Red Faces at Redcentric

Events

As a (modest) shareholder in Redcentric, I was shocked by yesterday’s announcement: http://www.investegate.co.uk/redcentric-plc–rcn-/rns/accounting-misstatements/201611070700094407O/

Redcentric plc (AIM:RCN), a leading UK IT managed services provider, announces that an internal review by the Company’s audit committee in relation to the interim results for the six months ended 30 September 2016 has discovered misstated accounting balances in the Group’s balance sheet…

This announcement prompted a shareprice fall of more than 50% at yesterday’s open, from 149.6p to 71.5p, with the shares hitting a low of 40.4p later that day. They have since recovered somewhat from that low and stand at 69p, as I write.

Share Dealing by Insiders

Besides the fact of the accounting misstatement, resulting in Redcentric’s CFO being placed on “garden leave”, the pattern of share trades by insiders before and after the announcement is, if anything, more shocking. Firstly, we have share trades by Redcentric’s CEO:

On 24th June Fraser Fisher exercised 200,000 options at a price of 70p and sold them all at 180p, realising a gross gain of £220,000

On 9th September he exercised a further 285,000 options at 70p and sold them all at an average of 182p, realising a further gross gain of £319,200.

This is very much contrary to ShareSoc’s remuneration guidelines. Whilst we encourage the use of market-priced options (as opposed to nil-priced LTIP options) to incentivise executives, these should be alongside strict retention requirements (after satisfaction of tax liabilities), so that executives build up a meaningful shareholding over time. Mr Fisher’s remaining shareholding after these exercises and sales is just 90,557 shares.

It also raises the following questions: surely the share prices Mr Fisher was able to achieve for his sales were a result of the misstated accounts? Had historic  results not been overstated, surely the share price gains would not have been as great? Is it right that the CEO should have benefited significantly from the misstatement and should this situation be allowed to persist?

It is notable that between 16th September and Monday, before the announcement, the share price declined steadily from 187p to 149p. Was someone aware of trouble brewing and selling shares – i.e. illegal insider trading?

The Role of MXC Capital

Even more concerning, are massive trades by Redcentric’s “Financial Advisor”, MXC Capital. To fully understand this issue, it is necessary to understand Redcentric’s history.

Redcentric was floated on AIM in April 2013, having been demerged from Redstone plc, to form an SME focused managed network services business (the rump of Redstone since becoming AIM quoted Castleton Technology). Redstone was previously built up from the ruins of a failed dotcom business, through a series of judicious acquisitions. These acquisitions and the subsequent demerger of Redcentric were largely brought about through the efforts of a boutique advisory firm, MXC Capital. At that time, MXC Capital was the private vehicle of two individuals: Ian Smith and Tony Weaver. It has since IPOed on AIM in its own right.

Tony Weaver was appointed as CEO of Redcentric on its flotation and remained in that role until September 2015, when he was succeeded by the previous COO and current CEO, Fraser Fisher. Mr Weaver remained on the board as an NED until a couple of weeks before the shock announcement, standing down on 25th October this year. Ian Smith was an NED on Redcentric’s board until November 2014.

Of concern, is that MXC Capital sold 5.8m Redcentric shares @ 180p on 24th June this year… and announced today that they had repurchased 7.6m shares at an average price of 59.7p, yesterday. This is concerning because yesterday’s shock announcement states:

The work to date has identified that audited accounts for previous years are likely to need to be restated, resulting in some write down in historic profits. Current indications are that all issues relate to prior periods.

These prior periods are highly likely to include periods during which Tony Weaver was CEO. This raises the question: how much did he and MXC Capital know at the time of dealing?

Roles of Redcentric’s Chairman

Finally, it is notable that Redcentric’s chairman, Chris Cole, declared a massive number of directorships on his appointment in 2014: http://www.investegate.co.uk/redcentric-plc–rcn-/rns/directorate-change/201408210700186689P/

With all these roles, the question is raised whether Mr Cole was able to devote adequate time to overseeing the executives, accounting and business conduct? Note that ShareSoc NED Guidelines deprecate directors having too many roles.

Conclusion

ShareSoc calls upon all these unanswered questions to be thoroughly investigated by the appropriate authorities, as well as the root cause of the underlying accounts misstatement. If you would be interested in participating in any action ShareSoc may take on this affair, please contact the ShareSoc office.

Mark Bentley

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