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Weak market flattens IPOs

THE depressed state of the Australian stock market has led to a sharp drop in the number of companies completing Initial Public Offerings.

It has also reduced the volume of capital raisings by listed companies and, just as importantly, encouraged a shift away from straight equity towards alternatives such as hybrid securities and convertible notes.

Just 18 IPOs were completed in Australia in the six months to June 2003, well below the 38 completed in the previous six months.

The total for the financial year (56) was the lowest number since 1999, according to a survey by KPMG Corporate Finance.

“IPOs remain a very difficult option for the vast majority of Australian businesses seeking equity,” KPMG national head of mergers and acquisitions, Antony Cohen, said.

In Western Australia, only a handful of companies have completed IPOs this year.

The largest IPO was by Midas Resources, which raised $7.0 million, helped by its strong management team headed by chairman Don Boyer and its acquisition of a top class, advanced stage exploration project.

These attributes have not stopped its share price halving since listing.

The most successful IPO was Siberia Mining Corporation, which raised $2.2 million.

Its share price has more than tripled since listing, helped by the high profile of its chairman Andrew Forrest, who formerly ran Anaconda Nickel.

Agricultural electronics supplier Computronics Holdings had aimed to raise $3.5 million but had to make do with $1.2 million.

Cool or Cosy also raised a very small amount ($1.7 million), illustrating the limitations currently prevailing.

The latest company to complete an IPO was Gleneagle Gold, which has just closed its $4.5 million capital raising.

Five Perth companies are presently seeking to complete an IPO, with the average fund raising target being just $4.0 million (see For the Record for details).

This group includes several companies, such as Berkeley Resources and Chameleon Mining, which have been forced to extend their offer as they strive to achieve the minimum subscription level.

Other IPOs have been cancelled because of weak demand from investors.

These included Striker Resources’ plan to spinout its gold assets into a new company, Napier Minerals.

For companies that complete an IPO and list on the Australian Stock Exchange, there is an array of fund raising options.

Like the IPO market, listed companies with a ‘good’ story to sell can raise funds with relative ease while most others struggle.

Perth companies that have managed to complete substantial capital raisings this year were led by Alinta, which raised $36 million through a placement of ordinary shares and $130 million through an issue of reset preference shares.

Both transactions, which will help to fund Alinta’s national expansion, were fully underwritten by Macquarie Equity Capital Markets.

The reset preference shares are part of a trend towards the issuing of hybrid securities, which combine elements of equity securities (i.e. ordinary shares) and debt securities (e.g. convertible notes).

KPMG Corporate Finance said hybrid issues in the past year raised at least as much as the entire IPO market.

Given their complexity, hybrid securities tend to be issued by larger companies and marketed to institutional and sophisticated investors.

In Alinta’s case, the yield on its securities will initially be the higher of 5.35 per cent, or 0.85 per cent above the three-year swap rate.

The yield will be periodically reset on agreed dates.

Other Perth companies that have completed substantial capital raisings this year include emerging pharmaceutical company Chemeq and mobile accommodation supplier Fleetwood, which is enjoying a period of rapid growth.

Chemeq raised $25 million through a share placement by Bell Potter Securities, while Fleetwood raised $17.7 million through a share placement managed by Bell Potter and Burdett Buckeridge Young.

Local broker Euroz has also been active.

Transactions it has managed include capital raisings for Melbourne-based Indophil Resources ($8 million placement, supported by ABN Amro Morgans) and Westonia Mines ($4.4 million placement).

While most companies raising capital have favoured placements, Home Building Society and Mt Gibson Iron opted for rights issues, which give existing shareholders full opportunity to participate.

Mt Gibson raised $11.4 million early this year, fully underwritten by Paterson Ord Minnett, while Home raised $6.6 million, with Paterson as lead manager (but not underwriter).

For companies seeking to raise relatively small amounts, share purchase plans have become increasingly popular.

Under an SPP, existing shareholders have the right to subscribe for up to $5,000 of new shares.

This is a simple and cost-effective solution, avoiding the need to prepare a full prospectus.

Orbital Engine Corporation recently raised $3.5 million through an SPP as well as $2.8 million through a share placement.

Both transactions were fully underwritten by Paterson Ord Minnett.

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