Pump Up The Volume

Adrian J Cotterill, Editor-in-Chief

Investors Chronicle highlighted in a recent article about ImageSound that “despite spending £22m on six acquisitions in nearly four years, including the £5m reverse takeover that brought it onto AIM in 2004, it (Imagesound) has a market value of just over £6m”

As we point out in an article that we are currently working on this has resulted in a net asset value well above the share price (that means basically that there is hidden shareholder value).

Anyway, last week Richard Rivlin, managing director of Bladonmore wrote a very good article, entitled “Imagesound needs to turn up the volume” which was published in the UK’s Daily Telegraph and is applicable to many of the UK’s digital out of home companies that may have come too soon to the Alternative Investment Market (AIM)…

Imagesound needs to turn up the volume

By Richard Rivlin

Visitors to B&Q, Starbucks or Carphone Warehouse today probably have no idea how much effort goes into selecting the background music that is piped into the stores and aisles in an attempt to lull you into relaxing your purse strings.

Imagesound is the Aim-quoted business that supplies nearly 18,000 outlets with their music, including these three stalwarts of the UK’s high streets and retail parks.

The business’s robust business model has clients paying between £18 and £50 per site per month. With at least two-thirds of the company’s income contracted, Imagesound’s board can plan ahead, knowing how sales will pan out over the next one to three years.

Today the business employs 67 people, of whom a third are in sales and a third are engineers and software developers. The remainder are split across the typical head office functions of finance, human resources and the board.

Derek Mapp, who is chairman as well as owning 17 per cent of the business, also leads the board. He says: “We have a library of 60,000 tracks that have been coded into 66 different genres to allow our customers to play different music to different groups.”

What this means is that if B&Q has a pensioners’ day on Wednesday, the air might be filled with the likes of Glenn Miller or Gene Pitney. But if the customers are younger mums, then the playlist will be changed accordingly. Mapp explains how it can be focused: “Take jazz. We have seven different types of jazz and so are able to give a very focused service to clients.”

This approach is also increasingly being used by hotels and big leisure venues, which use music to set different tones in different rooms. Mapp gives the example of a hotel group in Dubai that has one room playing Moroccan music, another piping Italian-style melodies to match the restaurant atmosphere and a bar with still another style of music being played to guests.

But the stock market is not dancing to the beat of Imagesound. The share price over the past six months, which has dropped from 14p to 6.75 last week, is more like a funeral march than a bouncy pop tune. Last week’s share price values the business just £4.35m. Says Mapp: “We are now below our net asset value which is stupid.”

Last year the business had sales of £8.84m and pre-tax profits of £1.2m. Brokers at Collins Stewart have issued research suggesting that the business will deliver sales of £10.9m and profits of £1.8m this year.

The stock does appear cheap – but that does not necessarily mean now is the right time to buy. Given the uncertainty facing the British economy and fears over consumer spending, there is every likelihood that the share price will carry on heading down.

Mapp says his priority is to acquire rivals in Europe and North America, and he needs to find a new strategy for doing so as his room to manoeuvre is limited. Royal Bank of Scotland has provided a credit facility of £9m but there is only £2m left following a spate of acquisitions.

So what next for Mapp? He says: “We can ride the next two years before Aim becomes interesting again to investors. We can de-list or do a buyout.” None of these options, however, appeals to Mapp, who wants to do deals now. Hence he is on the look out for, what he describes as “professional support” to unlock the issue.

But before advisers to small companies sign their letters of introduction, it is worth knowing that Mapp has a firm view of the value of the business and has no intention of giving it away, whatever the market thinks. “We are a company that is anxious for growth and need to look at different tools to how we can get there.”

Howard Leigh, Managing Partner of Cavendish Corporate Finance added to this story (online) with a very good critique (reproduced below) which should be read by any private investor…

“Imagesound is typical of many companies who find themselves listed on the Stock Exchange and then wonder why they bothered. Companies often list for the wrong reasons, forgetting the that the primary purpose should be to raise capital.

Clearly the stock market cannot see the true value of Imagesound. It may be that it falls below the radar or that investors simply regard it as too risky at this point of the cycle.

It can serve no purpose for Imagesound to remain on the stock market, continuing to incur costs and regulatory inconvenience . Delisting would mean that a new structure could be created involving different financial instruments, which would also allow Derek Mapp to increase his shareholding and that of senior managers.

The ideal financial partner would be one which can help growth overseas, where acquiring companies can both be effective but also disastrous for a business if the deal is not structured correctly and executed with considerable local knowledge.

By acknowledging his concerns that he would be giving the company away if sold at the current value to a third party, this could be an excellent opportunity for Derek Mapp to benefit by liberating himself from the shackles of the stock exchange”

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