“Do you notice anything different about me?” Seven words guaranteed to strike fear into the heart of an unobservant suitor. But you would think that Bijan Mossavar-Rahmani, the DNO chairman now seeking a “bosom”-y £600m union with Faroe Petroleum, might know how to respond. However, his failure to acknowledge Faroe’s latest assets — or at least pay them the compliment of an enhanced takeover bid — has met with a predictable result. On Thursday, Faroe wrote a long list of reasons why it feels utterly undervalued.
These were contained in a circular spurning DNO’s 152p-a-share cash offer. Chief among them was the fact that Mr Mossavar-Rahmani “ignores” the new oil-producing assets that Faroe gained from Norwegian oil giant Equinor, in a swap deal after DNO’s first approach. And, as is often the case in such rows, the resentment was soon shared with friends. An analyst at Jefferies sympathised with Faroe’s hurt feelings: “‘The EQNR asset swap’ has not led to a revised offer.”
To be fair to Faroe, DNO might at least have said something nice about its new look — and shown it meant it with a change to its 152p offer price. Instead, DNO made an unfortunate remark about Faroe’s assets looking “mature and declining”. Ouch.
So who is in the right, here?
Faroe’s figures certainly look different now: it pointed out that its Equinor assets will lift production by 60 per cent in 2019, generating £96m of incremental cash flow in the next two years. Its supporter at Jefferies reckoned that, even without this positive effect, 152p underestimated the present value of Faroe’s proven and probable oil reserves — and a precedent-based valuation suggested 190p a share. Faroe’s new look was a bargain, too, as it brought tax benefits.
In response, though, DNO said Faroe’s makeover had not exactly won it any new admirers. In fact, when Faroe first showed off its Equinor assets, “the market was as underwhelmed as DNO . . . [the] shares ended the day down 0.1 per cent”. DNO suggested Faroe owed its recent value to DNO’s attentions, and observed it could still pick up Faroe shares for less than its own offer price.
How will it end? Usually, it is the inattentive beau who has to overcompensate — and some say DNO needs to offer Faroe 200p a share. But, with the market denting Faroe’s self esteem, Mr Mossavar-Rahmani might be the one suitor who can answer the “anything different?” question without even looking up from his newspaper.
Aim’s many singularities
In astrophysics, the centre of a black hole is called a singularity, writes Kate Burgess. And, on Thursday, energy supplier Yu Group revealed how astronomical the singularity in its accounts really was: enough to suck it in to a £7m loss. Back in October, it had warned that its invoiced revenues, as well as revenues against invoices not yet sent out, would never materialise. Its shares fell from £6 to £1 then. But a day after it revealed on Wednesday that the Financial Conduct Authority had launched an investigation, Yu added granularity to the singularity.
Now, it thinks it will make an adjusted pre-tax loss of £7m-plus in 2018, having found “material weakness in systems and controls”. Its bill for bad debts and impairments will be £7.4m. It still has cash of £11m, but lower margins on contracts will eat into cash forecasts for the next couple of years. Its shares fell by just over a fifth to 60p.
Yu is just one of a string of scandals on Aim.
The accounts and audit of Redcentric, the IT provider that revealed it had overstated profit and understated net debt, is still under investigation by the Financial Reporting Council and FCA. The FRC is also probing the audit of Conviviality, the booze business that admitted it had over-calculated profits, and collapsed into administration. Then there was Patisserie Holdings, the cake shop chain chaired by entrepreneur Luke Johnson, that shook the market in October when it announced a £40m singularity in its numbers. The Serious Fraud Office has been brought in, and the FRC is asking questions of its auditor.
Specific reasons for the black holes differ. Redcentric’s new bosses blame misapplication of accounting policies, not theft. Costs were capitalised. Supplier payments were delayed — also a theme at Conviviality. Revenues were booked early and cash paid booked late. By contrast, Yu booked revenues from customers it had yet to bill and who might never pay.
Nevertheless, each singularity resonates with the others. All were small fast-growing companies with ambitious management teams that seem not to have checked their cash balances often enough, had poor systems and maybe were a tad optimistic about recognising revenues.
Accounting standard setters have tried to tighten the rules to eliminate over-use of discretion. Aim’s bean-counting brouhahas of 2018 suggest they need to do more.