KEY POINTS:
Backdoor listings, which are a longstanding feature of the New Zealand and Australian stock exchanges, are in the spotlight again because of Blue Chip's problems and the collapse of The Joneses real estate agency.
These reverse listings, which involve the takeover of a non-listed company by a listed entity with no operating assets, are attractive to entrepreneurs because they do not require a prospectus and are cheaper than an initial public offering.
However investors get what they pay for as most backdoor listings have been unsuccessful.
A number of the NZX's more infamous companies were backdoor listed including:
* Chase Corporation, which was listed through the struggling radio manufacturer Fountain Corporation.
* Force Corporation listed on the NZX through Ascot Management.
* Sir Michael Fay and David Richwhite's Capital Markets was originally Horizon Oil Exploration.
* All of Eric Watson's listed entities came through the back door; he hasn't listed a company through a prospectus offering.
The failure rate of backdoor listings is high. When this column last looked at the topic in July 2000 there were 20 backdoor listed companies but only six had survived.
These are Abano Healthcare, CDI Investments, Dorchester Pacific, Hellaby Holdings, Millennium & Copthorne and New Zealand Experience.
The rest have either gone under, been acquired or changed their business and name once again.
The most successful backdoor listing has been Peter Masfen's Montana Group.
In 1973 Allied Group, an Auckland vehicle distributor and financier, listed on the NZX and shortly afterwards changed its name to Collingwood Holdings. Masfen's business interests were backed into the company in 1985 when its name was changed to Corporate Investments.
Montana Wines was acquired in 1987 but the company struggled to survive after the crash as its share price plunged to just 14c. The company made a slow recovery and Corporate Investments changed its name to Montana Group in 1999. Masfen's endeavours were well rewarded when Allied Domecq acquired the company in 2001 after a hotly contested takeover battle with Lion Nathan.
Backdoor listings remain an important feature of the NZX with 23 on the NZX at present compared with 20 in mid-2000 (see table).
The current crop is a mixture of good and bad with Millennium & Copthorne (previously Rod Petricevic' s Euro-National), Abano Healthcare (a former Eric Watson company), Hellaby Holdings and CDL Investments at the top of the class while MFS New Zealand is firmly rooted at the bottom as its shares are suspended and its future uncertain.
The plight of Blue Chip and The Joneses Group contains many of the features of backdoor listings.
Blue Chip was originally listed on the NZX in 1983 as The New Zealand Salmon Company Ltd. It was not a commercial success and in 1999 the company was used as the backdoor listing for Newcall, a telecommunications company.
Newcall was also unsuccessful and on July 1, 2004 it was used as the backdoor listing for Mark Bryers' Blue Chip. The PricewaterhouseCoopers independent report concluded that the former New Zealand Salmon/Newcall group had nil value after over 20 years in operation.
In October 2004 Jock Irvine was appointed chairman and former Deputy Prime Minister Wyatt Creech joined the board two months later.
In March 2005 John Luxton, another previous National Government minister, also became a director.
Former politicians do not have a good record when it comes to listed company directorships.
Although Blue Chip reported strong profit growth it was never embraced by the New Zealand investment community because of its unconventional financial structure and questionable business model.
Its results were also confusing. For example in the December 2006 year Blue Chip reported net earnings of $14.8 million but a negative operating cash flow of $9.3 million as receivables surged from $40.5 million to $116.6 million.
In addition Bryers was a big seller of shares, there were constant changes at board and senior executive levels with Creech and Luxton resigning in 2006.
In December 2006 Blue Chip delisted in New Zealand because trading activity in the company's shares on the NZX was minimal and Bryers believed it would receive more support from Australian investors.
This proved to be correct through to mid-2007 but the company's share price has steadily declined since then and it was suspended from the ASX on February 14. Bryers was one of the biggest sellers of Blue Chip shares as the price fell steadily during the second half of 2007.
The important lesson from Blue Chip, and most of the other backdoor listings, is that they are extremely risky and do not normally attract institutional interest. Those that have, notably Abano Healthcare, Hellaby Holdings, Millennium & Copthorne and Montana, have had to prove themselves over a long period before fund managers invested in them.
The Joneses was established in September 2006 to challenge the traditional commission-based real estate fee structure by having salaried sales staff and a fixed sales fee of $7995 regardless of the value of the house.
Its aim was to become the preferred real estate brand in this country and to establish "a significant beach-head in Australia".
On December 12 the NZX-listed RLV No 3 announced it would acquire The Joneses for $13.75 million through the issue of 613.5 million RLV shares at 2.25 cents each.
RLV was listed on the NZAX in October 2007 after a prospectus issue of 30.98 million shares at 1 cent each. According to the prospectus RLV was "established as a reverse listing vehicle for the purpose of providing a private owned company with a cost and time efficient way to achieve a stock market listing on the NZSX or NZAX markets".
RLV's main promoters were David Stubbs and Brett Wilkinson. Stubbs is a former director of Plus SMS, Blue Chip and MFS New Zealand while Wilkinson has specialised in reverse listings, one of which was MFS New Zealand.
The Independent Adviser Report, which was prepared by WHK Corporate Finance and dated January 30, showed that The Joneses had operating losses of $6 million in its first 14 months and clearly needed more capital than the $5.1 million contributed by founding shareholders.
The Joneses failed to achieve its minimum capital raising target of $1.5 million and on Monday its backdoor listing was cancelled and the company was placed in liquidation.
The real estate agent has joined the graveyard of backdoor listings partly because it was poorly advised. The $13.75 million purchase price, compared with the capital contribution of $5.1 million, was far too high for a loss-making company and it discouraged potential investors from contributing to the capital raising.
Blue Chip and The Joneses have been disappointments but Montana Group and Abano Healthcare have demonstrated that there can be rich pickings from reverse listing. Investors need to approach these companies with extreme care placing particular importance on the quality and track record of the promoters and directors.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
