Back-door listing costs rising

BACK-DOOR listings have enabled many small Perth companies to make it onto the Australian Stock Exchange, but rising costs could change the equation.

The run up in the stockmarket this year has led to a sharp increase in the price of shell companies, which traditionally trade between 0.1 cents and 4.0 cents per share.

While a range of market players surveyed by WA Business News agrees the cost of acquiring shell companies has risen, there is less agreement on the impact of this trend.

Businesses that have prospered after completing back-door listings include retractable syringe maker Unitract (formerly Musgrave Block Holdings) and mining company Mt Gibson Iron (formerly Whittakers).

A current example is Perth software company Medepartner, which is completing a reverse takeover of Startrack Communications.

On the other side of the equation, Australian Healthcare Technology has effectively become a shell company after agreeing to sell its existing business assets.

AHT chair Tony Trevisan said the company plans to seek other investments “in technology and other fields”.

Businesses wanting to acquire a shell company have always had to pay a premium over net asset backing.

Argonaut Capital managing director Eddie Rigg believes the premium has more than doubled to more than $1 million.

“But there will always be a role for back-door listings,” Mr Rigg said.

“The biggest advantage is being able to raise money for less developed, more speculative opportunities.

“It provides an alternative to private equity funds.”

He said “quality” deals would generally always seek a frontdoor listing, through an Initial Public Offering.

Ascent Capital director David Steinepreis agrees that the premium for shell companies has more than doubled over the past six months.

Ascent specialises in recapitalising companies that have been placed in administration, such as View Resources (formerly Smart-world) and Extract Resources (formerly Tuart Resources).

Mr Steinepreis said the attractiveness of a shell depended on several factors, including the spread of shareholders, the amount of cash and how ‘clean’ the company was.

He added that incumbent directors would be less inclined to forgo control of their company if they saw an opportunity to achieve a higher price.

“If the market keeps up for the next six months, you will have people looking far more closely at IPOs,” Mr Steinepreis said.

A key issue was the willingness of existing shareholders to participate in future capital raisings.

“That shareholder base can be so wounded that they don’t want to participate,” he said.

In other cases, existing shareholders can assist the capital raising process.

For instance, Ascent recently facilitated a $2.4 million capital raising for Q-Vis, in which long-suffering shareholders contributed $380,000.

And when Ascent recapitalised GEO2, 350 of its shareholders participated in a capital raising.

Startrack is another company to have gained funding support from its existing shareholders, recently raising $650,000 through a share purchase plan at 1.3 cents per share.

Grange Consulting corporate adviser Peter Landau, who has advised on several back-door listings, agreed that the cost of ‘shell’ companies has increased.

“Given the increased market interest in small cap companies, there has been a dramatic increase in value,” Mr Landau said.

He believes the real value of shell companies depends on how they are used.

“Can you utilise the shareholder spread? Do you have to raise money at 20 cents?”

Mr Landau said valuing a shell was complicated by the fact that listed companies generally retained an operating business.

In addition, the acquisition of a shell company normally occurs in conjunction with capital raisings and the vending in of a new business.

A key issue is whether the new business being sold into the shell triggers ASX listing rules, which could require preparation of a long-form prospectus and capital raisings at 20 cents.

An ideal scenario involves the listed company having a broad spread of shareholders and being able to quickly raise fresh equity without having to issue a long-form prospectus.

Paterson Ord Minnett corporate finance director Aaron Constantine believes the premium to be paid for shell companies has changed very little over the past decade.

His rule of thumb is that the premium will be between $1.5 million and $2.5 million over the asset backing of the company.

He said valuations had recovered from unusually low levels six to 12 months ago.

Mr Constantine said the “integrity and quality of the underlying shareholder spread” was a key driver of value in shell companies.

He suggested companies seeking to raise more than $10 million are likely to pursue an IPO.

“The grey area in terms of time and opportunity and execution risk revolves around the five to ten million dollar area,” Mr Constantine said.

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