressed by retained earnings now exaggerated by core sticky business going.
Share options behave in a similar way, future potential dilution tomorrow on the premise of good performance in the interim. They are still accounted for. £25m / £9m net debt, not excellent for a business of this size in any case.
I see that Ince have put net cash as one thing but in any instance recognise the long term liability (including the contingent which I cannot see a breakdown of) as a total of £29.20 - £3.25m cash. On what basis (with no cynicism) do you suggest that this contingency is so improbable that it shouldn't be recognised and therefore net debt can go from £25m to £15m. It's not so improbable, then it should be recognised as a liability surely. In the same way, in the money options can be reasonably exercised and make the diluted eps more pertinent than a eps.
Correct, partner and non partner pay has been pushed dramatically upwards. You must pay in line else lose not only staff with costly hire of lower calibre but also for continuity of operations and on going case work. Razor thin margins in Ince and now EPS will fall once dilution makes way for Arden. Arden are staffed by circa 35 individuals and have very high over heads. £1.2m on IT alone, much of which I suspect is trading systems and regulatory compliance software. If you strip this away to save cost, then what are you actually buying? Arden may be a small company but it is not small compared to Ince. Ince has £3m in the bank and net debt of £25m. Is diluting to make way for a historically loss making entity with high fixed costs a good idea?
Reading the RNS below, I will explain why I believe this is incorrect:
1. Arden's reputation is already in tatters. The quality of the corporate clients which has retained as expressed by their share price performance, earnings growth and cruically market cap has fallen YoY over the last five years. Latterly, they have lost clients in 2020 and 2021 as per the FY report.
2. Not having a NOMAD license will not affect Arden's ability to raise money in as much as they can still raise money as a function. However they will lose 30+ corporate clients who Arden are NOMAD to. On that basis, they will no longer be raising money for those clients , which accounts for the majority of their pipeline of fund raising.
3. Arden are not great fund raisers. They tried to raise $100m for Ondine Biomedical and managed $30m in 2021. The share price of 2021 has fallen off significantly, suggesting they cannot even keep their anchors and institutions engaged in the stock.
4. Arden primarily acts as a NOMAD. The RNS suggests it should not materially impact new client prospects, again whilst they 'can' engage new clients, Arden have done a poor job of doing this so far and will not be able to engage AIM clients whom require a NOMAD which are their speciality. Arden are so small that they are unlikely to be worthy of joint broker status. You typically seek to 'deal up' joint broker candidates, i.e go for a larger broker than you started, not smaller, as your company grows.
5. Ince already have a corporate finance division, so with 30+ clients now gone from Ince given all the NOMAD clients will leave how is this 'fundamentally' the same as the RNS suggests?
Board of Ince believes that Arden's reputation is primarily built around its ability to raise money for its clients and provide other broking and advisory services, and therefore the loss of its Nominated Adviser licence should not materially impact Arden's brand and ability to engage new clients nor its ability to provide fund raising and corporate broking services. The strategic rationale for the Acquisition as set out in the Scheme Document and announcement of 26 October 2021, which focuses on expanding the Enlarged Group's client base and deal flow, fundamentally remains the same.
Most of which has no liquidity. Some will also be used to pay for future losses as history has shown. Look at retained profits, one of the most important indicators in a company that has been public for north of 10 years.
As a market maker and occasional underwriter the must hold this cash for regulatory obligations. Life jackets on a boat cannot be sold unless the boat is sold after all.
Depends on Biles / Brown tenacity to secure the deal. Brown takes approx £220k from an entity which hasn’t retained any profits. In good years it flushes our cash by way of dividend or uses it to pay for losses made immediately in the following year. So with a dwindling number of corporate clients and a moderately successful career at RBC well behind him, his prospects are slender. Ince saves bacon in as much as pension contribution likely higher and there will be a golden goodbye when he has to go.
