Andrew Regan is back.
The controversial (cough, cough) businessman has struck a deal on Monday that will see him acquire a block of shares in the London Metal Exchange.
His vehicle, Corvus Capital, is paying a pound for the operating business of Mentum Investments, an Aim-listed trading company. As part of the deal, Regan has also agreed to take on a contract with commodities broker Sucden.
And that’s where this complex deal gets interesting. Mentum claims the previously profitable Sucden contract is now a liability because of volatile market conditions and things like mark-t0-market accounting.
From the Mentum press release:
The Sucden Contract (pursuant to which Mentum is entitled to receive a proportion of the trading profits of the LME trading team in return for which it guarantees a minimum level of income to Sucden of £3,250,000 per annum), whilst historically a profitable contract for the Company has recently been loss making and, in addition, exposes the Company to potential future cash calls triggered by daily close mark-to-market adjustments which it might not be able to meet from its existing cash resources (although it should be noted that the Board has in place risk management procedures designed to manage the Business’ risk profile with the objective of protecting the Company against exposure to any cash calls that it cannot make).
To that end, Mentum wants shot of the agreement and it’s prepared to give Regan $1m of cash and the LME ‘B’ shares to take it way.
The Sucden Contract provides that Mentum can only terminate the contract on giving 12 months’ notice or immediately on payment of a sum of £8,000,000 (approximately US$12,800,000) to Sucden. Given Mentum’s current financial position, the Board is concerned as to the impact on its financial resources of meeting the costs of (a) any cash calls that might arise under the Sucden Contract; and (b) closing out its existing trading positions, over the course of the next 12 months. As a result the Board does not believe that issuing notice to terminate the Sucden Contract is a prudent course of action. The novation of the Sucden Contract to Corvus will allow Mentum to be released from these potential liabilities at no cost to itself.
Fair enough, you might think. But what are those LME B shares really worth? Mentum says very little, even though they are in the books for $2.8m.
The LME Shares are non-voting and non-participating shares. Whilst the Board is aware of the recent media speculation regarding a possible sale of the London Metal Exchange, the Board believes that, notwithstanding the value attributed to the LME Shares in the Interim Accounts, these shares currently have little immediately realisable value and that there is no market in these shares at this present time. In any event, the Board believes that any value attributable to these shares would be far outweighed by the financial exposure to continued trading and the existing losses and liabilities of the Subsidiaries and is likely to be substantially lower than Mentum’s minimum income guarantee to Sucden of £3,250,000 per annum (approximately US$5,200,000).
Little immediately realisable value! That’s somewhat cheeky, given rumoured Chinese interest in getting LME membership.
In summary then, Regan is getting cash and assets worth $3.8m for a pound. Mentum will also stump up working capital for the Sucden team. In return, Regan takes on the contract and guarantees a minimum level of income to Sucden of £3.25m.
Why does he want to do this? We haven’t a clue. But we do know Regan has close links to Mentum. He was behind the deal that saw Mentum, previously known as Commoditrade, listed on the London Stock Market via a reverse takeovers.
Moreover, the two remaining directors of Mentum have been both been chairman of the Corvus Capital over the past five years. Indeed, one of them has agreed to back the deal, which requires a 50 per cent acceptance vote at an EGM on December 13.
If it all goes through, Mentum will position itself as a cash shell targeting a reverse takeover in the oil and gas sector.
Great. Another E&P shell. Just what the London market needs.
Shares in Mentum closed 41 per cent lower at 0.5p.
Related link:
Regan makes ‘substantial payment’ to CWS, ending battle out of court – FT