Small Companies Notebook: PEI board challenged over 'poison pill' pay deal

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The Independent Online

Laxey Partners, the aggressive hedge fund group most famous for demanding management change at British Land, has launched a new battle to unseat a board, this time at the £55m investment trust Private Equity Investor.

Laxey is demanding a vote to dismiss the four-strong executive team, whose peculiar remuneration scheme has been condemned as "a lethal poison pill" that prevents the trust being taken over.

PEI was set up by Tim Childs, a Dublin-based investor and entrepreneur, to invest in other venture capital funds, giving shareholders the widest possible exposure to technology start-up companies. He and the three other executive directors manage the trust's investments directly, rather than outsourcing to an external fund manager.

The trust is not alone in having collapsed in value since its launch under its original name, Net Investor, in February 2000 at the height of dot.com mania. But it is what the receding tide has revealed that has angered its shareholders and given Laxey - which has built a stake of 27 per cent - a platform for its raid.

If the trust is taken over and wound up before the planned date in 2014, the four managers will share compensation for loss of office covering the remaining period of the fund. When it launched an abortive takeover bid for PEI in the spring, Laxey learned that the compensation totalled £80m - more than the trust's £64m of assets.

"We have seen some poison pills in our time, but rarely on the scale of that embedded in PEI," Tom Tuite-Dalton, an investment trust analyst at Arbuthnot Securities, said. "The upshot now is that even if the board performs atrociously, the trust cannot be taken over and wound up without payment of compensation so out of proportion with reality that it would make today's fat cats seem like kittens."

PEI has 10 days to set a date for a vote on Laxey's plan to replace the directors with its own nominees. Colin Kings-north, a partner at Laxey, is confident of victory. "Normally, trusts have their fund managers on a 12-month notice period, but these guys effectively have another 10 years. Meanwhile, nobody would bid for the trust because nobody would want to trigger a payment to the board," he said.

Mr Kingsnorth argues that the remuneration scheme skews the board's approach against returning cash to shareholders early, since they are paid a proportion of assets which would diminish with payouts. So would the size of their compensation for a takeover.

But PEI says a trust's managers should be incentivised to keep the pot as large as possible, since that is ultimately in shareholders' interests. It points to Laxey's spring takeover bid, which was rebuffed, and says that the hedge fund group is now trying to take control of PEI without making a full bid. Shareholders should hold faith now that valuations in the technology sector are starting to rebound, it says.

Pharmagene tonic

Watch out for news from Pharmagene, an ambitious life sciences company which buys and sells human tissue for use in medical research, but which also has a biotech arm developing its own treatments for cystic fibrosis and irritable bowels.

Word is there could be a deal to license one of these new drugs to a bigger pharmaceuticals company this month - a key moment for any biotech company, since it proves others in the industry see commercial potential in a new drug. Further out, big acquisitions are on the cards. The company has just appointed a new finance director and charged him with planning an "inorganic growth" strategy. Ronald Openshaw, formerly of the industry's then-busiest corporate finance team at WestLB Panmure, says his mentors have been Rolf Stahel and Paul Drayson, who created Shire Pharmaceuticals and PowderJect respectively through a string of acquisitions to "double and double again" the size of their companies.

Sky buys in the US

An intriguing double-headed acquisition has been made by Sky Capital, the London and New York mini-investment bank, and its sister company Sky Capital Enterprises, an investment company. The two, both listed on AIM, are each spending £410,000 on a 12 per cent stake in Crown Financial, a New Jersey-based market maker that specialises in trading small-cap US stocks. It is Sky Capital's first move into market making, bringing a potentially lucrative new set of skills to the group.

Deals disappoint

Finally, a word of caution. About 95 per cent of all small company deals fail to fully deliver their pre-deal expectations, according to Grant Thornton, the corporate advisers. The shocking statistic comes in a survey of private company investors and stock market corporate financiers, the deal-doers who have worked on many such transactions. The majority of deals end up with the wrong management in place, and half the time the operational benefits of a merger have been overestimated, the survey found. Shareholders should scrutinise every mooted deal very closely.

THE STREETS, The Darkness, Morrissey and 50 Cent are among the acts at the Reading and Leeds festivals which, the organiser Mean Fiddler will announce today, have sold out in record time.

Mean Fiddler, chaired by the impresario Vince Power, has sold £10m of tickets for the bank holiday weekend events, which will be attended by more than 100,000 people.

The group also stands to gain from sponsorship, food sales and merchandising.

Its shares have risen 38 per cent this year.

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