Growing numbers of Australian businesses are listing on overseas stock exchanges, with the Frankfurt Stock Exchange proving to be one of the international exchanges of choice.
Five hundred and fifty Australian companies are listed on the Frankfurt Stock Exchange, vastly outnumbering the 43 companies on the London Stock Exchange which are either Australian-incorporated companies or companies where the majority of their business operations are based in Australia.
Phil Jones, chairman and chief executive of Hemiphon, is in no doubt as to why the workforce management company has listed on the Frankfurt Stock Exchange, putting it down to “speed to market and cost”.
However, the ranks of Australian companies listed on the Frankfurt Exchange are swelled by the exchange’s practice of listing major Australian companies which did not seek a listing and have not agreed to the exchange’s listing requirements.
Leticia Adam, spokesperson for Deutsche Börse, told SmartCompany most of the Australian companies listed on the Frankfurt Stock Exchange are on the exchange’s Second Quotation board so while the companies’ shares are traded in Frankfurt they did not do an initial public offering in Frankfurt.
The companies do not need to have an office in Frankfurt in order to list on the exchange.
“As soon as a company is publicly listed, the shares can be admitted to trading at any other stock exchange,” says Adam.
“This does not mean that a company has to agree or even has knowledge about this admission to trading.”
However, Adam says Australian companies are also actively seeking admission to the exchange.
“The attraction for Australian companies is certainly an easy and cost-efficient access to the capital market as well as getting access to special peer groups,” says Adam.
“For example, if you are an automotive company, it makes sense to position your shares in an environment or country where you know that there is a strong industry sector in that field.
“Germany is famous for various industries such as automotive, biotechnology, telecommunications and renewable energies.”
Australian companies who have recently sought a listing on the Frankfurt Stock Exchange include Astra Resources, and HemiPhon, while Management Resource Solutions, Astra Mining and Rapid Nutrition are all preparing to list on the exchange this year.
Management Resource Solutions (MRS) is one of the Australian companies in the throes of preparing to list on the Frankfurt Stock Exchange.
MRS co-founder and chief executive Paul Morffew told SmartCompany there were a “couple of reasons” the project management and engineering company opted for the Frankfurt Stock Exchange where it will list on the Entry Standard board on May 2.
“One, is it is cheaper than the Australian Stock Exchange (ASX) and two, it is more liquid on the German exchange which means it is easier for our shareholders to trade shares,” says Morffew.
Morffew says the Frankfurt Stock Exchange is also attractive because of companies is valued on the basis of five years of discounted cashflow projections.
For MRS this means the company’s market value when it lists will be €45 million in comparison to Australia where it would list at $15 million.
“It is a huge difference,” says Morffew. “When we initially raised our $300,000 capital the people who bought in at one cent will now get 15 times that when we list, even though it has been four years since then, it has been a good four years.”
Morffew says MRS considered listing on the Toronto Stock Exchange (TMX), the OTC, the Alternative Investment Market (AIM) in London and a secondary board in Australia before doing a feasibility study and deciding on the Frankfurt Stock Exchange.
Morffew says the problem for MRS in listing in Australia was the high compliance costs of the ASX and the problems of “no liquidity whatsoever” on Australia’s secondary exchanges, the National Stock Exchange of Australia and the Bendigo Stock Exchange.
The popularity of the Frankfurt Stock Exchange with Australian companies could be short-lived with the exchange announcing that its listing rules will be tightened to combat “massive and frequent suspected cases” of market manipulation.
The exchange’s open market currently includes a First Quotation Board, a Second Quotation Board (where most Australian companies are listed) and an Entry Standard Board.
The First Quotation Board, which allowed applying members to assume selection of issuers, is being discontinued from December 15, 2012.
From July 1, 2012, stricter rules will apply to the Entry Standard, the open market’s transparency segment for SMEs, access will require a public offering and a prospectus.
In addition, businesses must have existed as a company for at least two years and have share capital of 750,000 euros, a par value of one euro per-share and a minimum free float of 10%.
The prospectus requirement does not apply to companies which are already listed on the Entry Standard or to companies which move from the Regulated Market to the Entry Standard.
Aside from bonds, only equities which have a listing on another domestic or foreign stock-exchange-like trading venue recognised by Deutsche Börse will be included in the Quotation Board, as was the case in the former Second Quotation Board.
