21 November 2019
CRYSTAL AMBER FUND
LIMITED
(“Crystal Amber
Fund” or the “Fund”)
Crystal Amber Fund
requisitions General Meeting of Allied Minds plc:
Proposes to remove
four directors and appoint two new directors
Crystal Amber Fund, the activist investment fund, announces that
it has sent to the board of Allied Minds plc (“Allied Minds”) a
requisition notice requiring Allied Minds to convene a general
meeting at which resolutions will be proposed to remove
Jeffrey Rohr, Fritz Foley, Joseph
Pignato and Michael Turner
from the board, and to appoint Mark
Lerdal and Stephen Coe to the
board as non-executive directors. The Fund expects that the
proposed board will be more effective at minimising ongoing costs
and maximising distributions to shareholders from the orderly
realisation of Allied Minds’ remaining investments. The
proposed removal of Allied Minds’ executive directors from the
board does not preclude their continued employment as
executives.
Since becoming a shareholder in Allied Minds in November 2018, the Fund has engaged extensively
with its management. Despite some necessary and long overdue
changes, the Fund has concluded that the board of Allied Minds is
still not acting in the best interests of its shareholders.
This is evidenced by the annual ongoing headquarter (“HQ”)
cash cost guidance from Allied Minds, which has recently been
increased to US$7.5 million.
The Fund estimates that US$67
million of Allied Minds’ current market capitalisation is
attributable to its non-cash net assets (i.e. after deducting
parent-level cash, which the Fund estimates to be approximately
US$88 million). The annual
ongoing HQ cash costs represent more than 11% of this value.
In addition to this, Allied Minds this month awarded a
US$4.9 million cash pay-out to
current and ex-employees, despite cumulative operating losses since
its 2014 IPO now exceeding $460
million.
The Fund believes that it now has no alternative but to
requisition a general meeting of Allied Minds in order to address
the issues identified:
- Excessive ongoing HQ costs and misaligned incentive
arrangements
- Insufficient prioritisation of excess cash redistribution to
shareholders
- Inability to redress the longstanding significant discount of
the share price compared to the Net Asset Value (“NAV”) per share,
which now stands at over 40% despite the carrying value of the
portfolio having been verified by substantial third-party
funding
Richard Bernstein, investment
adviser to Crystal Amber Fund, said: “In the 11 years since
the Fund was established, this is only the third time that we have
felt compelled to requisition a general meeting of an investee
company to change its board composition. The Fund hopes that,
as has occurred on the previous two occasions when the Fund felt
forced to requisition a general meeting of a company, the current
board of Allied Minds will accept the Fund’s proposals without
delay and without having to call a general meeting. Mark
Lerdal has an excellent track record of delivering for shareholders
in a not dissimilar situation at Leaf Clean Energy. We are
confident that he can do the same for the shareholders of Allied
Minds.”
Allied Minds’ track record:
- Listed on the London Stock Exchange in 2014 at a valuation of
£405m and raised a further £64m via a placing in 2016. To
date Allied Minds has paid zero cash to shareholders and its market
capitalisation is now around £120m
- Reported total consolidated operating losses of around
US$590m from 2011 to mid-2019, of
which approximately US$465m since it
listed in 2014
- Invested in over 40 companies but has achieved only a single
successful exit. Following many write-offs and closures, only
six holdings are now deemed to have any value, of which three plus
cash at the holding company now account for around 95% of the total
NAV
- Despite having committed not to make further investments in new
businesses, Allied Minds operates with ongoing HQ cash costs of
US$7.5m per annum, an increase from
its guidance of US$5-6m announced in April
2019
- Maintains misaligned management incentive schemes, including:
- The “Phantom Plan” that pays out 10% of any gains on individual
holdings, irrespective of losses incurred across the investment
portfolio as a whole
- Annual bonuses (worth up to 225% of salary) that are determined
independent of shareholder returns and the performance of the
portfolio, e.g. US$576,000 CEO bonus
paid in respect of 2018 despite a share price fall of 57.5% that
year
- A golden parachute scheme that would pay out upon a takeover of
Allied Minds
- Redistributing to shareholders only half of the proceeds from
the disposal of Allied Minds’ stake in HawkEye 360, despite the
sale triggering a Phantom Plan pay-out of up to $4.9m to current and former management.
