UK: THE SHELL SEEKERS.

UK: THE SHELL SEEKERS. - Luke Johnson and Hugh Osmond turn cheap companies into expensive ones, without doing anything to the underlying business. The trick they use may be very simple but it's made them a lot of money - and a reputation in the City whic

by Chris Blackhurst.
Last Updated: 31 Aug 2010

Luke Johnson and Hugh Osmond turn cheap companies into expensive ones, without doing anything to the underlying business. The trick they use may be very simple but it's made them a lot of money - and a reputation in the City which they're keen to exploit.

Some day soon, Luke Johnson and Hugh Osmond will go for the big one. Flush with their success at taking Pizza Express, the upmarket pizza chain, to the stock market three years ago and watching its value multiply 10 times, the duo, say those who know them, will try something spectacular.

Already they have nibbled at Wembley Stadium and MGM Cinemas. Even a company the size of Littlewoods, the privately-owned £1 billion stores, mail order and football pools group, says one associate, could be within their sights. With Johnson and Osmond, it is not a question of if but when.

In their 30s, confident, ambitious, rich - little is beyond them. Talk to their friends and acquaintances and comparisons with fledgling Jimmy Goldsmiths, Jim Slaters and James Hansons trip off the tongue. When they make their move, it will add to their growing reputation as the sharpest of young Turks, as financial engineers par excellence, as the brightest, most thrusting entrepreneurs around.

If past form is anything to go by, the deal will follow a well-trodden path: Johnson and Osmond will find a small, obscure, publicly-quoted company and use it as a shell into which they reverse a bigger, unlisted business, which may be facing some sort of crisis and will be grateful for their attention. Their reward for effectively taking the target to the market will be warrants allowing them to subscribe for cheap shares. The deal will go through, and Johnson and Osmond will be left as major shareholders, having spent little of their own money, sitting on a vast paper profit.

They have turned this sort of trick on numerous occasions. Others, notably Damian Aspinall, son of John Aspinall, the casino owner, and Jamie Packer, son of Kerry Packer, the Australian magnate, are also ploughing the same furrow.

But the undisputed kings of what the City knows as the shell game are Johnson and Osmond.

To date, they have remained in the background, operating, with the notable exception of Pizza Express, in a semi-twilight world of mostly dull, small companies and third market stocks. Johnson (or Luke Skywalker to his friends) is very much the front man of the pair, and writes a column in the newspaper, Sunday Business, but otherwise they are little known outside their milieu of well-heeled City slickers and well-connected wheeler-dealers.

So far, Johnson and Osmond, either together, or occasionally separately, have dipped into publishing, restaurants, leisure, engineering, property, bridal wear, theatrical scenery, cable TV and cargo handling. Companies which have passed through their hands include My Kinda Town, Pizza Express, American Port Services, CRP Leisure, Utility Cable and Bath Press. As a rule, once they move in, they leave the business to others to run.

What Johnson, Osmond and the other leading players in the shell game are good at is turning a cheap company into a more expensive one overnight. They bring some razzmatazz to a company nobody has ever heard of and would never dream of investing in, and make it a 'must have' stock. Take Utility Cable. Until late 1994, the company was known as J P Fitzpatrick and was little different from the myriad Irish building firms based in north London. There was one difference, however: its owners, Brendan McCann and Sean Maguire, were more ambitious than their rivals and wanted to go to public. Together with Stephen Hargrave, formerly a financial journalist and more latterly an adviser to Lord Stevens, head of United Newspapers, Johnson gave them what they wanted.

In November 1993, Hargrave and Johnson took over Baillie Gifford Technology, a tiny, run-down, publicly-quoted investment trust. They subscribed for 7.5 million ordinary shares and received warrants for a further 1.5 million.

Their shareholding was conditional on the company agreeing a major purchase.

A month later, notice of that purchase duly came when Baillie Gifford's shares were suspended, pending a large acquisition. A fortnight on, the investment trust announced the acquisition of J P Fitzpatrick for £8.7 million. This sum was made up of £3.9 million from the issue to J P Fitzpatrick of 39.4 million shares, loan notes for £4.7 million and £110,000 in cash.

Then came the masterstroke: Baillie Gifford Technology, now the owner of J P Fitzpatrick, changed its name to the more modern and ritzier, Utility Cable. Suddenly, a company that had been digging up roads was presented to the stock market as being at the cutting edge of the information superhighway, which, in a sense it was, laying the lines for cable TV companies. A placing of 48 million shares raised £4.8 million and a rights issue of 33 million shares brought in a further £3.3 million.

Of this £8.1 million, out went £4.7 million to redeem the loan notes and £110,000 went to provide the cash portion of the price.

