If you have seen the film Jerry Maguire then you will know the catchphrase “Show Me the Money!” very well. If you are also a shareholder in Tanfield then you will understand why this article was nearly called “Show Us Our Money Tanfield!” We had hoped to warn investors about a storm coming towards the beleaguered Tanfield investors, but unfortunately the Tanfield Board beat us to it with their announcement on 26th August 2010 that they were going to do a deep-discount share offer. This shock announcement caused the stock to fall promptly from 29p to a low of 14.75p on the day.
Tanfield stated that in the “absence of available credit facilities”, the company is currently in negotiations to finalise a possible equity fundraising. It is expected to be a pre-emptive open offer to all shareholders and was to be partially underwritten by certain Directors, at a substantial discount to the current share price. In a word they had squandered all their shareholders’ cash reserves. At the start of their interim statement on 18 August 2010 the board had the cheek to state that they had focussed on cash preservation, but when you read down the report you became aware that the net cash had in fact fallen to £2.2 million at 30th June 2010. Management concluded their share raising statement on 26th August with the words: “A further announcement will be made as soon as practicable.” We have heard this before and it would not surprise us to hear soon that Tanfield has been put into administration or wound up and that the electric vehicle business will go for a song to the ex-management who have destroyed all the shareholder value over the last three years.
Those who have been holders of the shares through 2010 have been on a rollercoaster ride, driven by empty promises of takeovers and mergers made by management. Those shareholders who have been in the stock for over three years could tell you that this is nothing new. They saw their shares decline from having a value of £10 each in July 2007 to 28p a year later and have pretty much remained at that level over the next two years. This latest news means that shareholders can only come to one conclusion. They should dump the stock and get out while it is still quoted. The management of this company are not to be trusted and it is disappointing to see that the authorities who investigated them in 2008 have allowed them to carry on their same old games.
OUR OWN EXPERIENCES as TANFIELD SHAREHOLDERS
Our attention was drawn to Tanfield on 2nd December 2009 after they had a new contract win from Sainsburys in the UK for 51 Edison Electric vans to be delivered in the first half of 2010. Sainsbury had the electric vans for its online shopping delivery business since 2006. Even the The Mayor of London, Boris Johnson said that he wanted to put London at the forefront of the electric vehicle revolution and Tanfield was been put on UK Government’s list of favoured Low Carbon Emission businesses.
The share price was much lower than three years ago. The shareholders funds at 30th June 2009 were £72m, but the market cap on 30th December 2009 was only £19m. We were made even more enthusiastic by Tanfield’s 49% stake in a US associate company producing electric vehicles, which had gotten a new contract in December 2009. Moreover, the old chairman was also being reappointed which was normally good for share prices.
We saw that on 6th August 2009 Tanfield’s new US Associate had won Federal Funding for an Electric Vehicle Demonstrator Fleet. The Department of Energy had awarded a $10m grant to Smith Electric Vehicles US Corporation (“SEVUS”) to subsidise the private sector procurement for up to 100 electric vehicles, including the ‘Smith Newton’ electric truck and a first fleet of Ford Transit Connect BEV electric light vans. This funding was part of a much larger $2.4bn in electric vehicle and traction battery grants from the Department of Energy (“DoE”) announced in August 2009 under the American Recovery & Reinvestment Act. Other recipients included prestigious names like Ford and General Motors, so this all looked very good for Tanfield’s prospects.
We started buying Tanfield shares at the end of December 2009 as we though it better to move before their new US JV gave more post year end updates, as it already looked like it was a success. Tanfield seemed to have sensed the winds of change at the US Department Energy under Obama and secured the USD 10m grant, which was pretty impressive for a company with a market capitalisation of only £20m. We took a look at their website and looked at the press releases over the previous 6 months and thought that the cyclical part of the business had been trimmed down and that all losses had been contained. The idea of splitting the company into the electric vehicle and non-electric vehicle entities also appealed to us a lot, as we thought the parts were worth more than the sum.