Deutsche Börse says companies which are currently on the First Quotation Board and which fulfill the relevant entry and follow-up requirements will be able to switch to the more highly regulated Prime Standard and General Standard segments in the Regulated Market and Entry Standard in the Open Market.
“We are convinced that the envisaged measures will protect and further improve transparency, quality and efficiency of the overall market, thereby ensuring continual raising of funds and tradability of securities,” said Alexander Höptner, who is responsible for the Market Services Department at Deutsche Börse.
Morffew says MRS was not deterred from listing on the Frankfurt Stock Exchange by the exchange’s new, tougher listing requirements but acknowledged other Australian companies may be.
“Because we are an unlisted company in Australia the criteria is pretty similar, it is essentially just having audited reports so the changes should not really put you off, if you are a proprietary limited company then maybe it would turn you off,” Morffew says.
“It hasn’t turned us off as we are already subject to pretty stringent requirements.”
In response to the new listing rules some of the Australian companies listed on the Frankfurt Stock Exchange are upgrading their listings.
HemiPhon, a workforce management company which listed on the Frankfurt Stock Exchange in September last year is planning to upgrade to the exchange’s Entry Standard in July this year.
Hemiphon’s chairman and chief executive Phil Jones told SmartCompany the attraction of the Frankfurt Stock Exchange was “speed to market and cost”.
Jones says he initially wanted to list on the Nasdaq but “numerous” advisers told him not to list there warning of “horrendous” costs, including a $1 million cost of listing and up to $1 million a year in compliance costs.
Jones says that cost wise there was not that much difference between listing on Nasdaq and the ASX but as a technology stock, Hemiphon wants to be listed on Nasdaq eventually.
Another alternative was listing on AIM which Jones says lacked liquidity and had more stringent entry requirements than the Frankfurt Stock Exchange.
Jones estimates it ended up costing HemiPhon $500,000 to list on the Frankfurt Stock Exchange including the actual listing fee and various consultancy fees.
He predicts it will cost $200,000 to put out a prospectus and move to the next level of the exchange but says HemiPhon would have made the move anyway even without being required to do so by the new listing requirements.
“We were doing it anyway because it gave us better access to capital as you are then far more transparent to the marketplace,” says Jones.
Jones thinks the more stringent listing requirements will put some companies off listing on the Frankfurt Stock Exchange
“I think it will certainly slow them down, but it is a good thing,” he says.
“In hindsight I probably would have gone straight to that level because when you come in at Entry Level you are definitely at entry level if you know what I mean, investors don’t take you all that seriously at that point and it is very hard to get volume happening.”
Jones says the process of trying to list on a stock exchange had been “confusing” and “not an easy trip”.
“We were only a small company to start with, but it is very hard to raise capital in Australia and when you have a product that is international level and we have blue chip clients and to all intents and purposes we will succeed on the international market, then the problem is you need capital to do it,” says Jones.
“There are a lot of blood suckers out there who will provide money but then want 60% of your company which is just ridiculous.”
Jones says he felt that listing on the Frankfurt Stock Exchange was the best option for the company to try to raise capital.
“I am often asked ‘Would you do this again Phil?’, and my general answer is that I would probably think a lot more before doing it, it is the only way I know to get where I want to go but it is very hard work.”
Corporate advisory firm Stepping Stone Equity advised Astra, 2UP Gaming and Rapid Nutrition on their Frankfurt Stock Exchange listings.
Terry Richards, chief executive of Stepping Stone Equity, told SmartCompany the only real alternative in Australia for these companies was to list on the ASX which he said had “a lot of compliance restrictions”.
“The Frankfurt Stock Exchange is far more flexible, has less corporate restrictions to actually list and more importantly because it is one of the biggest exchanges in the world it has far more liquidity and transparency than the Australian market,” says Richards.
Richards is not concerned about the stricter rules that the Frankfurt Stock Exchange is enforcing.
“We are happy as it lifts the bar and means the companies we are dealing with are more credible and they benefit more from a public listing,” says Richards.
“It is quite possible that people were listing companies that were not credible so that is why they have lifted the bar now.”
