Blinkx rebuttal of blog allegations

Blinkx has today published an extended rebuttal of the allegations against the company made in a blog a few weeks ago. Those allegations called into question the ethics and business practices of the company and resulted in a major fall in the share price. As the blog author had been commissioned by investors, it has been suggested that this was a typical shorting attack, and might be market abuse (we understand more than one person has complained to the FCA on the issue). ShareSoc did an extensive review of the case in previous newsletters.

The document published this morning is 14 pages of dense text and you may find it heavy going. So here are two extracts from the start and end of the document that summarises the key points:

“The Company has been able to confirm and verify that the blog contains materially misleading information, uses selective data, makes erroneous assumptions about current and past practices, and reflects either a fundamental misunderstanding of the online advertising ecosystem and economics or is a deliberate attempt to use partial, incorrect and misleading information to arrive at subjective and malformed conclusions.”

“The blog is rife with numerous factual errors and materially misleading information. Since its original publication, the blogger was forced to correct and update the blog and make further disclosures around conflicts of interest that still remain vague and opaque. In addition, we know that the blog was aggressively marketed to the institutional investor and analyst community, and that following its publication, the blogger continued to promulgate his opinions with retail investors. This leads us to question the motivations of both the blogger and the sponsors of his research, and in our opinion may indicate the use of expert network techniques to influence shareholder sentiment and share price. Ultimately, the misapprehensions in the blog could easily have been corrected through publicly available diligence or by asking blinkx for comment.”

You can read the full report here: http://www.blinkx.com/corporate/blog

The company is also holding a meeting for investors and analysts today which will be recorded and made available on their web site.

Comment: Let us hope that this is the end of this matter and that the company is now able to pursue its business affairs without further distraction. Lively debate and analysis of companies is healthy, but publishing unverified facts and dubious comments which are distributed around bulletin boards without even checking with the company is another matter altogether. This kind of activity simply brings the market into disrepute and puts people off investing in AIM stocks.

SSE, Centrica and Energy Market Probe

The prices of shares in energy supply companies such as SSE and Centrica fell sharply last year after Labour threats to impose a price freeze for retail customers. For example SSE was as high as 1675p in May 2013, but fell back to below 1350p by November. It’s 1508p at the time of writing and has shown a steady recovery in the last new months. That recovery arose because both the Government and the companies took steps to minimise future price rises.

For example, on the 26th March SSE announced that it was freezing household energy prices in Great Britain until January 2016. The announcement included a focus on operational and financial efficiencies, including cost cutting and asset disposals. This announcement nicely pre-empted the news the following day from OFGEM that it had asked the Competition and Markets Authority to look into competition in this sector.

To quote from the OFGEM announcement, their concerns are:

– Declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent. This may deter consumers from engaging in the market and prevent them from getting a better deal for their energy;

– Continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests;

– Retail profits increasing from £233 million in 2009 to £1.1 billion in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits, and;

– Suppliers consistently setting higher prices for consumers who have not switched.

The essence of the allegations (as Diane Abbott put it succinctly in a recent BBC question time) was that the big energy companies are effectively running a cartel to maintain prices at similar and high levels.

The market reaction in the share price of the companies was minimal, which might be seen as surprising.

SSE welcomed the referral so as to achieve “greater political and regulatory stability” and the Chief Executive of Centrica, Sam Laidlaw, said “Britain’s energy market is highly competitive and we believe that a full independent review by a respected regulatory authority would demonstrate precisely that“.  But he also warned that a prolonged period of uncertainty would inhibit new investment in generating capacity – the Daily Mail reported this as creating the risk of “mass blackouts“).

Indeed Tim Yeo M.P. noted that the cut backs at SSE which included cancelling large off-shore wind farm projects were a symptom of future investment shortfalls that would “aggravate the coming crunch in generating capacity and increase the risk of blackouts“.

It would appear that the companies welcome the political gesture of the investigation, expect to get a clean report, but would simply like to get it over with quickly.

