CNG a timely lesson for those thinking of taking Aim

Business Opinion: It is just over 12 months since CNG Travel Group listed on the Alternative Investment Market (Aim) amidst much hoopla.

The Kerry-based online hotel booking business had a very attractive story and a number of high profile backers, not least Dr Michael Smurfit, who holds 4.6 per cent.

The pathfinder prospectus from Evolution Beeson Gregory was relentlessly up beat and the pitch attractively simple.

The internet had transformed the market for hotel rooms. Instead of being sold through travel agents for a commission, room were now increasingly being sold by internet-based merchant who secured blocks of rooms at low cost and sold them on with a hefty mark up.

CNG's business model was to offer large corporate travel business access to hotel rooms secured under the merchant model.

At the heart of this was CNG's software called TLC which allowed the agents sell hotel rooms in the normal way, but also access CNG's merchants stock.

CNG made little money on rooms bought in the normal way over its system - between $1 (€0.82) and $10 a room but would earn around $20 per room bought from its merchant stock.

At the time of the float CNG had four of the five largest US travel agents signed up and a stake in another, called Tzell. All else being equal, Evolution was forecasting profits after tax of $10.7 million in 2004, $16 million in 2005 and $19.1 million in 2006.

Not surprisingly the punters were queuing up to get in and the company raised $40 million.

Things, however did not work out as planned. Problems were already manifest by the time the interim 2004 figures were issued in September.

They showed losses at the halfway mark of $10.1 million and contained the admission that the full year revenue mix "would be somewhat different from that originally forecast due to the weakness of merchant bookings being made on TLC".

The company went on to report full year loses of $6.9 million in March this year, commenting: "As previously stated, while usage of Travel Lodging Connector (TLC) was strong, conversion rates of TLC bookings to our own private hotel stock was lower than expected during the product roll-out phase."

Hotel chains have been pushing back against the online aggregators as their hand strengthens due to a strong rises in occupancy rates."

Two weeks ago the company issued a profit warning for the first half of 2005, once again highlighting the continuing failure of demand for its merchant stock.

Last week saw announcement that chief executive officer and founder Finbarr Power is leaving and that the group was putting up for sale Places to Stay, the online accommodation booking site it bought for $10 million last year.

Mr Power will be amongst the prospective buyers for the business.

CNG is not a broken business, but it is a severely damaged one and shareholders are angry and showed it last last week by defeating a couple of motions at the group's annual general meeting.

Their anger is understandable given the collapse in the shareprice from the £1.03 levels it enjoyed at the time of the flotation to the current levels of around 28p. But how justified is it?

The first point to make in this context is that the vulnerability of CNG to lack of demand for its merchant stock by TLC users was stated in the Aim prospectus, albeit somewhat tangentially.

The prospectus warns - under the heading Adverse sales mix that "CNG earns money from 4 inventory types, which have differing margin and volume characteristics.

In ascending margin/descending volume order these are; 1/ GDS (

Travelweb (c.$5-10) and 4/ CNG Merchant (>$20). Forecasts have been prepared based on the mix achieved to date and detailed guidance from agency partners".

The other issue for CNG shareholders to bear in mind is the nature and purpose of the Aim, which is to give companies "access to the market at an earlier stage of their development, allowing them to experience life as a public company," according to the London Stock Exchange.

What this boils down to is a far lower set of hurdles to be crossed before a company can avail of the market to attract investors.

A company wanting to list on the full exchange must meet the following criteria, according to the London Stock Exchange

* Minimum 25per cent shares in public hands

* Normally 3 year trading record required

* Prior shareholder approval required for substantial acquisitions and disposals

* Pre-vetting of admission documents by the UK listing authority (UKLA).

* Sponsors needed for certain transactions

* Minimum market capitalisation

A company listing on Aim does not have to have a minimum number of shares in public hands; it does not have to have a trading record and it does not need prior shareholder approval for transactions. Admission documents are not pre-vetted by London Stock Exchange or UKLA and there is no minimum market capitalisation.

CNG is a timely lesson for anyone thinking of taking a punt on one of the rash of Irish companies that have joined Aim in the last 12 months.