Two minuses may make a plus, but two lossmaking businesses don’t make a profitable one.
Last week, lossmaking Aquis agreed to pay £1 for Nex Exchange, plus about £2.7m to cover working capital needs.
Aquis is a small fintech business set up in 2012 to offer shareholders low-cost and transparent pricing and easy dealing in European equities. It floated on the London Stock Exchange’s Alternative Investment Market last year.
Nex is the even titchier lossmaking wannabe rival to Aim. Wannabe is the operative word.
Aim has 900 companies quoted on it, valued at £100bn. It has become, with the backing of an indulgent LSE and a sizeable marketing budget, about the biggest small-cap exchange globally. Nex has a paltry 89 companies, such as winemaker Chapel Down and brewer Adnams, valued in total at less than £2bn. It made pre-tax losses of about £2m on revenues of £1.5m in the year to March 2018 and much the same in 2017.
Nex has serially failed to challenge Aim, passing between owners until ending up last year as part of the CME, the world’s largest futures exchange, which has been trying to flog the business ever since.
Now Aquis, under chief executive Alasdair Haynes, an exchange veteran, thinks it can make a go of Nex as one of Europe’s few primary markets for initial public offerings. Buying Nex could be the first step to disrupting Europe’s IPO market and turning Aquis into a pan-European listing exchange.
That is aeons away, though. First, Aquis must cut Nex’s costs, improve the technology and reverse its losses. The group should be breaking even by 2021, even if revenues don’t accelerate, says finance chief Jonathan Clelland. That seems to be little upside for a lot of effort and is as ambitious as Aquis’s aspiration to lift its own revenue, from selling its technology and trading European shares, to more than £10m by 2020.
To give Aquis its due, it now has a 4 per cent share of the market in European equity trades. In the year to December, the group’s revenues doubled from £2m to £4m. Analysts forecast they could just about double again within a year and that by December 2020 the group will be making prettified profits of about £2.4m.
Still, its pre-tax losses increased in 2018 to £3.7m, from £3.3m, including IPO costs. And it is nowhere near Cboe Europe, LSE and Euronext, which between them account for 60 per cent of European share trades.
Moreover, the outlook for IPOs and equity trading is uncertain — as demonstrated by Deutsche Bank’s recent decision to shut down its entire equities business. It looks worse for small companies. Statistics from Aim show a steady deterioration since the highs a dozen years ago when the number of junior market companies peaked at 1,694. Last year just 65 companies launched on Aim, compared with 462 in 2006. Money raised topped £15bn in 2007, three times as much as Aim companies raised last year. Still, that is better than Nex. Last year just 14 companies joined it. Three have joined so far this year.
And Aim and Nex have had the best of numerous breaks on inheritance, capital gains and income taxes as well as stamp duty that have been awarded by successive UK governments.
Last week, FinnCap, the small-cap adviser, remarked on the declining enthusiasm for primary fundraisings and the increasing popularity of alternative funding sources, from private equity to peer-to-peer. Entrepreneurs, it seems, are afraid that the generous tax perks on listing their companies will be repealed whatever government makes it to Downing Street. The Office of Tax Simplification, under the chancellor’s orders, is already examining the IHT breaks linked to business property relief.
Against this backdrop, the danger is that Nex is a money pit for Aquis, as it has been for previous owners.
Shelling out £1 for Nex may have seemed like a bargain. And Aquis shareholders, who include Rich Ricci, the former Barclays banker, clearly have faith in the ability of Mr Haynes to make them money. Aquis shares have risen 80 per cent since floating last year. But at £132m, the market value is more than 30 times last year’s revenues and 13 times those forecast for 2020. There is little room for forgiveness in the share price. Aquis has to make every pound count.