December 14, 2011 5:24 pm

Software companies take flight from Aim

Enough software companies are leaving Aim to prompt investors to wonder if they are being properly valued by the market.

Clarity Commerce Solutions, a provider of software and computer services to the international retail and leisure sectors, succumbed to a bid from private equity group Enigmatic Investments earlier this month. Shares in Parseq, a specialist in mobile and online banking software, are to be cancelled at the start of next year after Rami Cassis, the largest shareholder, and his backers won their bid to take it private.

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David Blackwell

Then last week WorkPlace Systems International announced a £41m management buy-out at 25p a share, a premium of 82 per cent to the closing price the day before the offer.

WorkPlace has been on Aim in one form or another since 1999. Over 25 years it has developed software that enables mainly retailers to improve their performance by increasing service levels through the management of work patterns, including shifts. The customer base is headed by Walmart in the US, and includes Next, Gala Coral and Wickes in the UK.

Over the past five financial years ending March turnover has been close to £9m. It has showed a pre-tax profit twice, and once paid a dividend. So hardly a spectacular growth story.

But more recently the company has been turning itself into a supplier of software as a service, using the cloud and known as WorkPlace OnLine. This has to some extent been recognised by the market, and the shares have risen from 3½p two-and-a-half years ago to 15p before the buy-out offer. It returned to the black with pre-tax profits of £278,000 on turnover of £5.3m in the first half to September 30.

Such a transformation requires investment, and now might be the time to tap the market for funds. Instead the management has turned to private equity in the form of Lloyds TSB Development Capital (LDC), which promises “to support the company by providing resources to continue to invest in research, product development, sales and marketing, and, should valid opportunities arise, strategic acquisitions.”

Bernard Quinn, the chief executive leading the buy-out, believes it would be difficult under any circumstances to raise funds from the market under current conditions. But the position is even trickier given that Ian Lenagan, founder and chairman, has reached the age of 65 and wants to sell his 45 per cent stake.

Mr Quinn also argues that the expected growth of WorkPlace OnLine will be easier to manage as a private company. As a quoted company, he says, there is too much information available to competitors, many of which are bigger private companies based in the US.

It could be argued that WorkPlace International should never have been quoted on Aim in the first place. It has spent a long time making little progress, and the fact that it still has a single dominant shareholder has made it impossible to use the market just as it is approaching a size – as the MBO valuation suggests – when institutional investors might start to take an interest.

Instead a twist of fate has left City institutions taking a look at a US-based software company. Reddwerks Corporation, which hails from Texas, helps retailers to manage internet sales. The company has spent this week trying to raise £10m for expansion, which would give it an expected market capitalisation of about £40m, almost exactly the same size as WorkPlace International. Which company has the right strategy?

Shock and ore

African Aura restructured itself in April, splitting into Aureus Mining, a gold specialist, and Afferro Mining, which is concentrating on iron ore. Shares in Afferro Mining have since fallen from more than 175p to a last month’s low of 39½p. That left it in facing difficulties, to say the least, if and when it required funds to develop its iron ore projects.

But this week the company agreed to sell its 38.5 per cent stake in its Liberian iron ore stake to Severstal for a minimum of $115m cash. The funds will be used to accelerate its development strategy at the Nkout project in Cameroon, which it owns outright.

Luis da Silva, chief executive, said the company was adapting to very difficult market conditions and creating value for shareholders. The deal would leave the company with cash to the equivalent of 77p a share.

The market is taking some time to digest the news. Investec Securities, an independent broker, said the company now has the financial resources to advance the Nkout project, “thereby creating value while still having the freedom to bring in a larger strategic partner at a later stage.” But at the current share price of 55.13p, a negative value is being ascribed to Nkout.

david.blackwell@ft.com

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