No pain no gain: Life can be a beach when you play the shell game

Shells are a traditional feature of the stock market. Come boom or slump, there seems to be a readily available shoal of these oddities drifting around, looking for real sustenance to keep them going.

Shells are a traditional feature of the stock market. Come boom or slump, there seems to be a readily available shoal of these oddities drifting around, looking for real sustenance to keep them going.

Today I think there are more of them than at any time since the break-up of the British Empire. Then, many mining and plantation companies were left with little more than cash and a quote when their assets were taken over by newly independent countries flexing their nationalistic muscles.

This time the high-tech burn-out has spawned the abundance. But even without thissudden infusion the shell community would be a sizeable force, able to accommodate any company seeking a speedy, relatively cheap back-door route to the stock market. An ideal shell is a company with cash in the bank, allowable tax losses and little or no trading encumbrances. Size should be largely immaterial, although large companies are not considered. So there is, I'm afraid, no hope for Railtrack to become a shell.

Still, like Railtrack, a shell has often made a mess of its trading operations. But few slide into receivership. Most sell their underperforming trading interests, hanging on to the cash received as they assume their shell state. Some do say returning cash to shareholders might be a better option. But cost and tax influences often weigh against that. Far more rewarding is to be the shell for an unquoted company taken over in exchange for a large chunk of shares. In other words, a reverse take-over.

Even in the present uncertain stock market the shell game is alive and well. This week Andaman, a company that has been round the block a few times, admitted it was in talks that could lead to a reverse takeover. Like so many of these deals, mystery surrounds the identity of the other party. Entrepreneur George Allnut built a 7 per cent stake but did not institute the talks.

And although many of the former dot.com stars are still looking for partners some have been snapped up. Internetaction, once above 500p, became Intelliplus. Shareholders who paid more than three figures for their shares during the internet euphoria. The shares are now 3p. But Intelliplus, a telecom services provider, does have a future; Internetaction, on its own, did not.

Internetaction is a warning to shell punters. There are exceptions but the stock market does not provide free lunches and the terms of a reverse takeover can leave little, if any, reward for shell shareholders. And not all shell deals are long-lasting. The partner company can turn out to be a can of worms. Still, well-known stock market players are shells. Carlton Communications is one, PizzaExpress another.

Shells touting for business also come from all corners of the stock market, brewing, food, leisure, media and mining are jockeying for position. Two leisure shares – Paramount and Perthshire Leisure – are among the more intriguing. Paramount, with a 24.5p share price nearly equating to its £5m-plus cash hoard, became cash-rich when it sold its 150 pubs. It became a shell after Stock Exchange red tape blocked a bid to substantially increase its pub estate. But its complex capital has been tidied and it has put itself on the shell beach. So far, no takers. But Guy Naggar, chairman of the Dawnay Day bank, with his partner, Peter Klimit, has moved in. They were formerly involved with Delyn, a shell that is now Ingenta, a specialist and successful internet publisher.

And there have been intriguing moves at Perthshire. It raised cash by selling assets and has just one for-sale bar left. The financier Laurence Laybourne, whose brother Terence is the Geordie celebrity chef, has a 5.1 per cent shareholding.

As Laurence is believed to have provided the finance for Terence's up-market restaurants, their eating interests may be pumped into Perthshire in exchange for shares. The Perthshire price is around 2p, more or less in line with its cash pile.

Rewards from reverse take-overs are mixed. But in these treacherous days, with a tense and nervous stock market, the shell game does offer light relief, provided any outlay is regarded as sheer speculation.

derek@derekpain.totalserve.co.uk