Number crunchers put the pieces in place

OFTEN overlooked in the chest-thumping world of corporate finance are the accounting firms that perform many of the transactional elements of each deal.

Two key areas of Western Australia’s corporate finance scene involve a heavy presence of accounting firms for the provision of statements that form part of the due diligence requirements for investors.

In equity capital markets, accounting firms are most prominent as investigating accountants for initial public offerings. According to research conducted for WA Business News’ Corporate Finance database, investigating accountants were used for 58 of the 60 IPOs conducted last year, including some which did not go ahead. IPOs accounted for around 80 per cent of the instances where it is known investigating accountants were used.

In mergers and acquisitions, accountants are prominent in providing independent expert reports to assist directors and investors in understanding the valuations set by bidders and target boards. Investigating accountants featured in 69 WA-linked M&A transactions, more than one third of the deals.

In the IPO space, KPMG was revealed to be the biggest player by transaction value, albeit based on just two floats that did not go ahead. The biggest was mining contractor Barminco’s $600 million float on the ASX and the other was Galaxy Resources’ plan to list on the Hong Kong Stock Exchange with a $250 million raising.

Second-tier accounting firm BDO dominates the IPO market in Perth in terms of the quantity of deals, reflecting the WA market’s role as a big player in the small company space.

BDO is also a major participant in the M&A side of the equation, listed 27 times as an independent expert.

BDO director corporate finance, Sherif Andrawes, said the firm had developed a big pool of expertise that provided a cost-effective service for those looking to float.

Mr Andrawes said many of these investigating accountants’ roles resulted in longer-term appointments with the companies post-IPO, which fed the audit practice and other services. Numerous floats were undertaken by the same promoters, he added, who turned to those they felt comfortable dealing with.

In general areas, the fields appear to be neatly divided between those who are involved in a few big transactions and those who work at the smaller end, although BDO is the only player that could claim to be high volume in both. 

Its role as investigating accountant for the $25 million float of Lemur Resources was a rare example of a larger IPO that otherwise seemed to be handled by one of the big four accounting firms, PwC notwithstanding.

Another IPO exception is WHK Horwarth’s role as investigating accounting for Blackgold International’s $70 million IPO, the biggest float to actually take place in WA last year.

The next biggest float, that of potash hopeful Elemental Minerals, which had a $50 million IPO on the Toronto Stock Exchange last year, did not list an investigating accountant in its prospectus, although PKF Mack & Co was the auditor. 

On the independent expert side of things, PwC throws the balance out somewhat by having a significant volume when compared to other big four firms, which have a bit more competition from specialist players in the valuation market such as Grant Samuel and Canada’s Scotia Capital.

While the IPO market has been dormant for between four and five months, many in the accounting and advisory sectors said there were signs of revival.

BDO said it had four new mandates on its books, although Aaron Constantine, head of corporate finance at stockbroker Patersons Securities, said retail investors remained wary and he was currently seeing more interest in backdoor listings as an alternative to pure IPOs.

KPMG Transaction Services partner Matthew Kelly said those with the right angle would invariably be given a hearing in WA’s investment world.

“We expect smaller exploration IPOs with a good story and/or exposure to Africa to continue to be successful,” Mr Kelly told WA Business News.

“Market conditions for the larger floats particularly for retail and private equity exits remain challenging. 

“With market sentiment affected by concerns over national debt default in Europe, the US economy and a general lack of confidence, institutional investors may be less willing to price an IPO on its fundamentals and could seek a discount to insure against market shocks; a discount vendors may be unwilling to give.”