We discussed our purchases of Tanfield in early January 2010 with colleagues who challenged our thinking and asked more detailed questions about the cash position and any fundraising. We were comforted by the cash position of about £10m at the end of December 2008, the shareholders’ equity of £72m at 30th June 2009 and that the cash generated from operating activities after the working capital adjustment was over £1m for H1 2009. Moreover, the Cash position at 30 June 2009 was £10.8m and there had been no fundraising.
However, when we went back through the 5 years accounts from 2004 to December 2008, it was the losses of 120p per share in 2008 that really caught our attention. In the light of the 2008 numbers it was not surprising that the stock fell off a cliff and we asked ourselves: “What the hell had happened?” and what had caused these massive write-offs in 2008. In addition, “how reliable was the stated NAV?” Finally we asked if the management had also been thrown off a cliff?
Our worst fears were confirmed when we found an article by The Telegraph dated 2nd July 2008 with the title “LSE launches probe after electric vehicle firm Tanfield sees shares collapse”. This article spoke of criticism from analysts due to poor standards of disclosure and weak financial controls. The company had spent far more of its cash reserves than analysts were expecting.
It seems that in 2010 – two years later – we were seeing exactly the same story. An analyst at Daniel Stewart who met the company on 2nd June 2 2008 was told by the finance director then that cash at the end of June 2008 would be £18m. It turned out to be £11m. The annual results for 2007 had already disappointed the City and raised questions about its disclosure standards and its high level of cash burn. Pressure grew on the board, led by chief executive Darren Kell and finance director Charles Brooks and chairman Roy Stanley.
Roy Stanley had founded the Tanfield company in 1996. He spun a company called Comeleon out of the Tanfield group which collapsed in 2003. Then he used the Comeleon shell to complete a reverse takeover of the rest of the Tanfield group. The Chairman also cashed in £14m of Tanfield stock in summer 2007 when the company was worth more than £700m, selling 8.5m shares to institutional investors for 163p each. Then he moved his attentions from Tanfield to Darwen (now called “Optare”), his latest Aim venture in the bus-building sector.
Although there was some management in late 2009, Roy Stanley is still there as Non-Executive Director and more significantly as chairman of SEVUS, Darren Kell is still there as Chief Executive and Charles Brooks is still the Financial Director. We had now been put on alert and we became very keen to see the cash position when the preliminary results for 2009 would come out. It was good to have a sceptical view of Tanfield management and to be reminded of the importance of kicking out bad management.
On 10 March 2010 Tanfield received a Non-binding, conditional offer for the Smith Electric Vehicle division assets from SEVUS. The offer was £37.0 million in cash (50p per Tanfield share) with an additional £33.3 million contingent credit to the benefit of Tanfield in any SEVUS IPO offering prior to September 2015 (equivalent to up to 45p per existing Tanfield Share in issue). This offer had a four month period of exclusivity and was conditional on SEVUS getting the finance. Hidden with the details of this “conditional” offer was a short indication of the results for the year ended 31st December 2009. A loss of £11m was known for H1 2009 and no improvement in trading was expected for H2 2009. The Company expected to report net cash at 31st December 2009 of around £5 million. The outflow of net cash was the crucial indicator we had been waiting for.
It was a complicated offer. The catch was that SEVUS did not have any money and needed to raise it. This was why the Tanfield share price only went up 11.5p to 40p and not up 50p to 80p. We tried to work out what the business was worth. There were 74m shares in issue. Net assets at 30th June 2009 were £72m, which was nearly 100p per share. This included £15m in intangibles.
Management stated that there was £5m net cash at 31st December 2009, compared with £11m at 30th June 2009, so Tanfield were burning £6m per half-year. This was what we had feared and why we had been waiting until the numbers come out.
