Back door still leads to ASX

FOR companies wanting to list on the Australian Stock Exchange, the traditional path is via an initial public offering.

An alternative route that is comparatively attractive in the current depressed market is a ‘backdoor’ listing.

This typically involves selling an unlisted business to a listed company.

The vendors of the unlisted business will receive shares in the listed company and end up controlling the newly merged entity, which adopts the name of the formerly unlisted company.

A recent example is Perth information technology company ASG Limited, which early this month completed a backdoor listing via Melbourne-based eSec Limited.

ASG’s original plan, back in 2001, was for an IPO.

It prepared a prospectus, appointed an underwriter and started marketing its shares, but was stymied by tough market conditions.

The blow was softened by global IT giant Compaq’s decision to invest $3.1 million in the company in return for an 18 per cent shareholding.

Under the terms of the backdoor listing, the owners of the ‘old’ ASG have ended up with more than 80 per cent of the merged company, which has changed its name to ASG.

This reflected the relative value of the two businesses, with the ‘old’ ASG having annual revenue of $18.7 million and net profit of $1.7 million whereas eSec was incurring losses.

For ASG, the key benefit of the merger is its ability to raise extra capital.

“Since 1996 ASG has grown rapidly and consistently,” chief executive Geoff Lewis said.

“The improved access to capital that an ASX listing provides will help to sustain our expansion.”

Stockbroking firm Paterson Ord Minnett, which is a leader in the IPO market, has also been active in backdoor listings.

Transactions it has worked on include timber company Whittakers becoming Mt Gibson Iron, tech company Heartlink becoming Jetset Travelworld and Focus Technologies becoming Apollo Gold Mining.

Corporate advisory firm Grange Consulting is also active in the market.

It is currently working on the backdoor listings of waste treat-ment company Organic Resource Technologies via Syntech Group and medical technology firm Medepartner via Startrack.

Grange was also involved in the very successful backdoor listing of retractable syringe maker Unitract via Musgrave Block Holdings.

Another group active in the market is Ascent Capital, which specialises in buying listed companies out of administration and vending unlisted businesses into them.

A current example is the plan to recapitalise and relist Tuart Resources as Extract Resources.

Other examples include View Resources (formerly Smartworld), Avon Resources (formerly Triton) and Imugene (formerly VosTech).

The main advantage of a backdoor listing is that the listed entity has an existing shareholder base.

This gives the merged company an avenue for raising extra capital, by marketing a new share issue to the existing shareholders.

In practice, a capital raising is normally a precondition of the merger.

For instance, eSec was required to raise $1.9 million as a precondition of its merger with ASG while Syntech must raise $2.5 million as a precondition of its merger with ORT.

Another advantage of a backdoor listing is that the listed company may already satisfy many of the ASX’s listing rules, such as having a wide spread of shareholders.

The disadvantages of a backdoor listing include possible legacies from the old listed company, such as the risk of outstanding legal action.

The role of groups such as Paterson, Grange and Ascent is to ‘clean up’ the listed entities to ensure such ‘skeletons in the cupboard’ do not emerge.

If the listed entity has been through a Deed of Company Arrangement, such risks can be removed.

The ‘cleaning up’ process can be protracted and complex, often involving reconstruction of the existing capital base and a series of shareholder meetings and regulatory approvals.

Backdoor listings may also need to overcome the perception that companies go down that path only if they are not good enough to complete an IPO.

There may also be lingering negative perceptions associated with the old listed company, especially if it failed or incurred big losses.

However the growing number of successful backdoor listings indicates that the advantages outweigh these risks.