The ASX does not think there has been a drift by Australian companies from the ASX to Frankfurt but admits it needs to do more to attract small to mid-cap companies to list.
Richard Murphy, general manager of capital markets at the ASX, told SmartCompany the number of Australian companies listed in Frankfurt did not represent a drift from the ASX to Frankfurt as the majority of the Australian companies listed on the Frankfurt Stock Exchange had not sought a listing there.
“They are not actual listings on the Frankfurt Stock Exchange, what has actually been happening is that [the exchange] just started quoting stocks and they simply put them up,” says Murphy.
“Frankfurt has been marketing over here as has the Munich Stock Exchange more aggressively.”
Murphy says he would be surprised if more than 10 or 15 Australian companies had sought a listing on the Frankfurt Stock Exchange and believes most companies would look at the TSX or AIM before Frankfurt.
He says a small number of Australian companies are actually listed on the Frankfurt Stock Exchange and comply with the listing rules of the market but a large number of Australian securities are traded on the exchange.
“The theme all around the world is that companies of every size are being traded all over the world in very different ways,” says Murphy.
“The new world is that once you issue your shares the company is not really involved and they can be sold wherever you like.”
“I can sell my BHP shares in London if I want to and BHP can do nothing about it.”
Murphy defended the ASX’s decision not to open a second listing board saying companies had said they liked a single, high profile, high quality board where everyone must comply with minimum standards.
He also indicated that any second listing board with looser entry requirements could run into market manipulation problems like the Frankfurt Stock Exchange.
“We have decided many times not to set up an entry board or an alternative investment market, nobody wants it as you are looking for trouble down the line by setting it up.
Murphy acknowledged that there were often liquidity issues for smaller and mid-size companies listing on the ASX.
“That has been true for ever more and it is also true on AIM and the Deutsche Borse,” says Murphy.
“The factors are that the companies are very small and have a small number of shares on issue which are tightly held by the people that started that company.”
“The people who have invested are like venture capital investors, they are not looking to trade the investments.”
Murphy says the exchange is trying to address small- and mid-sized companies’ concerns about the ASX by doing investor road shows with small companies and changing some of the more “onerous” listing rules such as the requirement to have 400 shareholders in order to list.
He concedes this will not provide a complete solution.
“They are very naturally illiquid so we have stopped being hung up on the lack of liquidity down there.”
The two secondary listing options in Australia for subscribers are the National Stock Exchange of Australia (NSXA) based in Newcastle and the Bendigo Stock Exchange (BSX).
The NSXA woos small to medium size companies with simpler “principle based” listing rules, listing fees up to 80% cheaper than the ASX and annual fees up to 60% less than the ASX.
However the NSXA and BSX have been shunned by business owners such as Morffew who say there is “no liquidity whatsoever” on the secondary boards.
Emlyn Scott, chief executive of the NSXA, concedes a lack of liquidity is an issue for the exchange and one he is seeking to address six months into his role as chief executive.
“When I first started I looked at the market and thought, ‘That is not as liquid as it should be’ so I looked at the reasons why, to some extent it is about brokers getting interested, volumes brings more volume.”
Scott has tried to improve accessibility through the use of new software and improved internet access to the exchange.
He claims the ASX has similar liquidity concerns, saying “liquidity down the bottom end of the ASX is a very long tail”.
Scott says it is “astonishing” to hear of the number of Australian companies listing on the Frankfurt stock exchange.
“Frankfurt really had not hit the radar, they were always known for derivatives not the cash equities,” he says.
The NSXA’s strategy to attract more small- and medium-sized companies away from exchanges like Frankfurt is to focus on listings rather than trading.
“The market itself is actually fragmenting because the people who are buying and selling securities are becoming more discerning,” says Scott.
“By definition, one market can’t provide all things to all people so the long and short of this is where you list a company will be different to where the company is traded.”
“In the future you will not care if your stock lists somewhere and does not trade there as your stock will trade in multiple places.
“We want to be the best listing exchange, we need to provide good secondary trading but to do that we need to aggregate our companies to encourage them to trade on other markets.”
“That will take time to put in place but we know it is a very strong model as it is very compelling for investors.”
Cara Waters is the editor of SmartCompany. Cara was previously a senior reporter at the Financial Times website FT Adviser in London and has also worked for The Sunday Times.