This will leave Allied Minds with a parent-level cash balance of
around US$55m
Crystal Amber Fund’s engagement with Allied Minds:
- Commenced investment in Allied Minds in November 2018, having analysed the company over
the preceding year, and now owns 16.8% of Allied Minds’ total
issued share capital
- Expressed concerns regarding the urgent need to realign the
excessive HQ cost base, the unprecedented and wholly unacceptable
Phantom Plan, and the granting of long-term incentive shares that
had cost around US$3.9m during the
first half of 2018
- Met with then-CEO, Jill Smith,
along with the CEO of portfolio company Federated Wireless, in
February 2019
- The Fund subsequently conveyed its views that, despite a guided
reduction of over 40% in ongoing HQ cash costs, these would still
be hugely excessive at around US$13m
per annum, and also that the portfolio companies SciFluor and
Precision Biopsy were likely to be significantly overvalued.
Since then, both of these portfolio companies have been written to
zero, taking around US$115m off
Allied Minds’ NAV
- Met with co-CEOs, Joe Pignato
and Mike Turner, in August 2019 and reiterated our views that the
Phantom Plan represents a major misalignment between management and
shareholders
- The Fund was disappointed that, despite being one of Allied
Minds’ largest shareholders, it was excluded from Allied Minds’
consultation with shareholders regarding preferred quantum of
immediate cash distribution following the HawkEye 360 disposal
Track record of Mark Lerdal and
Stephen Coe:
- Mr Lerdal and Mr Coe have both been directors of UK-listed
company Leaf Clean Energy Co (“Leaf”) since 1 April 2014: Mr Lerdal as executive Chairman and
Mr Coe as a non-executive director
- Leaf was a failed investment company that had focused primarily
on US-based private-market opportunities, similar to Allied
Minds
- In the financial year that ended shortly after the appointment
of Mr Lerdal and Mr Coe, Leaf’s administrative expenses were
US$5.4m. These costs were
halved in the following year and have been reduced in each
subsequent year, down to a level of US$1.4m in FY2018
- After formally adopting an orderly realisation and
redistribution strategy, Leaf’s investments were then monetised
over the subsequent five and a half years – a process that was
prolonged by a very protracted legal dispute relating to its
largest investment, which was finally resolved in Leaf’s favour in
mid-2019
- Prior to the appointment of Mr Lerdal and Mr Coe in 2014,
Leaf’s shares traded at a substantial discount to its NAV.
Since then, Leaf has to date returned a total of US$128m cash to its shareholders, an impressive
cash realisation of over 100% of the rebased $116m NAV as of 30 June
2014, after all holding company costs
Mr Lerdal is currently executive Chairman of Leaf Clean Energy
Co and a non-executive director of three private companies.
Mr Coe is currently a non-executive director of Leaf Clean
Energy Co, Weiss Korea Opportunity Fund Ltd and various private
companies.
For further enquiries please contact:
Crystal Amber Fund Limited |
|
Christopher Waldron (Chairman) |
Tel: 01481 742 742 |
|
|
Allenby Capital Limited - Nominated Adviser |
|
David Worlidge/Liz Kirchner |
Tel: 020 3328 5656 |
|
|
Winterflood Investment Trusts - Broker |
|
Joe Winkley/Neil Langford |
Tel: 020 3100 0160 |
|
|
Crystal Amber Advisers (UK) LLP - Investment
Adviser |
|
Richard Bernstein |
Tel: 020 7478 9080 |
|
|