Mark Kleinman is Sky News’ City Editor and is the man who gets the City talking in his weekly City A.M. column. This week he tackles Reaction Engines, PRS REIT and EMK Capital
Concorde successor’s failure risks chain Reaction
What about this for an adverse Reaction? Two leading City fund managers – Artemis and Schroders – have slashed their valuations of Reaction Engines, a hypersonic aviation pioneer.
Their moves reflect the precarious nature of the Oxfordshire-based company’s balance sheet. Having raised £40m in a funding round last year, and £150m in total, its cash-burn rate is unsurprising – Reaction Engines operates at the cutting edge of aerospace technology, designing a pre-cooling system aimed at enabling aircraft to safely operate at speeds of up to Mach25, or 19,000mph.
Sadly, like a rocket hurtling to Earth with no brakes, time may be running out. As I reported on Sky News last weekend, Reaction Engines is in talks with its existing UAE sovereign wealth fund backer, the Strategic Development Fund (which holds a stake of close to 13 per cent) as part of an increasingly urgent race to attract new funding. Administrators have been placed on standby.
The omens are not promising. Its existing strategic backers, BAE Systems and Rolls-Royce Holdings, collectively own nearly a quarter of the company but have shown little appetite to follow their money, according to people close to the talks.
Herein lies a major problem for innovative companies which are cash-hungry and which initially benefit from the prestige of enlisting the support of big-name strategic investors. The corollary of this is that when those shareholders fail to reach further into their pockets at a critical juncture, it can sound a death knell for broader investor confidence.
This quandary illustrates why so many start-up founders bemoan the difficulties of raising risk capital in Britain as opposed to the entrepreneurial journey in the US.
Admittedly, Reaction Engines was founded in 1989, but that merely highlights the painful duration of many companies’ journey to commercial viability – or financial oblivion.
The UK government is also a small shareholder in Reaction Engines through the National Security Strategic Investment Fund. Perhaps it should consider whether it, alongside BAE and Rolls-Royce, might bankroll a rescue deal which preserves the company’s technology in British hands – or risk seeing PricewaterhouseCoopers, the administrator-in-waiting, sell it to the highest overseas bidder.
PRS REIT chair Smith should find new lodgings
Talk about getting the band back together. It’s been a rocky period for real estate investment trusts listed in London – as this newspaper has extensively covered in the case of Home REIT – and you can now add PRS REIT, a private rented specialist, to the list.
A group of shareholders accounting for over 30 per cent of the stock have launched a bid to oust Stephen Smith, PRS REIT’s chairman, and Steffan Francis, a non-executive director.
In their place, Robert Naylor, a life sciences and technology investor, and Christopher Mills, the veteran fund manager, would be appointed and work with the remaining board members to eliminate the steep discount to net asset value at which the company’s shares trade.
If the Naylor and Mills duet has a familiar ring, that’s because they were the double act who recently orchestrated the sale of Hipgnosis Songs Fund, the music rights management company, to Blackstone, following a bitter shareholder row.
Housing stock is a somewhat less glamorous affair than the catalogues of Blondie and the Kaiser Chiefs, but the rebel investors – which include CCLA Investment Management and Waverton Investment Management – believe there’s decent money in a more efficiently run business.
In particular, according to people familiar with their thinking, they believe an extension to the contract of the investment advisor, Sigma PRS Management, was superfluous, with a six-figure annual cost saving in exchange for that extension scant compensation for it.
It may not quite be on the scale of the Gallagher brothers’ Oasis reunion, but the Mills-Naylor autumn songbook is already a noisier affair than PRS REIT’s board would like. Against this weight of opposition, Smith should admit defeat and fall on his sword.
Go-kart venues’ £150m to rev up with rival bidders
Bidders, restart your engines. It looks like EMK Capital, the London-based private equity firm, hasn’t quite got its acquisition of TeamSport, Britain’s biggest operator of go-karting circuits, to the chequered flag.
Private equity sources say a period of exclusivity granted to EMK to finalise a takeover recently expired, allowing Duke Street – TeamSport’s owner since 2018 – recently expired, paving the way for rival bidders to rejoin the race.
EMK had initially been in talks to buy the company for about £150m, but had since sought to chip the price, the sources added.
Operating 40 sites in the UK, Germany and the Netherlands, Teamsport had courted bidders with a business plan outlining ambitious plans to grow it fivefold over the coming decade, in its existing markets and beyond.
That represents a clear bet on consumer confidence remaining stable, but in a leisure sector increasingly attuned to delivering active experiences, and with substantial growth opportunities among corporate clients, that expansion plan does not look impossible.
Among the underbidders in the original auction were private equity firms 3i and Livingbridge. They, and a number of other financial sponsors, may want to have a fresh look at a business that I suspect will prove to be a smart investment when the business heads for its next change of ownership in a few years’ time.