It was June 20th and Andrew Brian was ‘delighted.’ He had just announced a deal whereby Darwen Holdings, of which he is chief executive, would acquire Jamesstan Investments, the holding company for the Optare coach-building business.
By combining Optare, with its expertise in low-emission, hybrid engine technology with the traditional diesel-engine bus manufacturing skills of Darwen, the ‘combined product suite’ Brian said, ‘is expected is expected to deliver a complete vehicle solution to its customers, and will have at its core a lightweight, diesel-engined vehicle with a low emission hybrid variant.’
OK, that makes sense to me and clearly it did to investors also. Having gone around the City presenting what he described as ‘fantastic news for investors’ Brian was ‘delighted with the level of institutional support.’ In consequence of this enthusiasm Darwen had no difficulty persuading investors to stump up the £16m that it needed to fund the deal, through the issue of 40m new shares at 40p. That was just a fortnight ago, and within that short space of time the enthusiasm of these long-sighted institutional investors has apparently waned. Because in a shocking announcement last evening Brian revealed that the price at which the new shares were being sold was to be slashed from 40p to 30p. Now 53.3m new shares are to be issued, representing 49% of the company.
It looks as if the institutional investors, having given their word that they would buy shares at 40p have changed their mind and demanded a price of 30p. Why?
Darwen is still solid
The only good reason would be deterioration of the business prospects of Darwen, but this is clearly not the case. If the general economic climate does not look too bright today, it is hardly any different from two weeks ago and in any case coach-building is a long-term business, little affected by recession, and the shift towards green engines promises a sustained period of demand.
This much is accepted by Brian who, commenting upon the decline of Darwen’s share price since June 20th, ‘knows of no reason within the business for the decline.’
No. The real reason why institutional investors have reneged upon their promise to pay 40p per share has nothing to do with Darwen and everything to do with Tanfield.
The mastermind behind Darwen is the same Roy Stanley, who in a series of deals expanded Tanfield rapidly in the areas of electric vehicles and powered access. Now Tanfield has been hit by manufacturing problems at its electric vehicles division and a downturn in demand for powered access machinery. Its cash position does not appear to be as good as was thought and the shares have crashed spectacularly.
To me this looks like another case of a small company that has expanded on too many fronts too quickly, and has run into a recession. Tanfield’s institutional investors only have themselves to blame for financing its helter-skelter expansion, but are now trying to lay off the blame wherever they can. So now we hear calls for an investigation into Tanfield’s accounting and hear accusations that Tanfield misled the market. This is all too familiar in circumstances when fund managers who have just lost millions of their customers’ valuable pounds will say anything rather than admit that they might have made a mistake.
Roy Stanley stands accused of building up the hopes of investors, and also of selling out his shares last year close to the top of the market. As to the former Tanfield’s public announcements have always been full and detailed, the numbers in the accounts are there for all to see, and the company has made every effort to build relationships with the City.
The fact is that fund managers, having enjoyed a ride in one of Tanfield’s electric vans, got carried away by the excitement of green technology and failed to properly appreciate the difficulties of converting this into a major profitable business.
In fact, Stanley has taken a back seat at Tanfield for the last year or so, handing over the reins to forty year old chief executive Darren Kell, forty-five year old finance director Charles Brooks and forty-two year old operations director Brendan Campbell. There is not a lot of experience here in managing a large multinational manufacturing business – a point that Tanfield’s shareholders might reflect upon.
Institutional retribution
Stanley sold 8.5m shares last summer at 163p, as part of a very enthusiastically received placing. But the implication that he sold these shares because ‘he knew something’ just does not hold water. Stanley still holds 19.6m shares in Tanfield, and as I pointed out in my newsletter Red Hot Penny Shares, he also sold five million at 19p, before the great rise of the share price got under way.
Anyway, that is Tanfield… but what bothers me is that the institutions have seen fit to take retribution on Darwen. Having said that they would pay 40p for shares in Darwen they should have been as good as their word.
Incidentally, Stanley and Brian both could be accused of benefiting from the lower price as they will be buying shares in the placing for themselves. But before anyone misconstrues that, let us at least be clear that their interests would have been far better served by the 40p price. Before the deal Stanley in particular held 50% of Darwen shares and the revised terms are a particularly unwelcome dilution to his interest in the company.
And this applies to all other Darwen shareholders.
Rather than admitting the Tanfield factor and saying that those investors who promised to buy shares at 40p have backed off and demanded 30p, Andrew Brian has explained the revised terms of the share issue by citing ‘extraordinary market conditions’ and a desire to ‘ensure a strong long-term partnership with our investors.’
That may suit those who are buying into the placing at 30p but the price cut unequivocally damages the interests of existing shareholders of Darwen, including many private investors, some of whom may have reckoned that if the institutions were willing to pay 40p per share they were happy to follow suit.
This is another nasty episode in the life of the City. Another instance where the word of investors has not proved to be their bond; another instance in which the interests of private investors have been trampled upon with utter disregard; and another stain on the increasingly damaged reputation of AIM.
Regards,
Tom Bulford
for The Penny Sleuth