What is in it for Biles is either a function of very poor judgement or some friendship with Brown. If they decide to deal break then a number of clients will have already left depending on the next few days as Arden will have to decide to inform clients now (point of no return) or pre-empt deal break and hold fire on that. They have regulatory obligations so expect a transparent approach. By the end of trading today all brokers in SMID will have formulated a strategy to work out which of Arden’s clients are worth pitching for. Many are loss making and have major negative ROE so expect only some are worth pining for.
As I have posted a few weeks ago, Arden have a staff turnover on a 12 month basis of over 35%. They are heading into a terrible primary market and have consistently failed to raise cash for secondaries, Ondine being one example. Family office that I know was approached for the raise. They wanted to raise north of £100m but had to come back with a smaller raise as cash not found in market. Now that price is under water.
See my previous posts for the maths on the deal and how it is value destructive for both parties.
In chess this is known as Zugzwang. You must make a move but every move is worse than you started
Arden achieved the blockbuster result of £0.8m….
Still with negative retained earnings. Now they have lost NOMAD as predicted by SMID brokers in October and as highlighted, embarrassingly by the FT in relation to their own faculties to run the deal.
Arden derives the majority of its revenue from its dwindling corporate clients, down from 47 to 42. The majority of these will be NOMAD status. Now Arden will have to tell all of them to find a new NOMAD. None will transact through Arden now. Most micro cap companies have one broker and require a NOMAD on AIM. So it’s fanciful to imagine that the bulk of Arden’s recurring revenue will somehow have another NOMAD but use Arden for transactions, the real discretionary ‘fee earner.
So now Ince have charged on with a valueless transaction. The NOMAD issue was a ‘known quant’ in October but the dynamic duo of Biles and Donnie Brown clearly smelt some personal value creation here. What mutual back scratching was done then will now be rewarded by the market with long lasting scars.
No recurring revenue. Arden’s corporate clients will fall by Atleast 50%. Every shareholder, Arden and Ince is now underwater on this deal.
Chocolate tea pots are Atleast edible. Worthless shares might suffice as kindling.
I agree that Ince have not overpaid. I am simply suggesting they should have not paid at all.
With the rest of your thesis, as you lay it out, I can only agree. Stock markets are not rational. However, stock markets can remain a lot more irrational than investors can remain patient and or solvent. Tesla Shorts being one notable example.
Do you think management can deliver? The stock may well be cheap on a relative basis but margin contraction can be met with earnings contraction. Then the stock will not look so cheap. The Bank of England report on productivity and broader focus on the UKs small cap productivity may align with this stock, time will tell. Comparing INCE to an immediate peer group it is cheap at 11 x trailing P/E but then compared to Knights it has half the earnings margin at 5%. Furthermore it has the worst EPS growth in its peer group at negative 37%. Supposedly Biles enjoys a close relationship with Donald Brown and chatter is that the price of Arden was "agreed over a pint". Is this really indicative of quality management? Where is the actual logic that Arden can tap city sources for cash properly for Ince Clients when they have consistently been unable to find money for capital raises for their existing clients resulting in either deeper discounts or a reduced raise?
Correction.
Melvin Hemming +904,700 in Q4/21 not Biles Q4/20
But Charles Robert Biles did add +387,730 in Q4/21
Others:
John Parkinson +1,200,000 (Like Melvin Hemming and Robin Hall a new investor) in Q4/21
Allianz have trimmed position by 75% since deal announced.
@errattum You make a very balanced and reasonable set of points. However what I would say, recognising that your points also allude to not being able to read the future is that both businesses are clearly challenged. For certain micro cap companies attract volatility and liquidity droughts. That being said, micro cap companies remain micro for extended periods of time (Arden being no exception) for good reason. The fundamentally are unable to produce meaningful, durable earnings. We can point to liquidity and technicals all we want. But the underlying quality of the business matters.
In Arden we have a business that struggles to make profits. In periods where it has made small ROE, it has gone and squandered the cash either in the form of a periodic dividend or in covering losses in very short order. No annual report makes reference to meaningful investment in technology, capability operationally let alone a concrete strategy beyond 'spray and pay' which in an ever dwindling and consolidating broking market does not make sense. Peel Hunt and Numis have made very considerable investments in technology and strategy. Their results YoY speak for themselves. Whereas in Arden, It has never moved up the value chain. The quality of its clients, reputation and deals falls and has fallen YoY. Its inability to access the abundance of cash in the city of London for micro deals and then let clients down speaks for itself. This is reflected in staff retention and reputation and latterly the income statement. Its an incredibly challenged business.
