Derek Pain: The Solution – avoid private share placings

No Pain, No Gain

For a few months the no pain, no gain portfolio was recording a handsome profit on its investment in Clarity Commerce Solutions. Recruited at 29.5p in April last year the shares topped 50p in the summer only to slip to 28p last month. The price is now at a more acceptable 38p.

Why the slump? Two unconnected influences seem to have created the discomfort on the stock market. The first was one of those private share placings that I have frequently criticised. The second related to court proceedings facing the man who, until last month, was the group's chief financial officer.

Whereas the possible fallout from the placing can be laid directly at Clarity's door, the difficulties engulfing the chief financial officer have absolutely nothing to do with the group, which spends its time providing software for the entertainment, hospitality, leisure and retail sectors.

The shares had started their decline before the £2.7m placing was announced. The price was 42p when the stock market was informed of the 40p issue. Clarity needed around £1.5m to satisfy part of the deferred cost of an earlier and highly successful acquisition. The rest was put into the business.

Shares worth around £1.7m were taken up by venture capital funds and, with directors also subscribing, it seemed safe to assume that much of the issue had gone into safe hands. Yet the share performance suggests steady selling, before and after the placing.

There have, I feel, been numerous examples of high-flying shares laid low by private placings as directors take advantage of stock market enthusiasm to raise cash.

Extra money is always a welcome inflow for a hungry and growing business. But placings are unfair as only the privileged few, usually institutions and individuals who are clients of favoured stockbrokers, are invited to take part at a price below the then ruling stock market level. Too often many of the subscribers do not stick around for long. They are short termers, content with snatching a very modest profit. Such activity must have an unsettling impact on the share price.

Quite clearly most of the shareholders on the register, particularly those with small holdings, are left out in the cold – another example of inequality in the City.

In my view, old-fashioned rights issues, admittedly more expensive and taking longer to complete, are in most cases far more equitable and do less damage to the share price.

The departure of Chris Ford, who became full-time chief financial officer only six months ago, follows allegations of conspiracy to defraud by the Serious Fraud Office. The alleged offences concern a business that collapsed four years ago. Mr Ford storngly rejects the charges and resigned from Clarity to work on his defence.

When announcing Mr Ford's resignation, the group said it was hopeful of meeting City profit expectations (around £1.8m) for the year ending next month. Next year could produce £2.5m.

As if to underline his confidence chief executive Ken Smith, the man behind the group's transformation from a loss making basket case to prosperous enterprise, said this week that the group had clinched a £2.6m point of sales contract with a restaurant chain. The deal prompted stockbroker Arbuthnot to repeat its 55p target price.

As well as Arbuthnot, internet tipster t1ps.com believes the shares are still in the bargain basement. So do I.

Another constituent, Marston's, has also retreated. The brewer and pub owner rolled out a reasonable trading report but its progress failed to impress the stock market. There seems to be some argument in the analytical community about the likely performance of the shares.

Although the portfolio is around 12p light on the stock I have no present intention of selling, partly in recognition of the handsome dividend yield. I also believe there is strong evidence that the booze business is over the worst and headway is likely this year.

Two other constituents have successfully negotiated the takeover trail. Whitbread, through its Costa Coffee subsidiary, is swallowing Coffeeheaven International, which has 90 outlets in central and Eastern Europe. The £36m cash takeover is priced at 24p a share, a far cry from the 50p hit three years ago.

Mears, the support services group, is near to completing its £27m share exchange acquisition of Supporta, a homecare group.

yourmoney@independent.co.uk