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Investment firms still dominate corporate activity in the Channel Islands taking advantage of the favourable tax regime, but trading companies are also making their presence felt.

In a small jurisdiction such as the Channel Islands, M&A news does not come much bigger than when CI Traders announced it was in advanced takeover talks in March.

The AIM-listed company’s share price had jumped by about 6p on the back of press speculation about a deal and the company confirmed it was in advanced discussions, after receiving an approach in October 2006.

However, the corporate community on the islands is still awaiting the outcome – no deal has been forthcoming at the time of writing, but talks are still ongoing.

It is not the first approach CI Traders has received in the past two years. In October 2005, private equity firm Alchemy Partners made an unsuccessful enquiry.

But it is understandable why CI Traders has received amorous advances. The company posted pre-tax profits of £17.8 million for the year ended January 27, 2007, up 44% year on year. In addition, its turnover from continuing operations was up 6% at £332.9 million.

Nevertheless, M&A interest such as this is rare on the islands compared to the mainland UK. Indeed, deals of any size are relatively scarce given the size and number of businesses based there. But in financial services and investment fund terms, the islands continue to be a major international player.

The Channel Islands have long been a favourite for investors and investment funds thanks to the lack of corporation tax. This ensures all profits are available for dividends, giving them far more than they would receive in the UK.

Not only this, but in the Channel Islands a company is more profitable on net asset value, so an investment is also worth more. Also, investors do not have to pay stamp duty, but can still get UK tax breaks.

It guarantees that entities such as protected cell companies [PCC], which allow investors to create a series of funds under one structure – a cost-effective, quick and flexible method compared to other vehicles – remain a favourite. The ability to spread risk in a PCC by keeping investments and their liabilities separate and its means of entry into the captive insurance market ensure their continuing popularity.

In addition, the Guernsey real estate investment trust – a corporate vehicle that allows speculators to invest in property without having to buy it outright and garner tax breaks in the process – continues to be popular, despite the introduction of a mainland UK version this year. Again, tax benefits are a major driver, as is the experience in establishing and administrating these structures available on the island.

Off to market

Tax breaks have also ensured that the Channel Islands have continued to be a favoured domicile for companies or funds listing on one of the UK’s three capital markets. For example, in March and April alone this year, six companies registered on the islands joined AIM.

This included mining firm Noventa, which raised £8 million on its debut on March 20. However, its share price has slipped to 140p at the time of writing from 197p at admission, partly because it pulled a planned acquisition and announced delays to the ramp-up of its Marropino mine.

Other recently-listed companies domiciled in the Channel Islands have fared better. For example, forestry and timber investment firm Cambium Global Timberland, which was admitted to AIM on March 6, raising £104 million, has seen its share price increase to 106.5p from 100p at admission.

The is partly down to Cambium securing an option to acquire the fund’s first timberland asset, a 8,500-hectare reforestation project in New South Wales, Australia.

Elsewhere, St Peter Port Capital, which invests in pre-IPO companies, joined AIM in April. It has since invested in six companies in the mining and energy sectors and has seen its share price increase marginally on the back of this.

But companies do not only look to London to list. Increasingly, investment funds and businesses are choosing to join the Channel Islands Stock Exchange. Indeed, the CISX recently approved its 2,000th listing, with more than 300 admitted in 2007. This follows a record year in 2006 when 582 securities were listed.

Indeed, the CISX is now also attracting mainland UK-based companies. For example, niche engineering company Southbank UK plc joined the CISX in March 2006, raising £5 million.

Ewan Lloyd-Baker, chief executive of Southbank UK, said the company had considered joining PLUS (then Ofex) or AIM, but decided against those because of the uncertainty surrounding the former at the time and the sheer volume of numbers making it difficult to attract investors on the latter.

As one of the few trading companies on the CISX – the vast majority are funds – Southbank UK’s move could be seen as risky, but Lloyd-Baker believes it was a good move for the company. “It’s certainly suited us,” he said. “We feel that we’re getting a personalised service at the moment because we’re one of a handful of trading companies rather than one of 1,500 [on AIM].”

Indeed, in the past year Southbank UK has returned to profitability, posting a profit of some £1.4 million for 2006, compared to a loss of £46,000 in 2005. This was helped by Southbank UK’s acquisition of rival Hayward Tyler immediately prior to it joining the CISX. Lloyd-Baker is confident that the company can pursue further acquisitions.

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