Smaller Companies: Shell vehicles offer a lively ride for investors

INVESTORS who feel they have missed the spectacular gains in the stock market over the past year should not be dismayed. Although most sectors are now on pretty fancy earnings multiples, there are still special situations that offer something extra to canny buyers.

One area offering potential for smaller investors is shell companies. As entrepreneurs race to get back into the market, corporate financiers are looking for appropriate vehicles.

There are two types of entrepreneur to whom shell companies are attractive. Aggressive players can use them as acquisition vehicles, issuing shares to build businesses. Alternatively, owners of private companies can reverse into them to provide a stock market quotation.

The small investor can benefit by going along for the ride. Any deal involving a shell is likely to transform the company, usually to the benefit of existing shareholders.

A recent example was Europe Energy. Last month Gerald Davison, formerly an executive with Honda UK and Keep Trust, the car distributor, took a near 10 per cent stake with a group of backers.

Mr Davison plans to turn the company, whose only asset is a Welsh coal mine, into a motor dealership. The share price has risen from 8p a month ago to 28p.

City Marketing Financial Analysis, a smaller companies research specialist, has been looking at potential shell companies and has come up with some candidates to interest smaller investors.

Richard Bernstein, CFMA's managing director, says: 'Intrinsic value is more important than hope value.

'The ideal shell candidate is a once-healthy operation, which through losses or disposals is reduced to one small, preferably cash- generative business and possibly some cash or property assets.

'It is important for there to be a large stake available for purchase so that a new management can gain control cleanly. There is often not much of a market in the stock so hostile predators usually find them very difficult to take over. Consequently, reverse takeovers are almost always agreed.'

The Investment Company is a vehicle that invests solely in preference shares. More than 54 per cent of the stock is owned by its chairman, Major GL Webb. Net asset value should be above 50p a share by the year-end in March, but the shares trade at just 40p. The fact that it is trading at a discount to its net assets makes it an unusually attractive shell candidate.

Suitable shells can also emerge from large companies that get into difficulty and have to sell most of their trading businesses. An example is MTM, the chemicals company. After a series of traumas it has just one business left, but the new management wants to invest in science-based companies. According to the latest accounts, MTM had net assets equivalent to 77p a share, but the stock trades at only 53p.