Friday 12 October 2012

Avanti (AVN) ... still a space oddity

The loan by Avanti to its customer, Filiago, for what appears to have been £9.1m is interesting. As it is no longer a loan and has been exchanged principally for goodwill and intangibles, the cash has seemingly gone. The £9.3m loan cropped up some time in H1 2011 (calendar year), although at that time Filiago was not cited in name as the debtor; Avanti carried it on its balance sheet as a “financial asset to a strategic partner.” The loan was reported to accrue interest at 7%, and in the event that the asset was not fully recoverable over the term of the loan, then Avanti had “collateral over the balance which constitutes 75% of the equity interest in the borrower [Filiago] should there be a default.” I find this odd in itself as if a debtor defaults then I would assume the debtor to be insolvent and hence any equity to be near to worthless, particularly if there are hardly any tangible assets, which in this case there were.
When Avanti’s 2012 interims were released in February last, Avanti highlighted in its note 9. “Business Combinations/Intangible assets and goodwill” that it had “completed work which enhanced its security over the shares and the business ... The loan continues to carry the option to convert into a 75% equity interest.” To me this appears as though the debtor hadn’t paid any interest due (or was unlikely to) and so Avanti took control of the assets. At this point, Filiago was still not named as the debtor. Provisional values were attributed to the assets, liabilities and goodwill acquired as follows:

There are several things to note about the assets, liabilities and goodwill acquired:
  1. Trade and receivables appear to have been materially marked down from a book value of £606k to £229k.
  2. Where’s the cash? The debtor, Filiago, only had £2k in cash? Where did the other £9,133,000 of the loan go?
  3. A business that has net liabilities of £134k, contributes £330k in revenue, a loss of £81.5k, and seemingly cannot honour its interest payments has goodwill and intangibles (I expect the intangibles are possibly values attached to customer lists) valued at £9,478,000.
Skipping forward to Avanti's prelims update to 30 June 2012, and Filiago is identified as the customer/debtor and some items of the assets, liabilities and goodwill have received fairly material changes to their provisional values:
  1. Trade and other payables are £629k greater than initially thought.
  2. The value of the intangibles (which could be customer lists or software or other) is worth £2,419,000 less than originally determined six months prior. Fortunately the bulk of the difference has been bumped onto goodwill, which is £2,152,000 higher.
  3. There is still only £2k of cash!
I sent an email to Avanti’s Investor Relations in early March 2012 asking for some clarity on this loan, specifically asking who it was to, and when it matured. I received no answer. So I asked its house broker, Cenkos. They weren’t much help either.
All this seems a far cry from how Avanti described Filiago at the time it won its £1.3m contract in December 2010. Then it described Filiago as “one of the largest satellite broadband subscriber bases in Europe.” Somehow, I can’t see that.
In summary. Avanti had a financial asset of £9.135m on its balance sheet as at June 2011 and now has what is principally £8.448m of goodwill and intangibles on its balance sheet as at June 2012. Where has all that cash gone?
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  1. Hi Matthew. Our screens at Stockopedia have been pointing out AVN as a short for some time. Just discovered the blog here. Would you be interested in syndicating the odd article to us ? Let me know at ed [at] stockopedia [dot] if you'd like to discuss further.

    1. Hi,

      That's interesting to know. I've sent you an email.



  2. Hi Matthew. An excellent article. 

    You ask where is the cash? I suspect the answer is back at Avanti. Here is one possible  scenario. I stress there may be other explanations which are far more innocent.

    Avanti should have written the Filiago invoices off and taken a £9m charge  to the P&L, making an ugly set of numbers look even uglier. Instead it lent £9m to Filiago, which used  the cash to immediately pay the outstanding invoices.

    As you point out Filago is in no position to repay the loan, it only  has £2k of cash. Instead, Avanti crystallises its security taking 75% of Filiago's "worthless" equity and treats the money lent to Filiago as consideration for the shares. 

    Filiago has few tangible assets so the bulk of the consideration is treated as goodwill or intangibles arising on acquisition. 

    The intangibles then get written off through the P&L over time but as with so many quoted companies,  management will then ignore the entire amortisation charge in arriving at an adjusted operating profits figure. 

    Similarly, the goodwill will eventually be written off and be treated as a non-cash exceptional charge.

  3. Hi,

    Thank you for the positive feedback.

    I reckon the possible scenario you have suggested is very plausible. On the upside, perhaps the cash hasn't disappeared, but on the downside, it makes a mockery of the P&L.

    Having read the recently published accounts, I have a few more observations and will try to get round to putting them on the blog soon.



  4. Hi Matthew,
    Thanks for the piece. Have you figured it out yet?