Lakehouse – All Still a Puzzle

I attended a presentation by Lakehouse (LAKE) last night at Mello. I was keen to learn more about this company, and why a requisition to remove directors had been made recently which is a somewhat unusual event. The public announcements and national media comments on it left a lot of questions unanswered which I hoped might be supplied. Here are some notes on the meeting.

First some background. Lakehouse is an asset and energy support services group that constructs, improves, maintains and provides services to homes, schools, public and commercial buildings with a focus on the UK public sector and regulated markets – to quote the company. It listed on the main market in March 2015, but on the 1st February this year it issued a profit warning in a Trading Statement. This caused the share price to drop 60% on the day, resulting no doubt in some very disgruntled shareholders. The statement was somewhat unspecific in many regards but it did indicate that profits would be less than last year when they were forecast by analysts to be substantially higher.

A somewhat stormy Annual General Meeting followed where both Stuart Black, Executive Chairman, and Sean Birrane, CEO got 28% of votes against their re-election and there were similar votes against other non-execs, against the Remuneration Report/Policy, and even larger votes against other resolutions. That included the market share buy back resolution effectively blocking the company from doing that.

Subsequently Sean Birrane resigned without much explanation and Stuart Black became CEO with one of the non-execs taking the Chairman’s job.

On the 9th March, a requisition was submitted to the company by Slater Investments and Steve Rawlings (founder and major shareholder) for an EGM to remove the three current non-executive directors and replace them with Mr Rawlings and two other new directors (Ric Piper and Robert Legget). No explanation of the reasons for the requisition was given in the announcement but Mark Slater who manages Slater Investments was quoted on Citywire as saying that change was needed and that the company’s problems could not be solely attributed to the wider pressures in the social housing market and that “there may well be some business specific pressures, but there have also been some unforced errors”. It was also mentioned that he considered the existing non-executive directors had not done a good enough job in guiding management. Mark Slater is a well respected small cap fund manager and son of Jim Slater, and he has not historically been a particularly “activist” investor.

Stuart Black spoke at the Mello meeting, supported by the CFO, Jeremy Simpson. I have only attempted to cover the key questions and answers from a long meeting. I have summarised and paraphrased for the sake of brevity.

Stuart commenced by giving an overview of the business. He said they had opportunities to grow both geographically and organically. Each business had growth opportunities he noted. They made 5 acquisitions last year. He said the profit warning was given because they had to reduce market expectations by 20%.

He was asked why Sean Birrane left. He said he resigned and many people tried to persuade him to stay. Apparently he did not find running a public company “was for him”. This was the first of several rather peculiar and unrevealing answers.

There were several questions regarding the wording of the profit warning statement which shareholders obviously considered was poorly done. But Stuart felt they could go no further at the time. Peel Hunt, the company’s broker, forecast a 20% drop in revenue. Jeremy Simpson said they had extensive conversations with the broker before they formed their view. He then covered some of the reasons why customers are reducing orders and the problems (i.e. delays) in order timing. Comment: the reasons seemed to be numerous and made it clear that although they often had “framework” agreements in place these did not guarantee any actual business. In essence the company seemed to have little visibility on future orders and revenues.

A question was asked whether the dividend was under threat. The answer given was that the absolute level of dividend was adjusted down based on the profit warning. Note: the company was already giving a high dividend yield, and this was forecast to grow substantially, but obviously now will not do so.

Rather than keep going over old ground, at this point I asked the simple question as to why the requisition to remove the three directors was made. The answer given by Stuart was in essence that they did not know. There had been three conversations and all they had learned was that there were some concerns about the dividend.

Note: the requisitioners will no doubt be issuing a multi-page explanation for why shareholders should support them, as is normal practice in such cases. The company will then issue a similar length defence document. These will probably say a lot more, but it does seem somewhat unbelievable that Stuart does not know more than he was willing or able to reveal.

I then asked how much they intended to spend defending against the requisition. This is an important issue because this dispute is very similar to the recent case of Alliance Trust where a requisition to remove/replace non-execs was made and where I and ShareSoc got involved and backed the requisitioners. Alliance conceded defeat shortly before their AGM and agreed a compromise solution but spent £3 million in trying to defeat the requisition. It is very clear from the comments made here that the usual crowd of lawyers, proxy advisors and others are involved so the costs will not be cheap. I did not of course get a simple answer to my question but they do have a budget in mind apparently.

Jeremy made it clear why they opposed the requisition. In essence they did not want one guy with 6% taking control of the company (Slater I think he was meaning, although the driver might actually be Steve Rawlings).

There were some questions as to why the company had not gone into the market to support the share price (they appear to have plenty of cash in the balance sheet although that is of course historic data), but it was made clear they could not do that because Steve Rawlings had voted against the resolution to enable that at the AGM.

Comment: There is obviously more to this than meets the eye and it is simply not credible that the directors do not know more specifically at this point in time as to the reasons for the requisition. There was some suggestion that having three new non-executives nominated by outsiders would give control to someone else, but it is worth reminding readers that all directors must act in the best interests of the company and not be beholden to anyone else. The shareholders appoint directors in their votes at general meetings.

It might be of course that the executive directors see the appointment of three new non-execs to the board as a way to subsequently remove them or completely change the strategy of the company. In other words it is a threat to their current power. But if that is what the majority of shareholders want, and they can probably figure out that before the formal vote takes place, then the shareholders should get their way. The current directors should not be spending a lot of the company’s money in fighting off such a requisition. They should surely be attempting to reach a compromise solution – perhaps accept replacement of the current non-execs by new ones, including possibly one or more of the suggested nominees if not all. It makes no sense to dig in their heels and fight it out, although no doubt their advisors are quite happy to help them run up the bills in doing so.

At the end of the meeting, David Stredder offered to act as mediator which would seem a very good idea. It is unfortunately the case that when lawyers are involved, dialogue and compromise tends to fly out of the window.

That just leaves the question of what shareholders should do in such circumstances. They should probably wait for the full documents yet to be issued before deciding how to vote, while in the meantime encouraging some compromise. Note that requisitions can be easily withdrawn if the parties agree to do so. The longer this battle goes on the more damaging to the business of the company it can be. Another similar case was Victoria and look what happened there. Share price stayed very low until it was all resolved because no new investor would touch the company while the board was fighting battles over who controlled the company. It is certainly the case that the sooner this matter is resolved the better and it unfortunately might not be resolved cleanly at one general meeting.

As to whether there is value in this business is difficult to say until it is clear what the financial outcome for the current year might be and whether there is something more fundamentally going awry with the underlying business. So in the meantime, surely only one for speculators until the picture is a lot clearer.

Roger Lawson