After the Smiths Electric Car business would be sold there would still be the raised platform division which has suffered during the recession. They had laid off 40% of the staff there. It was difficult to value, except to say that turnover for the 6 months to 30th June 2009 in the cars business was about £9m and £20m in platforms business.
The offer was generous in relation to the Tanfield share price, but the share price was not going up on 10th March as much as it should have. Something was stinking here. The share price moved up sharply from about 23p to 31p two days prior to the offer. There was a lot of insider trading in this stock. So if these insiders knew so much, then why was the share price not rocketing? We sold all our Tanfield shares on 10th March for 41.55p, producing a gain of 45.79% on the day. We dumped the Tanfield shares in the middle of the excitement and the share price never again reached that price level.
This was absolutely the right move as the deal was highly contingent upon obtaining the cash finance for the proposed deal. If the management had been trustworthy the deal would have been good, but in this case they had only made a promise and they had no cash. The people making the offer, i.e. SEVUS, now had the ex-Tanfield boss/founder on the board. Tanfield had a bad track-record as regards honesty and the company was eating up £10 million cash p.a. We also feared that the Tanfield management were only pumping up the share price options as their share options were in the money over 20p. We were not happy with the delay in reporting the full 2009 year results was suspicious, but as they did disclose that management had destroyed another £6m in cash over the 6mths to December 2009, we would have been selling them anyway. At the end of the day we were happy that we were rid of the Tanfield investment. The idea to invest in an area with so much political support was good, but unfortunately the management were bad!
THE INTERIM RESULTS for the six month period to 30th JUNE 2010
Turnover was down to £28.1m from £29.9m in H1 2009. Management congratulated themselves on reducing their operating losses to £9.8m from an operating loss of £11.0m in H1 2009. However, net cash at 30 June of £2.2m was down from £5.4m at 31st December 2009. This cash burn was the crucial part of the interim statement. Darren Kell, CEO of Tanfield, said that “both of the principal business units performed in line with [their expectations, during another extremely challenging period for the global economy. He added that they “maintained tight control of cash and moved closer towards a break-even position, while still retaining all [their] core people and skills.” Unfortunately the facts contradicted this claim. There was in fact a decline in net cash of £3.2m during the six months ended 30 June 2010 and the Directors stated that they were conscious that this had subsequently reduced further and were reviewing alternative ways to fund the continuing cash outflow pending successful completion of the consolidation of the Electric Vehicle business which is expected to lead to a cash inflow for Tanfield.
The word “subsequent” would indicate that the cash position since 30th June has worsened. Therefore, Tanfield would soon be in a position where all its cash was gone. If we had been shareholders at the time of this announcement made on 18th August, we would certainly have sold. Fortunately for us, we recognized these problems on 10th March 2010 in the numbers which were released for the full year ended 31st December 2009.
The most sinister thing however about the interim statement and the statements which had led up to it was the fact that the non-binding offer made to shareholders on 10th March 2010 was never mentioned again. This was another demonstration of sharp practice at Tanfield and surely something the supervisory authorities should have been observing, given serious questions and controversy over Tanfield’s disclosure in 2008.
The balance sheet at 30th June 2010 showed shareholders’ equity of £55.4m. Of this Goodwill and intangible assets made up £13.4m and there was a deferred tax asset of £1.9m. These assets seem to have little value at present. Furthermore, inventories valued at £39.7m made up the bulk of the remaining equity, but this amount would represent a full year of the cost of sales materials, which was too high.
FANTASY TAKEOVER OFFERS, MERGERS and OTHER FAIRY STORIES
On 10th March 2010 SEVUS made a non-binding offer for Tanfield’s Smith Electric Vehicles business. Tanfield spoke of the strong interest in the Electric Vehicles in the USA and mentioned the increasing US federal commitment to low emission vehicles and a visit by President Obama to the SEVUS facilities. The days before the bid the share price of Tanfield shot up without explanation, but nobody was watching. For the next four months nothing more was heard. Then on 9th July the Tanfield story took another twist as it issued its latest statement in its takeover negotiations. The board of Tanfield announced that it remained in active takeover discussions with SEVUS regarding its electric vehicle interests and that it agreed to extend the discussions for a further 60 days. The usual disclaimer was added that “there can be no assurance that any agreement will be reached with SEVUS in relation to the Smith Electric Vehicles business or that SEVUS will be able to complete any financing required”.
