Will Banks's MBO move pay off?

Arron Banks’s plot to take Brightside private again, following his resignation as chief executive of the broking group, is a shrewd move.

Brightside’s stock market listing has become more of a burden than a benefit, and the company has received little credit from investors for being a profitable, growing broker.

The stock market has not been kind to small and mid-tier brokers in general. After their initial public offerings, investors have lost interest and left them to fester. The stocks trade infrequently and valuations have fallen, regardless of the quality of the businesses.

Brightside is no exception. It made its debut on the London Stock Exchange’s Alternative Investment Market (AIM) on 9 January 2007, and its admission price was 69p. The price surged to 85p in the first day of trading and went above the £1 mark in the weeks following. Now, however, the stock is languishing at the 20p mark.

Behind the numbers

Anyone would assume from the stock price that Brightside is a shadow of its former self. Nothing could be further from the truth. Brightside reported a £3.9m loss on revenue of £451,000 in 2006, just before its stock market debut. In 2011, however, the company posted a £9.4m profit on £80.4m of revenue.

As well as being a bad advert, these depressed stock valuations can flag a company up as a takeover target. Most of Brightside’s AIM-listed peers have been taken out. THB has gone to US broker Amwins, CBG to Giles and Cobra is in the throes of a takeover.

Risk and reward

Stock market listings can bring benefits, such as access to capital through further share issues and giving companies the option to pay for acquisitions in listed shares. However, these benefits are greatly diminished if the stock has a low value and is traded infrequently.

In today’s tough conditions, Brightside’s money and efforts would be better spent broking than complying with stock exchange rules”

Without these benefits, a stock market listing is a burden a company can do without, particularly in lean times such as these where managing costs and maximising efficiency are of paramount importance. Put simply, in today’s tough conditions, Brightside’s money and efforts would be better spent broking than complying with stock exchange rules.

Banks’s plan to bring in private equity money to buy out the stock market investors has its risks. Private equity can impose sometimes undue pressures on a management team to grow too quickly or assume too much debt. However, if he chooses his partners wisely, these risks can be mitigated.