Ceres Power lives on (but David Pumell does not!)

An RNS just out this afternoon detailing a dramatically scaled back fund raising announcement for Ceres Power Holdings and, thankfully, a clean sweep of management has been welcomed by Ceres shareholders. The stock has nearly doubled in price as the “bust scenario” has been averted!

The company is now planning to raise only £3.3m, before expenses, to fund a revised business strategy. This is likely to be the first of one more or possibly 2 additional fund raisings over the next few years and the initial tranche will carry the company through for the next 12 months whilst new management attempts to license/put in place commercial deals to fund the company through to operational profitability – likely to be 2015.

The new business strategy is to focus on the development and commercialisation of Ceres’s existing core fuel cell and fuel cell module technology platform through offering its technology together with technical support to a wide range of original equipment manufacturers. In effect, the company is looking to license all the IP that has been created over the last 5 years at a cost of in excess of £100m and that is tantalisingly close to end market commerciality. Arrangements are already in place with British Gas and Itho-Daalderop to bring these fuel cells to market by way of mass market CHP boiler systems,

The terms of the fund raising are not great for existing shareholders, particularly as there is only £650k available by way of open offer, with the lions share of the new equity going to existing placees but still, it is better than a complete wind up of the company and more interestingly, the arrival of ORA Capital (run by Richard Griffiths of Evolution fame) on the register is, I believe, a big positive. Griffiths is no mug and he wouldn’t be here unless he thought he could make multiples of his money. Ditto, IP Group’s backing further validates the potential of the technology.

Ceres expects to earn revenues from a combination of development licenses, on-going fees for services and royalties on OEM mass market product sales. The market always has been very large and so the “ARM” licensing route is the next best thing to the original plan and at a swoop will take out all the manufacturing overhead. Why this route wasn’t taken 18 months ago is beyond me and this is Pummells shocking legacy.

Existing shareholders should certainly take up the Open offer but be aware that the “cap” is likely to be handed around again in 12 months time. Hopefully, for the new shareholders and existing, subsequent capital raisings will be at a substantially higher level with a few license deals in the bag and commerciality a year closer. The new deal structure also avoided a complete “give away” of the technology.

The share register dynamic leads me to believe there is a very high probability of a squeeze in the weeks ahead for a few reasons – 

1. The market cap is still woefully small relative to peers like ITM and AFC

2. IP & ORA cannot sell any stock for 12 months and so a large proportion of stock will not be hitting the market unlike a lot of placings without restrictions.

3. It’s a “closed” placing which means only ORA & IP are participating and so you can’t get the “spivs” selling stock ahead of the placing in the expectation of closing such a short with the placing stock.

4. £650k in the open offer is likely to be taken up in full by existing shareholders who will look to avoid being diluted and so locking up more of the new stock until a realistic valuation is created.

5. Those who sold recently expecting a wind down of the company have obviously had their stock taken by people possibly “in the know” and I don’t expect this stock to return to the market soon either given the minimal profit thus far for the holders

6. The remaining shareholders are so far under water (in the majority of cases) that whether a sale is made at 2,3,5 or 8p is likely to be irrelevant to them. 

In short there is a price “vacuum” between the current price and a level that would tempt sellers again (probably toe-ing towards double figures) and so any buyer wishing to get in to ride with ORA & IP is likely to struggle to get stock.

Pummell (not so shiny & happy CEO anymore!)

Hold tight and wish Pummell well in his new job search (or not, I certainly don’t!)