Tanfield postponed their AGM on 9th August 2010 and announced that they were seeking to merge the US subsidiary’s electric car business with the electric car business of Tanfield in the UK. They were really pushing to the limit as regards corporate skulduggery. We wondered about Tanfield and how they were doing as there was no word yet on the cash offer for the misfortunate shareholders. We could see them continuing to burn their way through their cash pile and that a crisis was looming. They could not continue to make loses much longer and expect to finance that out of cash reserves and reductions in their inventories. Both were going to run out sooner rather than later.
FOLLOW THE MONEY – SEVUS
If you are ever trying to get to the roots of dirty dealings then the best thing to do is follow the money trail, or if the ship is sinking you should watch where the rats go. Tanfield’s founder Roy Stanley was Chief Executive of Tanfield until he became Chairman of in September 2006. Then he became Non-Executive Chairman in 2008 and Non-Executive Director in 2010. He is now Chairman of Smith Electric Vehicles in the USA (“SEVUS”). This is 49%-owned by Tanfield. This is the same man who was at the centre of the controversy in 2008 regarding positive comments to institutional investors very shortly before the disclosure of a profits warning. SEVUS is the company which made a bid without substance for Tanfield’s Electric Vehicle assets in March 2010. It is also difficult to find the disclosure of exactly when the ex-Chairman reduced his significant stake in Tanfield.
Indeed the only positive piece of positive news relating to Tanfield did come from the US side. This was the announcement on 2nd August 2010 by Valence Technology (NASDAQ: VLNC), that they had received a $13 Million Battery Order from SEVUS for advanced battery modules to power Smith’s all electric commercial trucks through the remainder of 2010. Valence also noted that the order was placed shortly after President Obama visited Smith’s Kansas City manufacturing facility. Valence referred to SEVUS as the nation’s top manufacturer of zero-emissions commercial trucks and added that SEVUS produced the Newton, the world’s largest battery-electric-powered truck.
CONCLUSION
We sympathise with the plight of Tanfield’s shareholders. We were personally lucky to get out of the stock with a profit on 10th March because we were alerted to the mismanagement of cash by Tanfield’s board. We are certain that the management and insiders are doing a lot better than shareholders who remained loyal to the green ideals of the business model. There are lessons for us all here in the need to carry out a full historical analysis of companies before investing. This is also a reminder to ourselves and all institutional investors that we do not pay enough attention to the quality of management in making our stock selections. As for those Tanfield shareholders who are wondering if they should invest their savings in the share offering by Tanfield’s management they would be well advised to examine the track record of the management of Tanfield and SEVUS and ask themselves where the money has gone over the last 5 years. If Cuba Gooding Junior were a Tanfield shareholder he would say to the board “show me the money!” Unfortunately the Tanfield Board want to see our money – again!
EPILOGUE:
On 4th November 2010 the Accounting and Actuarial Discipline Board (“AADB”) issued a press notice advising their intention to investigate the conduct of Baker Tilly UK Audit LLP, who were auditors to Tanfield. Their investigation concerns past sets of accounts of Tanfield, specifically the valuation of certain assets (goodwill and other assets of the powered access division) in the 2007 balance sheet
FACTFILE:
The Tanfield Group is a quoted English company which was founded by Roy Stanley in 2003. There are two divisions: the portfolio of zero emission, commercial electric vehicle manufacturers; and the powered access platform business. It has a 49% owned subsidiary called Smith Electric Vehicles US Corporation. The company’s shares are listed on the London AIM Market and can be found under the Bloomberg ticker TAN:LN