A good match
The secret of a backdoor listing is to put together a good match between the shell company and the private operation. Guy Aird, the CEO of corporate advisors, Kennedy Needham, says: “The perfect situation is where you get a nice [shell] company that has got money and is keen to do a good transaction,” he says. “They are never easy.”
A lot can go wrong. In theory, a listed company that changes its operations substantially, the ASX listing rules require it to go through the whole listing process again. In practice, backdoor listings happen all the time. In the aftermath of the mining boom and bust, shell mining companies became dotcom companies. In the aftermath of the dotcom boom and bust, shell dotcoms became biotechnology companies. Ernst & Young partner, Anne-Maree Keane, says: “Shell companies fall out of what is going on at the time. Companies that have raised money and spent it. We are now seeing more empty resources company shells.”
But the match is not the end of the story. “You still need to perform in the after-market,” Keane says. “At EY, an initial public offer is a journey, not an end in itself.”
In other words, the business that is bought needs to be a good one. In the case of Yowie, there are reasons to be cheerful. Lam says: “Yowie is a well-established brand name, the business is established, and it can create some sort of public image and media attention. And the shell is very clean.”
Yowie did issue a prospectus and allow retail investors the opportunity to buy shares in the company to raise a minimum of $2 million at 20 cents a share. The prospectus is closed and the amount raised exceeded the minimum.
The other risk is that there is a “skeleton” in the closet in the shell company, a legal issue or financial obligation that has not been uncovered in the process of due diligence, that can sabotage the operation from the start.
Other backdoor benefits
Listed companies have an advantage over private ones when bank debt is hard to find: they can use their own scrip instead of cash to buy companies, many of which are currently at very good prices. Keane says: “We are starting to see lower priced acquisitions, and if you are listed you can talk a mixture of cash and shares. That is something that is really attractive.” Keane points to the recent deal where Virgin Airlines bought Tiger Airways as an example.
The backdoor approach also allows companies to list without raising capital – a completely cash-free transaction where the equity in one company is swapped for the equity in the other. “The equity markets now are very quiet,” says Keane. “People can list now, perhaps raise a little money and then, next year, when the market improves, continue to raise money with the listed structure.”
Kennedy Needham’s CEO, Guy Aird, points out that if the company wants some cash, it can take a placement from an institutional investor, boosting the credibility of its share registry as well as getting cash on agreed terms.
Once listed, investors from both sides have the chance to exit the investment and the company can attract fresh, eager shareholders keen to see the operation succeed.
Control
As in most business transactions, the issue of control can be a thorny one, says Lam. A shell company that has directors with skills and experience attractive to the new operation will be in position to get a better deal. Typically, the company being bought ends up with the majority of the share register and the shell company investors with about 30%, as well as control of the operations.
According to its latest schedule, Yowie Group is expected to recommence trading on Friday, November 23.
