IPOs in the downturn
Article Date: Nov 12 2008
It's not the best time to float
If you’re looking to list your company on a junior exchange in today’s dire financial environment, there are two steps you must take.
Firstly, lie down in a darkened room with a cold towel on your head, listening to the news.
For those who remain undeterred, it’s a good idea to consider the words of Philip Morish, one of the team at investment banking firm Rivington Capital. ‘This is an investors’ market: they, not you, dictate value and now they are very picky.’
Just how picky is starkly revealed in statistics from the Alternative Investment Market (AIM), the London Stock Exchange’s (LSE’s) platform for fast-growing companies. During the past 12 months, it’s seen its overall value drop by 40 per cent to £61.5 billion.
The difference a year can make is remarkable. A total of 58 companies joined AIM up to the end of September 2008, raising £900 million, compared to 167 companies raising £4.9 billion for the equivalent period of 2007.
The exchange that targets earlier-stage ventures than AIM, PLUS-quoted has performed steadily, notwithstanding the market turmoil. Companies raised £54 million in the first nine months of 2008 with 34 new companies coming on board, against £66 million raised in floats and 60 new entrants for the whole of last year.
New rules of the game
Jonathan Wright of broker Seymour Pierce, who helped raise £38 million on AIM in July for Houston-based oil developer Resaca Energy (and some more for existing shareholders), explains: ‘There is no shortage of people coming through the door for money and no shortage of cash waiting in funds. But the people with this money don’t want to spend it now and, when they do, they will be looking at more mature businesses.’
Resaca’s bosses, JP Bryan and John J Lendrum, both experienced oil men with previous public and private company experience, had a credibility which helped make the float a success – though it has not prevented a subsequent share price fall.
'People with bright ideas, and not much else, are being told to wait'
It’s a no-nonsense environment. Entrepreneurs with bright ideas, and not much else, are being told to wait and seek private funding to tide them over, while those who say they need to raise money simply to keep their companies going are brusquely shown the door. If the investment case does stir up interest, the overtly cautious mood among investors means that valuations will need to be scaled down.
Kenneth Turner, former boss of Crown Leisure and now chief executive of Lancashire-based Sceptre Leisure, brought the amusement and gaming machine company to AIM recently after a reverse takeover of the Gamingking group, without seeking new funding at that stage. He says he came with a plan to raise money for an acquisition in conjunction with the company’s interim results.
The forceful Turner argues his sector track record should stand him in good stead, and insists the company’s low-tech, recession-proof credentials – ‘everyone likes a flutter’ – should give comfort to investors when the time comes. He lists what he perceives to be the key dos and don’ts for others wishing to tread this path today:
1. You must have a good team and good advisers (don’t try and do it cheaply)
2. Know why you are listing
3. Do not float for an exit. If you want to leave, look for a trade sale
4. It is better not to take money out
5. Meet your forecasts
Others would add a ‘lock-in’ arrangement is useful. This prevents key directors and managers from selling their own holdings for a set period after the float.
Overseas wealth
In many cases, the pools of money still available for investment in junior companies are to be found abroad, notably the Gulf or the Far East. Cheong Chia Chieh, managing director of innovative advertising broker RedHot Media, based in Malaysia and incorporated in the Cayman Islands, raised funds in Malaysia before introducing the company’s shares onto AIM.
James Pinney of RedHot’s nominated adviser Blomfield Corporate Finance confirms that ‘a good network’ is crucial, along with a willingness to accept a lower valuation and a more modest amount of money than originally hoped for.
Andrew Smith, head of RBC Capital Markets London, which raised £5 million for Papua New Guinea-focused Rift Oil (chaired by entrepreneurial Australian Ian Gowrie Smith), concedes he had to accept a relatively modest five per cent discount when handling a £25 million secondary funding in July for Algeria and Kurdistan-focused Gulf Keystone Petroleum. Now, arguing the market is much tougher, he says that ‘we often get companies ready’ for an eventual float when the market is less glacial, while sometimes arranging private funding to fill the gap, through RBC’s private office in Switzerland.
Pricing pressures
Fast-growing Sunrise Biotech Holdings, a Beijing-based producer of herbal remedies and animal fodder from mulberry trees, wants to move from PLUS-quoted to AIM with a £2 million fundraising on the back of past performance, a lucrative Japanese distribution deal and potentially exciting prospects in other key markets. But founder and chairman Yonghu Li is having to bite the bullet and accept a radical reduction in price – possibly as much as 50 per cent – from the company’s present PLUS quote before its advisers believe it can be done.
Hugh O’Donnell, boss of Jersey-based Middle East-focused engineering contractor Kentz Corporation, recalls doing the City ‘roadshow’ with broker Evolution before the company’s £67 million float earlier this year. With decades of business experience from northern Siberia to Saudi Arabia, Qatar and the Gulf, the company had a good story to tell, but O’Donnell found himself in front of hard-nosed fund managers at the very time when one of the first of 2008’s financial traumas was in full swing.
'The world was caving in and we were talking about raising money'
‘This was my first float,’ explains O’Donnell. ‘The world was caving in and there we were talking to investors about raising money. Some of the institutions understood our position in our market and approved, but others just asked what we were doing there.'
According to O’Donnell, the company and Evolution had set out for a 20 per cent float discount to the sector’s average rating. That seemed to work, coupled with the fact that, though the owners were selling down their holding from 60 per cent to 25 per cent, 83 managers with a combined 24 per cent were variously locked in for between two and four years.
With £115 million cash, no debt and an impressive order backlog, Kentz shares were recently a few pence above their float price.
But, reflects O’Donnell with relief, ‘it would be tough to do it now’.
Tapping PLUS
PLUS-quoted is a different environment from AIM and, though overall investor sentiment may be the same, individual companies can buck the trend, especially if their characteristics catch a few investors’ fancy. Morish, of Rivington Capital (part of controversial share tipster Tom Winnifrith’s corporate network), recently raised £1.3 million for resources hopeful Africa Oil. He says most PLUS companies (though not that one) qualify for EIS tax relief.
Floating and raising money on junior markets, where it can be done, costs less in commissions and professional fees than trying to do the same on the Main Market of the LSE. But there are still bills to pay. O’Donnell says the total cost to Kentz of its £67 million funding came to £2.5 million.
It could still be worth it if you have a credible long-term strategy and a business not too dependent on current market vicissitudes. ‘Business is getting slower,’ comments Morish, who adds that Rivington is now working more with private equity groups to fund companies. ‘We are becoming more discerning about what we will handle.’
But, he insists, if you have good management, a sure revenue flow, preferably ‘in a regulated industry or the public sector’, make profits and accept a ‘realistic’ valuation for your business, ‘you could still raise money’.
