I have closed my position in London capital group at 23.75p for a rather disappointing loss of 42%. (Or approx 28% against when I first posted)

I have been investing for over 12 years now and have never encountered a situation like this… Please bear in mind when reading the below I am constrained by UK libel law – my real views are much spicier….

The problems with LCG started on 2nd May when a placing of convertible loan notes was announced. This was to finance international expansion (despite the company selling international ventures a few months earlier. It would also allow for the intervention of Charles-Henri Sabet who would, in essence, turn the company round…. I am sceptical of management at the best of times, without conclusive proof I would not put any value in their ability to do something like this.

I didnt like this as my entire thesis was built around LCG either recovering or being taken out. However the stock rose on the news so I didnt do anything – my main mistake in all this. The share price then rapidly fell to 27p.

Details were not released until 17th June when the shareprice fell again to 20p.

Shares will be issued to Sabet – at a maximum price of 27p. Given the company had 28p cash per share as at the end of March this was not remotely a good deal.

I was still content to hold as the placing was conditional on a shareholder vote – and a great number of shares were held by either ex management and institutional fund managers. Surely they would have their own best interests in mind and would simply vote this thing down.
The vote has just come through – they did not vote this down.

What makes this more complex is that the day before the vote on this was to be held Spreadbet magazine said management were sitting on a number of bid proposals. One involved a 5p per share dividend / reverse takeover and the other an offer of 30p per share cash. This was all disclosed at about 3pm yesterday – the day before the vote.

The share price rose to c 25-27p.

RNS were published announcing this offer which was conditional on board support (not forthcoming) and the financing not being approved.

In essence the board were not supporting an offer at 30p whilst issuing shares at 27p.

It was approved this morning and I managed to get out at 23.75. The bid was announced as withdrawn.

This whole business leaves a bit of a bad taste in the mouth – it clearly was a decent business at the price I bought with potential to be taken out / turned round. It has ultimately been taken from shareholders by management and given to their mate. What makes it worse is that shareholders voted for this. I can only assume that the large institutional investors despite holding substantial percentages of the shares were asleep at the wheel and didn’t bother to vote. This is less surprising than it might sound as smallcap managers often hold large numbers of shares so they may well not be paying that much attention.

It is still possible for this to turn round – Sabet needs various approvals – which will take time to go through, giving shareholders the opportunity to vote the management out, but given prior inactivity, it is looking rather unlikely.

As to lessons learnt – I should have gotten out much earlier when this whole business started. Better due diligence on management would have helped perhaps – although I will look at this more in future I am reluctant to add something to my process which will limit my investment universe still further. I already find it incredibly hard to add new positions which are up to scratch…. I would usually expect my study of the shareholder register to be enough – although it wasn’t here…

Institutionally, I believe there is no justification for depriving shares held via nominee of their vote – surely it can be done in this day and age. I would then get the opportunity to at least register a small gesture of my displeasure. I also think this whole affair should lead to thoughts on AIM regulation – there are far too many convertible loans and cushy numbers for management knocking about…

The size of the loss isn’t overly concerning I have a number of positions on 50% plus profits and some over 100% – so my winners are counterbalancing my losers. I was lucky in that I didn’t ultimately add to this so the position was about 7% of my total capital so the loss is only about 3%

On to the next…