In the case of Ince, despite having a far larger and broader operation, the very fact that the very engaged shareholders have allowed the price to fall to this level is not to be entirely dismissed. Any asset with value proposition will see a floor given that the 'sticky' holders will wish to reduce their average price, given the market cap it's not as if the small investment community here could not produce a meaningful floor to support the market cap. A relation of Adrian Biles, a Mr Charles Robert Biles gave this a go with a purchase of 904,700 in Q4/20. This and the handful of individuals who are the top contributors in the last 5 months, Robin Hall (+1,538,330) and John Parkinson (+1,200,000) have not stopped the fall. Tellingly, Ruffer the largest institutional owner and the Stonehage Fleming have not seen it fit to pick up a 'bargain' as any true believer would. They have both moderately trimmed their positions in the last two years. Wait and see only lasts so long when there is true value to be held elsewhere. After all, given the opportunity to switch alliances in a running race, you might start to question the runner who is forever doing up his laces when his competitor is prized to go. I suggest that in the case of both these businesses, with the value destructive acquisition as a leading indicator, investors will see other opportunities as better horses to make up for their not insignificant losses
Evidently:
1. I joined today as I said at 16.34 with the explicit purpose to discuss this deal
2. I am not purporting to be two different people (given similarity of usernames)
The second account came as I am unable to login to my first. I am sure there are more effective and subtler ways of stirring up trouble than simply creating a new account which is evidently born out of the first. I am here to discuss the deal not accept conjecture. Erratum, whom I don’t know clearly has an opposing view to mine so we are hardly acting in concert.
Right, my original post and my post at 13.04 suggested what you say. There is a fixed ratio, agreed at the start of the deal. This is simply a function of the number of outstanding shares. Looking at the offer...
Arden have 32,299,211m this will be multipled by 0.583r to get to 18,841,206
This will be added (diluted to create new shares) to the Ince share capital of
68,540,912
+
18,841,206
= 87,382,118
When you divide the Arden 18m by the new number you get 21.5%, precisely what the RNS reads.
I recognise that the dilution amount, which is strictly a number of shares, is not a function of interim valuations. I recognise that my language did not make this understanding clear.
My original maths still stands. The original offer was obviously set about with Arden thinking Ince held some value. There was an indicative upside to the 0.22p vs 0.53p. 40.5% is a great upside. It provides a cushion to Arden shareholders.
Arden's share price, perhaps in anticipation of lacklustre results and a failed 'home run' corporate action in 2021 for a client which would have otherwise brought decent EPS in, has fallen off by 14%. Not so bad.
Ince's share price however has fallen off by 52%. This dramatically changes the value proposition of the deal/ If there are any cost savings to be found they will take 1yr + to materialise, savings I am highly cynical of given that there will be pro-rata accounting required for Arden as it will remain a standalone company within the group with complex regulatory accounting etc for its market making. If we assume the market has correctly priced the wisdom of this deal today then the current share price pair represents a -21.7% fall. Worse still, when these shares join the group, assuming current market cap of Ince is near enough priced well, then the 21.5% of £17.5m market cap represents £3,762,500 of value. Vs Arden Market Cap today of £5,400,000.... i.e a 30% drop.
30% is not insignificant.
Perhaps the market will reward Ince for this acquisition and the price will climb. My evidence around client retention, staff turnover, retained earnings and perception of Arden would suggest otherwise. What we can say for certain is that Ince shares need to climb a very long way for this to make sense.
Maths = 12 Arden shares @ 19p = Cost £2.28
7 Ince shares @ 22.5p = £1.785 = P/L -0.495p (-21.7% vs starting cost)
I joined today 23/02/22 with the explicit purpose to scrutinise this deal. I do not know who erratum is.