Denuded shareholders in the financially mangled Stentor will have an easy decision to make in 17 days time. They should say yes, with alacrity, to the proposed refinancing package at the extraordinary general meeting on December 17th. Not so easy will be the decision to inject some of their own funds into a group that has treated them so cruelly. Stentor, the telecommunications group, under new management, has made it quite clear that unless the shareholders agree to a major refinancing package, which may see their share of the company severely diluted, it will go to the wall. That is not an idle threat; it is the harsh reality. The group had a deficit of £3.9 million shareholders' funds at the end of August (making it technically insolvent) and a loan of £6 million, due to be repaid on September 30th, has had to be rescheduled. The proposed refinancing package involves the creation of 5.5 million convertible preferred shares at 100p sterling per share. Provided shareholders agree, the £5.3 million net raised will go into the company, as Co-operation Retirement Benefit Fund, one of its major shareholders, has agreed to take up 3 million shares and to underwrite the issue. There is also an open offer to existing shareholders of 25 of the preferred shares, at the same price, for every 63 ordinary shares held.
If none of them take up their entitlement (excluding Co-operation Retirement's holding), their holding in the company could fall to a minuscule 7.2 per cent. So should they take up this offer?
The prospectus makes it clear that the preferred ordinary shares will not be listed on any stock exchange, nor is it intended to apply for any of the preferred ordinary shares to be admitted to trading on London's AIM, where the ordinary shares are quoted. "Accordingly, it may be difficult for shareholders who wish to take up their rights . . . to sell or realise their investment," the prospectus states. That statement and the price of the preferred shares - contrasting with the market price of around 11.5p sterling (high 192.5p, low 3.5p) for the ordinary shares - might put shareholders off.
By buying in, the existing shareholders would in effect be buying at 14.2p sterling, or at 7.7p sterling. This is because of the high conversion rates. The prospectus says the holders of the preferred ordinary shares can convert each of their shares into seven ordinary shares during any period of 30 days after the interim results or the audited accounts. That works out at a conversion rate of 14.2p per share. The conversion rises to 13 if the underwriter has to subscribe for an additional three million preferred ordinary shares. That works out at a conversion rate of 7.7p per share. The heavy conversions also apply to dividend payments, but that prospect must be miles down the road. Each preferred ordinary shareholder, for example, is entitled to seven times the amount paid to the ordinary shareholders. This also rises to 13 times if the underwriter has to put in an extra £3 million. The package appears to be fair enough. The ordinary shareholders are being given similar rights to subscribe as Co-operation Retirement. That fund is not receiving any underwriting fee; instead it is being paid through the issue of 2.3 million warrants which are convertible in ordinary shares at 16.45p sterling per share, putting a value of £375,000 on the fee representing 7.5 per cent, or 5.4 per cent on the present share price. That is on the high side but reflects the risk element. Co-operation Retirement will also have other warrants with conversions ranging from 8.85p (Irish) to 18.57p sterling.
However, conversion rights et al will be pretty meaningless if the restructuring does not result in Stentor being transformed into a viable business. So what are the prospects? Co-operation Retirement could have got out through a deal with NTL Cabletel but decided to reject that and stay in, according to industry sources. So it must have some confidence in Stentor making it.
Stentor has indeed been making progress. It has cut costs significantly under what the company calls a new business plan. This included a reduction in employment from 82 to 32, and a reduction in operations with a more commercial pricing structure. Importantly, it says revenue has exceeded the revised targets set for September and October.
Stentor argues that it has achieved a critical mass of business which justifies the transition from a high-cost leased-line infrastructure to a lower-cost owned infrastructure. It is certainly operating in an area which promises substantial growth, but competition can be expected to become more intense as deregulation gets into full swing. On balance, Stentor appears to have a potentially viable business. The new management team has been making the right moves, but it has still to be tested over a longer period.