In their announcement on the 26th March, SSE reaffirmed their commitment to increases in their dividends for 2014/2015 to at least match RPI inflation, with similar increases in later years. On a forecast p/e of 13 for the year ending March 2014, and a dividend yield of 5.7% (based on the current hare price), one can see why investors still view the shares as attractive for income in comparison with putting cash on deposit, albeit there is some political risk attached.

Comment: although the large energy companies might have benefited from some consumers failing to switch, there are actually quite a range of alternative suppliers who compete on both price and capabilities. At first glance, competition is fairly healthy. It’s also easy to use price comparison web sites to identify the best deals. For example Telecom Plus, trading as The Utility Warehouse, is one growing competitor and investors should bear in mind that if you hold a minimum of 2,500 of their shares for more than a year, you get an additional 10% discount.

Roger Lawson

Shareholder Activism wins at Leaf Clean Energy

Leaf Clean Energy (LEAF) is an investment trust that specialises in “renewable energy and sustainable technology”. It raised $386 million in 2007 but subsequently bought back some of its shares giving an effective net figure of $307m. At June 2013, net assets were reported as $183m, i.e. substantial losses have been made, and the latest interim figures announced yesterday (26/3/2014) reported another $1.8m of losses. A more extensive analysis of the issues at the company was given in the last ShareSoc Informer newsletter. It certainly looked to be “a suitable case for treatment” (to echo the words of that well known 1960s film).   

Crystal Amber, an investment company, who hold 10% of the stock, requisitioned an EGM  to replace the Chairman and Chief Executive with two new directors. Yesterday the board conceded defeat without putting up a fight (and the EGM requisition has been withdrawn). That is somewhat surprising considering the relatively small holding of Crystal Amber, but presumably the board consulted other large holders and realised the game was up. The company announced that Peter Tom and Brian Keogh have “tendered their resignation as directors” and that Stephen Coe and Mark Lerdal (who had been put forward by Crystal Amber) will be appointed directors with effect from the 1st April.

As Crystal Amber’s stated objective was to put the company into an “orderly run off mode”, it seems likely that this is what will now happen. The share price has not reacted significantly to this news even though the shares are on a very substantial discount to the claimed asset values. Perhaps investors doubt the asset values, or see some difficulties in exiting from a lot of the company’s holdings.  But it is surely good news that vigorous steps now look likely to be taken to improve the position of shareholders in this company.

Roger Lawson

ShareSoc launches Group for concerned shareholders in the Oxford Technology VCTs

The Oxford Technology VCT (OXT) and Oxford Technology 3 VCT (OTT) have announced that HMRC has withdrawn their VCT status. This has been done because one of the Venture Capital Trust rules is that no more than 15% of a fund can be invested in one company. Both these companies have a holding in Scancell, an AIM listed company, and the share price of Scancell rose rapidly so that the rule was inadvertently breached as a result of a small funding round in July  2013, in which the two VCTs participated. The rule breach was reported to HMRC as soon as the mistake was realised, in October 2013.

This is a pretty disastrous event for investors in these VCTs because as the announcement says:

– any ‘front end’ income tax relief in shares issued within a period of 5 years prior to the notice from HMRC will be withdrawn;

– any deferred gains come to charge;

– subsequent dividends from the Company will not be exempt from income tax;

– any subsequent gains on disposal of shares in the Company will not be exempt from Capital Gains Tax.

In other words, the tax relief obtained by investors in the company may be lost which is the most damaging impact. In addition, the company’s exemption from Corporation Tax will be lost.

Oxford Technology are appealing against the decision but say that if it is not successful they may have to consider the company’s future as a listed vehicle. Note that Oxford Technology VCT 2 and VCT 4 are apparently not affected by this problem.

