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Challenger a big wheel in London as re-listed shares soar

Published: 08:07 08 Dec 2015 GMT

London-eye
Challenger is eyeing a new future in the world of big wheels.

After more than six months suspended, shares in Challenger Acquisitions (LON:CHAL) began trading again earlier this morning.

The decision to put the quote on hold followed the unveiling of two acquisitions that triggered the market’s arcane reverse takeover rules.

It meant the firm had to compile a prospectus ahead of relisting stock in the enlarged company.

Although modest, the deals form the basis of Challenger going forward as the part owner of big wheels similar to the London Eye and the manager of projects to build these attractions.

The shares were listed at 10p each in February and by mid-March were up to 79p as investors bought into the initial strategy mapped out by chairman Mark Gustafson.

There was a slow drift back to a suspension price of 38p, and this morning the stock is changing hands for 48p, for a rise of 23%.

In April Challenger raised just over US$4.5mln (£3mln) via a convertible note that allowed it acquire a 2.5% stake in the New York Wheel. The deal may look like a bargain when the 630-foot landmark is finally up and running on Staten Island on Independence Day 2017.

New York will be the first of what it hopes will be a number of investments in wheel projects being built in major cities around the world.

The ambition going forward for the Challenger team is at some stage to become majority shareholders in one or more of these giant steel money-making machines.

The New York Wheel is predicted by analysts to make annual operating profits in excess of US$100mln a year.

That said, the cost of this feat of civil engineering is put at up to US$500mln (including all the related infrastructure – parking, restaurants, theatres, etc.), so debt repayments will trump dividends near term.

Key to its ambitions of being a big wheel in the world of big wheels is the second acquisition – that of Starneth, a deal concluded in July at a cost of US$8.1mln.

The business is run by Chiel Smits, who was the project manager of the London Eye, constructed in 2000, currently owned by Merlin Entertainments and now a fixture of the London skyline.

Starneth is also guiding the development of its New York sibling, so brings with it the proven expertise in managing and building of wheels.

Projects are in the planning stages with local developers in major cities around the world, and the company has a pipeline of 25 active and credible projects (whittled down from 72).

Challenger, with its London quote, creates a pipeline for Starneth to the equity markets that will help fund some of the opportunities, particularly where some form of start-up capital or a financial guarantee may be required to commence the project.

“Starneth always had a dilemma when working with local developers,” explained Gustafson.

“The dilemma was that they got to a certain point and the project would need funding. Starneth would say ‘we are the engineers, not the project financiers’. A couple of projects stalled because of that.”

Now, however, it needn’t walk away from opportunities to be co-investors in these projects.

The strategy is four-pronged. The company could in certain instances act purely as subcontractor on a big job where the local developer has the project management expertise and funding in place already.

Secondly, it could be the project manager; or a project manager with a minority stake; or an investor that comes in near start-up and takes a majority share in the wheel.

It showed with the New York wheel project that acquisition opportunities are there if Challenger is nimble enough to take advantage.

Financing is likely, initially at least, to come directly from the equity market. While the banks are always willing to lend to fund the construction of a new mine, or the building of an oil field, Gustafson thinks they would be more reluctant to bankroll the building of a big wheel, at least initially.

Once the company has projects under its belt that are income generating there may be the chance to borrow against these assets, but this scenario is likely to play out several more years down the line.

In the meantime, the plan would be to tap the market in tranches as it hits the various milestones in its development.

But Challenger’s chairman sees many similarities between the industry he is in now and the sector he cut his teeth – natural resources.

“People look at me and say, ‘you are an oil and gas guy, what are you doing in attractions?’

“The only difference between this [building a wheel] and, say, mining is the traditional debt piece you are able to raise,” said Gustafson.

“Short-term, I don’t think we will have that option here initially. I think it will be equity focused at the front end.”

There is no doubting the company has excited the market’s interest. There is, however, a caveat to this story. It is likely to be a slow burner as the company builds its portfolio from its current modest base.

One thing I would urge is to look closely at the acquisition metrics for the New York deal and balance that against the long-term earning potential of the attraction. It is fair to say Challenger scored a bargain there.

If it can repeat this trick over and over again, then this should be an interesting ride.

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