1st Jul 2016 08:53
LONDON (Alliance News) - Leed Resources PLC Friday said its shares are likely to be cancelled from trading in London next month as it will not have enough time to complete the takeover of Battalion International Ltd, but believes it will still acquire a large stake in the business.
Leed said this does "not necessarily represent a negative development" for the company in the longer term.
Leed shares were up 18% to 0.0265 pence per share on Friday morning.
Currently, Leed owns AUD1.7 million worth of convertible loan notes that were issued by Battalion, which in turn invested in convertible loan notes issued by its subsidiary, High Mannor Pty Ltd.
High Mannor is a Western Australian quarry and building materials business, trading as Cultural Limestone, focused on the production, delivery and installation of reconstituted limestone blocks for use in retaining walls - and is the main target for Leed.
If all the existing loan notes were converted, Leed would only obtain an 18.4% interest in Battalion, which in turn would give it an effective 14% stake in the High Mannor subsidiary.
However, Leed and the other existing loan note holders are trying to renegotiate the terms of the loans and that is expected to result in Leed holding a "substantially larger position" in the underlying business.
Leed only has until August 15 to complete its previously agreed acquisition of Battalion, but the progress has been hampered after a number of issues were discovered by the London-listed company during the due diligence process.
"As previously notified, Leed has the right to exercise an option to acquire Battalion... although it is now very unlikely that the company will be able to make a definitive decision whether or not to proceed with or have sufficient time to complete the reverse takeover in the requisite timeframe to prevent cancellation of the company?s shares from trading on AIM," said Leed.
The main issue that was discovered during the due diligence process involved fraudulent activity which had cost High Mannor in excess of AUD50,000. Leed said the total cost of the fraud is likely to be "substantially higher than this" and said police have been informed.
Once the matter has been progressed by the police, High Mannor will consider launching civil action against the individual for damages. In addition, poor management controls, inadequate internal communication and accountability, and lack of focus on delivery of wall panels to the market have all been identified as issues by Leed.
To alleviate the numerous concerns, investors in Battalion have established a steering committee which will be headed up Tony Cammarano, an experienced businessman from Western Australia with an interest in High Mannor.
Cammarano has implemented changes, including the removal of management and the filing of the police report. He has also made changes to the process for issuing quotations to customers, reduction in numbers of full time employees and formalising contractual arrangements with all subcontractors.
The committee is also "closely monitoring" actual job performance versus costing and improving the panel production process, Leed said.
A detailed monthly management accounting model is also being drawn up to enable the production of regular, accurate financial and management information and forecasts.
Currently, AUD600,000 is outstanding under the working capital financing that is required by High Mannor to replace a facility that was previously provided by ex-management of the company.
High Mannor's payment terms with subcontractors means that capital requirements rise as the volume of business increases, and as a result, Leed said it is likely that a capital injection into High Mannor will be necessary to support the company over the next few months.
However, that will require a major restructuring.
"The current financial position of High Mannor necessitates a major capital restructuring as the existing debt obligations of both High Mannor and Battalion are not sustainable. The convertible loan notes at both companies mean that currently there is over AUD5.0 million of secured debt," said Leed.
"Efforts are being made to improve High Mannor?s performance, with early signs of success, but clearly even in this scenario a debt restructuring needs to be completed in order to place the business on a stronger footing to move forward," said Leed.
"Ultimately future profit and value creation will require the successful roll-out of panels and may require further funding to cover any additional capital requirements. This will not be possible under the current capital structure," the company added.
High Mannor is obtaining an independent valuation of the business as a pre-cursor to exploring restructuring alternatives with stakeholders - and Leed believes this will result in a debt for equity conversion taking place, in turn, leading the company to becoming the largest individual shareholder of the business.
"As a result of any debt for equity conversion, it is likely that Leed will end up as the largest single shareholder in Battalion and in turn the Australian operations. Whilst the need for this restructuring has obviously meant that Leed has not been able to complete the targeted reverse takeover, it does not necessarily represent a negative development for Leed (and its shareholders) in the longer term," said the company.
"The board remains confident that the underlying business proposition offered by the wall panels is strong and the issues to date have mainly been due to poor implementation, which is now being addressed by the change in management at High Mannor," the company added.
Leed said it understands the "disappointment" that the deal will lead to Leed being cancelled from AIM, but said the board is of a "strong view" that pushing forward with the takeover of Battalion is not the right thing to do.
"The costs involved are substantial and if the board had decided to pursue the reverse takeover it would have required a capital raise which, assuming it was successful, would almost certainly have resulted in substantial dilution for existing Leed shareholders," said the company.
"The decision has been taken to avoid a highly dilutive capital raise at this juncture and to focus Leed?s existing cash to support High Mannor and increase its stake in the business, which could ultimately lead to a controlling position," it added.
Notably, Leed said it could assess "a number of liquidity alternatives on more attractive terms, such as an IPO or merger/trade sale" once the issues at High Mannor have been resolved.
"The directors understand that certain Leed shareholders may be uncomfortable with holding a position in an unlisted entity and, as such, the board are looking into alternative options for providing short term liquidity for these shareholders," said the company.
"The board will provide shareholders with a further update prior to the middle of August, including details of any liquidity arrangements that have been arranged. Following a delisting, the board will also undertake to continue to provide regular updates to the shareholders via the Leed website," Leed added.
By Joshua Warner; [email protected]; @JoshAlliance
Copyright 2016 Alliance News Limited. All Rights Reserved.