Formation of Shareholder Group

Shareholders in the company, supported by ShareSoc, have formed a Shareholder Action Group to co-ordinate action, keep shareholders informed and make representations to HMRC and to the Company on this matter. In addition if any appeal against the decision is lost, they may develop policies on what should happen to these companies that are in the best interests of shareholders. Any shareholders who wish to join this Group can do so by registering on this web page where more information is also present: www.sharesoc.org/campaigns5.html 

Comment from a shareholder

It seems somewhat unreasonable to withdraw VCT status on what is a minor technical breach of the rules that the company itself reported, and presumably could have been quickly rectified. Tim Grattan, one of the affected shareholders had this to say: “As a result of this minor, inadvertent breach of VCT rules, which was freely and promptly disclosed to the HMRC, over 700 individual shareholders, who are entirely blameless, have now been hit with disproportionate penalties, while the directors and managers of the company escape scott-free. This seems morally unjust, but seemingly simple to reverse.”

Roger Lawson

At first glance a good budget for private investors

Is the Chancellor’s budget good for private investors? At first glance it appears to be so, although more analysis of the detail will be needed in due course because like all Chancellors Mr Osborne’s hand outs might be taken away elsewhere in the small print. But there are some very positive things:

– The ISA investment limit will be raised to £15,000 with cash and stocks/shares ISAs merged. There is no obvious cap on ISA contributions which was rumoured as a possibility.

– Defined contribution pension rules will be relaxed and there will be no necessity to ever buy an annuity. Indeed those using drawdown will apparently be able to draw down as much or little as they like, effectively allowing one to completely cash in a pension. Is this right one wonders or will there be tax implications? Perhaps the Chancellor is hoping that all that money stuck in pension schemes will be freed up and spent, thus stimulating the economy and raising tax revenue?  As a result the share prices of insurance firms who provide annuities such as Legal & General, Aviva and Standard Life dropped substantially on this news but asset managers and platform operators might benefit. The Chancellor does not seem worried that pensioners will blow their savings but wants them to take responsibility for their own financial decisions.

– Pensioners over 65 will be provided with new bonds from NS&I that will apparently provide a more real rate of interest than they can obtain from banks or building societies at present. Let us hope that does not create difficulties for the latter institutions and inhibit their lending. It should encourage pensioners to save rather than spend, and help offset the impact of “financial repression” on small savers – surely a morally sound move.

– The Personal Allowance will be raised from £10,000 to £10,500 (i.e. more than inflation), but the 40% income tax threshold will only rise by 1%, thus dragging more people into the higher tax bracket.

– The housing boom will likely continue with the Help to Buy Scheme extended to 2020 as signposted, and a strong commitment to a new “garden city” at Ebbsfleet. The Chancellor made some jibes at Labour for announcing this ten years ago but in practice minimal development arrived. With major development probably dependent on improved road links and a new Thames Crossing (the Dartford Crossing is already severely congested) it may be another ten years before we will see the result.

– Companies using high levels of energy (cement works, chemical companies, brickmakers for example), will get some relief from energy costs which may help them to compete more effectively on the world scene.

– Betting companies will be hit by raised duties on fixed odds terminals, but bingo duty will be cut to 10%.

– Acohol duty will rise in line with inflation except for Scotch and Cider where it is frozen and Beer where it is cut by 1p. Diageo shares, which you might expect to benefit from that did not move, perhaps because international business is of more importance to them.

– As predicted Venture Capital Trust (VCT) rules are to be changed to prevent “Enhanced Buy Backs” but it is disappointing that investment platforms will be allowed to sell those products (the risks of which are not obvious to many). VCT companies and EIS schemes won’t be able to invest in companies which receive renewable subsidies in future which will put a damper on this hot area.

Some commentators point out that to finance some of these give-aways there will need to be further cuts in Government expenditure. That might be good for business and for investors but may not please everyone – here’s where the detail starts to be important.

It’s generally an investor and business friendly budget, and the changes to pension rules (which are surely overcomplicated and unnecessary at present) are really revolutionary. One can imagine the ire of some city directors at these changes though.

