The following is a detailed write-up of a trade idea that we covered on small caps live this morning and thought it would be of interest to readers here. It is takeover arbitrage on a company called Purecircle (LON:PURE).

For those who don't know we run Large Caps Live every Monday at 11am discussing large caps and macro, plus Small Caps Live every Wednesday and Friday at 11am covering smaller company news. They are text-based live discussions led by a couple of 'hosts' on a platform called discord. Everyone is welcome to join in and contribute:

With this trade idea I’m breaking two of my golden rules so this should come with a suitable health warning.

The first rule is not to get involved when you don’t entirely trust the management.

The back story:

I’ve been a long-time bear on Purecircle (LON:PURE) the provider of Stevia sweeteners to the food & beverage industry. They ticked all my short criteria, (and I have been short at various times depending on the availability of borrow and my risk appetite):

- Large Cap (They were over $1bn at one point.)

- Promotional management with lots of RNS-NON’s released.

- Over a year’s worth of inventory.

- Took them over 6 months to get paid by customers.

These suggested that either they were pretty bad business managers or they were being aggressive in their accounting.

It turned out to be the latter:

During the course of the audit of the Group's financial statements for the year ended 30 June 2019, a potential issue relating to the classification and valuation of certain inventory items was identified by the Group's auditors, PricewaterhouseCoopers.

Leading to suspension a bit later:

and Loss of CFO & CEO:

The inventory write-down was eventually finalised with the Final results:

The Group's gross profit has been further impacted by charges of $19.7m to write inventory down to its net realisable value and a further $14.8m to provide for slow-moving inventory, impairment on intangible assets of leaf & product developments of $15.7m and a further $6.8m one-off cost has been incurred in professional fees during the investigation.

They remained suspended pending interim results release on 9th April:

Finally, suspension being lifted on 15th April:

A tale of woe so far, but here is the interesting bit:

Along with the interim results…

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