No Pain No Gain: I'm mourning the sudden death of franchise firm
Saturday 27 May 2006
I feel obliged to comment on the signalled departure of Franchise Investment Strategies. Although an obscure little company, traded on the fringe Ofex share market, I have written about it on a number of occasions and even regarded it as a candidate for the No Pain, No Gain portfolio.
One reason I refrained from recruiting FIS was the presence in the portfolio of another Ofex share - the highly successful Myhome International. I felt two Ofex constituents would, even for an exercise largely focused on smaller companies, represent too big an exposure to what is often a high-risk corner of the investment world, even if it can be hugely rewarding.
Still, this week Myhome cleared the way for FIS's possible inclusion. It is graduating to the Alternative Investment Market (AIM). The trouble is - FIS will soon be no more. It is going into liquidation.
Admittedly it is a voluntary winding up and the 59 shareholders can expect some return. But I find its sudden death astonishing. True, some compelling reasons are put forward. Yet it is surprising that a company with an interesting programme and impressive backers should arrive on Ofex nine months ago, possibly spending £60,000 in the process, and is now planning liquidation at a cost of some £80,000.
FIS was set up to invest in Britain's booming franchise culture. The idea was to take stakes in franchise operations, help develop them, and then bring them to the stock market. Russell O'Connell, the man behind Myhome, was on the board. FIS invested in two franchise groups, DTT, a driving instruction business, and Myhome. But there was talk of a conflict of interest and O'Connell resigned.
His departure stripped FIS of its franchise "king". The company relied upon him to produce the deals. It seems without his contacts, FIS feared it had nothing to offer. But was he really irreplaceable?
There was talk that the shares, floated at 4p, would be worth 5.7p in liquidation. With DTT shares down to 3.25p (against a 5.4p high) that could be wishful thinking. Indeed, FIS shares, 2.75p against a 5.5p high, reflect the likely loss of value.
Addworth, the AIM-traded investment company run by colourful City character Mark Watson-Mitchell, is one of the 59 shareholders. In his report for the year ended December, he says FIS was showing a 30 per cent advance. Now it must be nearer a 50 per cent loss.
He will not sit happily on such a setback. True, FIS represents a small part of Addworth's year-end portfolio, which was worth £1.7m, showing a £764,000-unrealised gain. As befits a Watson-Mitchell venture it is a highly active share player. For example it has jobbed in and out of Myhome shares and currently has 3.7 per cent.
It does not confine itself to share trading. In the past year it has floated three companies on AIM and has a number of other debutantes in the pipeline. It is also planning to get more involved in Ofex through a newly established company, Early Equity.
FIS would, of course, have been one of the investments switched into the new vehicle. But unless it is saved by a takeover bid there is no chance of that happening. Myhome is also likely to escape being pumped into Early Equity following its signalled elevation to AIM, due to occur later this year.
Myhome's planned move upmarket was announced alongside its interim results. They are outstanding. Pre-tax profit is up 286 per cent to £279,000 with turnover 319 per cent higher at £3.15m. In the past year the number of franchises has risen from 19 to 85 with O'Connell expecting to top the 100 mark soon. And average franchise turnover growth is between 1.5 and 2 per cent a week.
O'Connell is also looking to increase his range of services. The company has been built on its Myhome residential cleaning franchises and this year took full control of the Nicenstripy gardening franchise business. It has also ventured into bathroom and kitchen surface refurbishment and repair through a franchise operation called Surface Doctor. Other activities will be added. Indeed O'Connell indicates expansion is near.
The No Pain, No Gain portfolio adopted Myhome at 15.5p a share. The shares are now 38p. I am happy to sit with them. Despite spectacular progress - they were around 5p at the start of last year - the shares are not expensive on trading grounds and there is little doubt the higher exposure the company will command on AIM will be beneficial.
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