The builders were happy: their firm was billed as being a market leader at the forefront of the technological revolution. Armed with the money left over, they could expand. Johnson and Hargrave were happy too, as they sat on substantial holdings. On top of 4.6 million ordinary shares, Johnson received 'management' warrants to subscribe to 1.2 million shares at 10.5p per share. He was also given further warrants for an additional 750,000 shares at 10.5p each. During the first year Utility Cable's shares reached a high of 30.5p and were as low as 17p. This year, the City has been less impressed, and the shares have remained more or less static at 19p. Nevertheless, that still makes a firm of builders which changed its name and revamped its image much better off. Utility Cable is now worth £27.3 million and Johnson, on his warrants alone, is sitting on a paper profit of £170,000.

Despite Utility Cable's lacklustre performance since, taking it to the stock market successfully was a brilliant coup. 'J P Fitzpatrick was just a couple of builders. Johnson and Hargrave knew they would not go down well in the City so they changed their name and they were the bees knees,' says a venture capitalist who followed the deal. 'They took a gang of navvies and turned them into the storm troopers of the information superhighway.

Their shares went to 30p. Brilliant,' says another awe-struck follower of Johnson and Hargrave. Sitting in Pizza Express's offices on a trading estate in north London, Johnson shrugs his shoulders about Utility Cable. 'We raised money for them that was desperately needed.

Becoming a plc helps them win contracts,' he says, simply.

For Johnson's warrants at Utility Cable, read a whole host of other cheap shares in other companies. In My Kinda Town, which he and Osmond took to the stock market, they are each sitting on 7.3 million ordinary shares and warrants for a further 4.2 million. In American Port Services, Johnson has 750,000 ordinary shares and warrants for one million more. It is his fee: if the deal goes well, he gets cheap shares; if it goes badly, he loses little.

The son of Paul Johnson, the political columnist, Johnson Jr went to Oxford to read medicine. Osmond was a fellow student and, exhibiting early entrepreneurial flair, they ran discos around the university. After deciding against a career as a doctor, Johnson worked for a spell for Jonathan Aitken in his merchant bank, Aitken Hume, before joining Kleinwort Benson as an analyst. He specialised in media but also kept an eye on smaller stocks. Bored and anxious to make his fortune, Johnson considered his options. 'There were three ways to make money. Invest in something, which I was not equipped to do. Go into property or manage public companies.

I thought the last was the most likely one I'd get somewhere with.' There was never any question that he would run the companies. 'Rather than running them, I decided I would do deals for them which is what I was best at.'

He is scathing about people whose dream it is to build up large conglomerates.

That was never his intention. His aim, always, he says, has been to help companies move forward, taking them to the stock market if that is what they want to do. People get turned down by the City and turn to him, or he seeks them out. What he and Osmond do, Johnson maintains, is to keep the company in the hands of its original owners, albeit with a smaller share, and to let them take it public. Venture capitalists, on the other hand, 'reconfigure businesses for a few years, package them up and then spit them out on to the stock market'. There is a risk that taking the Johnson and Osmond route will flop, and for that they are well rewarded for their successes. 'We take risks, that is part of our selling package.' It is, he claims, 'part of our appeal' that they choose to receive warrants rather than advisers' fees.

What sets Johnson and Osmond apart from their contemporaries who play the same game is the frequency of their deals. Others struggle to find suitable targets: they just keep on producing new ones. 'Merchant bankers often ask me how I find companies,' says Johnson. 'The answer is by knocking on doors. We have to go grubbing about looking for things.' As ever, he is being disingenuous. Once, he may have scoured the land for businesses, but these days the companies are brought to Johnson who has carefully cultivated an image as a 'can-do' deal maker. He is helped by press coverage which has rarely been sour - even when deals have gone badly. Observers attribute that to Johnson's courtship of well-placed financial journalists, always keen to receive a titbit about his next deal.

While there is no doubting the ability of the duo to take companies public, the overall record of what happens to them after that is not good. Many have not lived up to their initial promise. The outstanding exception has been Pizza Express. In 1993, David Page, the owner of several Pizza Express franchises, was looking to go public, with Johnson's help. This, recalls Peter Boizot, founder and owner of Pizza Express, left him in the invidious position of having a franchisee who would be listed on the stock market while the chain itself remained private.

'I was sceptical about being left with a franchisee who might appear stronger than the company, so I decided to sell.'

Three offers were on the table: from a management buyout which would have bought only a small proportion of his shares and meant him staying on; from a merchant bank which would have meant him running the business 'at their behest'; and from Johnson and Osmond who wanted to buy the bulk of his shares for £8 million but still leave him with 15% of the business.

The third option proved the most attractive, and Johnson and Osmond's reward was options on 960,000 shares at 42p. Pizza Express shares are currently 442p.

Johnson and Osmond, says Boizot, did not get the company cheap. 'At that time there was nobody around saying "Peter, we'll give you £25 million".' Nobody, he maintained, could have foreseen the surge in good restaurant stocks. He is, he says, delighted at their success - not least because of that 15% stake. 'It's a pat on the head for them and a pat in my back pocket because they 're doing so well.'

Boizot, says Johnson, has reason to be grateful. 'We've made more money for Peter than he would have got on any other route.' And, it goes without saying, made a lot for Luke Johnson and Hugh Osmond in the process.

Chris Blackhurst is on the staff of the Independent.

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