Brian Gaynor: Naive investors can learn from Plus SMS saga

What conclusions can be drawn from the Plus SMS debacle?

Was it blatant share-price hyping or just a bad case of investor naivety?

Should back-door listings be banned or are they an acceptable feature of the NZX?

Will the Securities Commission undertake a comprehensive investigation or will it issue another one-page press release declaring all is sunshine and roses as far as New Zealand investors are concerned?

The Plus SMS saga began on March 8 last year when RetailX, the struggling NZAX listing, announced it would acquire the SMS messaging company for $12 million.

At the time of the announcement, RetailX's share price was 8c and its total market capitalisation only $248,560. The stock was rarely traded and only 4000 shares had passed through the market during the first nine weeks of the year.

The deal was announced six weeks after 600,000 new shares were issued to Brett Wilkinson at 5c each and eight days after Jim Bracknell and David Stubbs were appointed directors, the former as chairman.

Bracknell and Stubbs were previously involved with Newcall, the vehicle for Blue Chip's back-door listing. Newcall/Blue Chip originally listed on the NZX as New Zealand Salmon.

On March 10, RetailX issued 300,000 more shares, representing 8.8 per cent of the company, at 5c a share. Who were these issued to and why were they sold at only 5c when investor interest in the stock had escalated and the next sale price was 18c?

RetailX's March 2005 annual report showed that Wilkinson was the company's biggest shareholder, with an 18.9 per cent stake. He is involved with two other listed shell companies, Holly Springs and Vistron, with Bracknell, Stubbs and Jock Irvine. The latter was appointed to the Plus SMS board in May last year.

Horwath Porter Wigglesworth's independent adviser's report showed that Plus SMS was incorporated in the Isle of Man in November 2004 and Garry Donoghue owned 100 per cent. The consideration was 240 million shares at 5c each plus $565,000 cash and 10 million options, exercisable within 12 months at 10c, and a further 20 million options exercisable at 10c within 24 months.

A notable feature of the deal was the 10 million 12-month vendor options issued to Brent King and Grant Baker on a 50/50 basis. King and Baker, who are both involved in 42 Below and Viking Capital, also received 5 million of the 24-month options each. These were issued for services provided to parties involved in the transaction.

In addition, the directors sought approval to issue a further 32 million shares at 8c each, with 16 million options attached, through a private placement. These stapled options could be exercised immediately at 10c a share.

The independent report concluded that the offer was fair and all resolutions were passed at the special meeting on June 30 last year.

Four days later, the company issued the 240 million vendor shares, with attached options, and the 32 million placement shares, plus 18 million options to professional investors at 8c a share. The market price was 20c on the day of the placement.

On July 11, RetailX changed its name to Plus SMS and nine days later it made the first of many announcements. This one stated it had "an exclusive agreement with Telecom New Zealand Limited for the exclusive use of its number ranges for the distribution of SMS and MMS messages worldwide". The release was short, had no factual information and Bracknell's name was at the bottom.

Between September 20 and October 31, 8.6 million options were exercised at 10c and, on October 7, the company placed a further 35 million shares at 18c each. The market price was between 30c and 32c on the day of the placement.

Plus SMS's share price took off in mid-October shortly before Bracknell revealed that the company had signed an agreement with Pak Telephone Mobile. The substantive section of this release was worded almost exactly the same as the earlier announcement, except that the Pakistani company had replaced Telecom New Zealand.

Shareholders continued to exercise their options and Bracknell issued a steady stream of positive announcements. The stock peaked at 82c on November 14, giving the company a market value of $262 million.

A new chief executive, who was appointed to replace Donoghue, came and went in just 10 weeks while more international agreements were announced by Bracknell.

Based on share trading data, many of these positive announcements seemed to give existing shareholders an opportunity to reduce their holdings.

In February, Donoghue sold 19 million shares for $10.4 million but the Plus SMS share price remained remarkably resilient, consistently trading above 70c.

On May 11, the company revealed a loss of $4.5 million for the March 31 year, with not a single dollar of trading revenue.

A month later, Christopher Tiensch was appointed chief executive but Bracknell continued to make positive announcements and, in June and early July, a further 10.9 million options were exercised at 10c.

But the charade came to an end on August 30 when the company requested a trading halt and, two days later, issued a statement that Bracknell and Donoghue had resigned.

The former chief executive had agreed to give back all the shares beneficially held by him , it said, and "the company has made what in hindsight appears to be a number of unrealistic statements".

An appendix at the end of the statement listed three significant incorrect statements by the company. These appeared in either the 2006 interim or annual reports above Bracknell's signature.

The announcement revealed that the agreement with the Pakistani mobile company, which was one of the catalysts for last year's share price surge, had lapsed but was in the process of renegotiation.

The Plus SMS saga has the hallmark of one of the worst cases of share-price hyping on the NZX for 20 years, although there was also a degree of investor naivety. Investors should never value a company in excess of $250 million when it has no revenue and they should be extremely cautious about investing in an entity where options are being exercised in large numbers (shares acquired through the exercise of options before closing dates are usually sold).

The Securities Commission needs to look closely at Bracknell and Donoghue and all option holdersand participants in the 36 million shares placed at 8c each in July 2005 and 35 million share placement at 18c a few months later.

Bracknell's name was at the bottom of most of the announcements, but did he compile them? Was he given misleading information and, if so, by whom?

The commission should do a good job on Plus SMS, as it is more decisive in dealing with small companies where none of the participants are members of the business establishment.

Finally, back-door listings are an important part of the sharemarket and should not be banned, but the stock exchange needs to monitor their activities and disclosure extremely carefully. Unfortunately, it may have a conflict of interest in this regard as Link Market Services, which is 50 per cent owned by the NZX, provides share registry facilities for Plus SMS, Holly Springs and Vistron.

The commission should also look at this issue.