Roger Lawson

Oxford Technology VCTs lose VCT status

The Oxford Technology VCT (OXT) and  Oxford Technology 3 VCT (OTT) have announced that HMRC has withdrawn their VCT status. This has been done because one of the Venture Capital Trust rules is that no more than 15% of a fund can be invested in one company. Both these companies have a holding in Scancell, an AIM listed company, and the share price of Scancell rose rapidly so that the rule was inadvertently breached in October 2013 which the company reported to HMRC.

This is a pretty disastrous event for investors in these VCTs because as the announcement says:

– any ‘front end’ income tax relief in shares issued within a period of 5 years prior to the notice from HMRC will be withdrawn;

– any deferred gains come to charge;

– subsequent dividends from the Company will not be exempt from income tax;

– any subsequent gains on disposal of shares in the Company will not be exempt from Capital Gains Tax.

In other words, the tax relief obtained by new investors in the company will be lost which is the most damaging impact. In addition, the company’s exemption from Corporation Tax will be lost.

Oxford Technology are appealing against the decision but say that if it is not successful they may have to consider the company’s future as a listed vehicle. The share price has already dropped substantially as a result but as there is normally very little trading in these companies, that is perhaps not surprising.

Note that Oxford Technology VCT 2 and VCT 4 seem not to be affected by this ruling as there has been no announcement on those companies.

Comment: it seems somewhat unreasonable to withdraw VCT status on what is a minor technical breach of the rules that the company itself reported, and presumably could have been quickly rectified. Shareholders affected by this problem might wish to make their views known to HMRC.

EGM Requisition at Leaf Clean Energy

Leaf Clean Energy (LEAF) is an investment trust that specialises in “renewable energy and sustainable technology”. It raised $386 million in 2007 but subsequently bought back some of its shares giving an effective net figure of $307m. At June 2013, net assets were reported as $183m, i.e. substantial losses have been made. At the time of writing the market cap is considerably below the net asset figure (near 47% discount) which may be the market’s view on the accuracy of the valuation.

Crystal Amber, an investment company, who hold 10% of the stock, have requisitioned an EGM  to replace the Chairman and Chief Executive with two new directors.

Crystal Amber say they have attempted to engage constructively with the Board of Leaf to explore ways to enhance shareholder value, but it seems they have been unsuccessful in doing so. Their three main concerns are:

1. The visibility of the underlying value of Leaf’s investments, which seems to be code for questioning whether they are really worth what they are valued at. Some investments are value on the basis of forecast future cash flow forecasts and no information on revenues or earnings is provided to investors.

2. The large share price discount.

3. The current scale of running costs in the company (total administrative costs last year were $5.2m, i.e. 2.8% of assets).

On the latter point, Crystal Amber point out that Brian Keogh, the Chief Executive, earned $750,000 in the year to June 2013 and Peter Tom, non-executive Chairman earned $200,000. The figures for 2012 were the same. Only those two directors sit on the Remuneration Committee.

Incidentally Peter Tom is also Executive Chairman of Breedon Aggregates where he earned £447,000 in 2012.

Crystal Amber have suggested that the company be put into an “orderly run off mode” with a three month handover period for the Chief Executive. You can see more about their claims and the requisition here: http://www.crystalamber.com/_library/_downloads/140306-LeafRequisition.pdf

Comment: In my experience green investments are often sold to green investors. In other words sold to investors more interested in the vision than the practicality of obtaining a financial return (and that’s true even taking into account that there are some heavyweight institutional investors in this company). The fact that Leaf Clean Energy is registered in the Cayman Islands would be enough to put me off. But given the current position of the company it would certainly appear that steps should be taken to change the management and reduce the costs in this investment company. Whether a wind-up would realise much value for investors is however questionable and could be an exceedingly difficult process given the nature and stage of the investments held. But perhaps better to start now rather than later.

Roger Lawson