Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Mega heads to NZX's back door

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Whether Kim Dotcom's company will be a long-term survivor is worth thinking about. Photo / NZ Herald
Whether Kim Dotcom's company will be a long-term survivor is worth thinking about. Photo / NZ Herald

Kim Dotcom, the country's latest superman, will soon be available to investors through the NZX.

But Dotcom is not coming to the NZX through the front door, he is flying sky high and will enter through the exchange's back door.

Back door or reverse listings are the controversial side of the NZX. There have been a few successful reverse listings but most have failed.

The early response to Dotcom's Mega listing has been positive but based on past experience there is only an outside chance that Mega will be a successful NZX company.

Backdoor or 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 initial public offerings.

Reverse listings are usually made through companies that have not been successful and are on their last legs.

It gives shareholders of these companies an outside chance to recover some of their lost investments.

There have been a number of high-profile reverse listings, including Chase Corporation, which listed through the radio manufacturer Fountain Corporation, and Fay, Richwhite, which was previously known as Horizon Oil Exploration and Capital Markets.

Eric Watson has listed all his companies through the back door, including American Apparel on the New York Stock Exchange.

Arguably the most successful back door listing was Peter Masfen's Montana Group.

The company began life as Allied Group, an Auckland vehicle distributor and financier which listed in 1973. It changed its name to Collingwood Holdings until Masfen's business interests were backed into the company in 1985 and it became Corporate Investments.

Montana Wines was purchased in 1987, Corporate Investments changed its name to Montana Group and was finally acquired by Allied Domecq for more than $1 billion in 2001.

The accompanying table shows that there are now 18 back door-listed companies on the NZX. This compares with 23 reverse listings six years ago.

The long-term survivors are Millennium & Copthorne (previously Rod Petricevic's Euro-National), Abano Healthcare (a former Eric Watson retirement village company), Hellaby Holdings and CDL Investments.

The non-survivors from six years ago include Allan Hawkins' Cynotech, Brent King's ICP Biotechnology, the infamous Plus SMS and the two finance companies Lombard Group and MFS New Zealand.

Mark Bryers' Blue Chip, which back door-listed through Newcall, was another spectacular reverse listing failure in the mid-2000s.

Charlie's, New Image and New Zealand Experience have all been subject to successful takeover offers since 2008.

The accompanying list of reverse-listed companies is a mix of success, hope and unfulfilled promises. A number of individuals keep popping up again and again as far as back door listings are concerned. These include Roger Gower, John Sorensen, Brett Wilkinson, Brent King, Sean Joyce, Ken Wikeley and Keith Jackson.

SeaDragon, which is going through its seventh reincarnation, has Joyce on the board while Wilkinson and Gower were previous directors.

Promisia Integrative is now operating under its fifth listed name while VMob has had numerous names and directors. These include Joyce at present and Sorensen and Wikeley in the past.

Gower and Joyce are on the board of Orion Minerals, which once tried to reverse list the real estate Joneses Group, and Wilkinson is a former director.

Brent King is a director of Vetilot and was the chief executive of Dorchester Pacific. Joyce, Gower and Wilkinson were on the RIS Group board with the latter originally owning 70 per cent of the company.

Reverse listings were back in the headlines this week when TRS Investments chairman Keith Jackson announced that the company had a conditional agreement to purchase 100 per cent of Mega Ltd for $210 million.

This replaced a proposal for TRS Investments to acquire a gold and silica prospect in Southland.

The Mega consideration will be 700 million new TRS shares at 30c each. These new TRS shares will be issued to Mega shareholders after existing TRS shares are consolidated on a one for every 148 shares basis.

Following the consolidation the existing 1107.4 million TRS shares will become 7.5 million TRS shares.

Mega is described as "a global technology business headquartered in Auckland that delivers encrypted, cloud-based services that enable private, secure online communication and collaboration for businesses and individuals".

There was no mention that Mega's predecessor, Megaupload, was shut down by the United States Department of Justice two years ago. There was also no mention that Dotcom, formerly known as Kim Schmitz, has received suspended prison sentences for computer fraud and insider trading.

Mega's largest shareholders are: Mona Dotcom, Kim Dotcom's wife, with 26.5 per cent, Munich-based Wolf Ortmann with 18.4 per cent and John Sorensen, 11 per cent.

Mega shareholders will receive $210 million worth of TRS shares but they appear to have contributed only $118,489 of equity since Mega was launched at the end of 2012.

TRS shares shot up from 0.1c to 1c following this week's announcement indicating that each TRS share will be worth $1.48 after the 1 for 148 shares consolidation.

Thus, the Mega shareholders will receive more than $1 billion of shares based on the 700 million shares consideration, at a market price of $1.48 each.

Reverse listings can have a positive outcome because they offer shareholders of unsuccessful companies the opportunity to claw back some of their investment. Kupe, Renouf Corporation and Euro-National shareholders can be grateful for this opportunity.

However, a number of features of these recapitalisations need to be improved, including:

The initial announcements should contain far more information, particularly financial details. If they don't then the shares should be suspended until the independent report is available.

The NZX should require full disclosure of all the individuals involved in a reverse takeover, including their previous board positions and all criminal, as well as securities trading, convictions and outstanding charges.

Companies should be required to spell out the procedures involved in the back door listing. This includes when the independent report will be available and the date of the special shareholders' meeting.

The last two reverse listings were The Mad Butcher through Veritas Investments and the Esquires Coffee Houses through Cooks Global Foods, formerly known as Cooks Food Group.

Veritas acquired The Mad Butcher for $40 million made up of $20 million cash and $20 million worth of shares at $1.30 each. Veritas had a capital raising at $1.30 a share to fund the $20 million cash paid to The Mad Butcher shareholders.

The Mad Butcher is a genuine business but its share price is trading below the $1.30 a share capital raising even though the overall sharemarket has been strong in the intervening period.

Late last year Cooks Food Group acquired a number of businesses, mainly a group of companies owning the intellectual property and master franchise rights to Esquires Coffee Houses worldwide, excluding Canada, New Zealand and Australia.

A substantial number of new shares have been issued in consideration of these acquisitions, to raise new capital, to capitalise debt, to convert preference shares to ordinary shares and for services provided by chairman Keith Jackson.

The company's share price is below the proposed 19c a share SPP (Share Purchase Plan) capital raising. The SPP's closing date has been extended twice and will now close on April 30.

Cooks Global Foods highlights one of the main problems associated with back door listings, namely new businesses are acquired for shares with little or no new capital raised to grow these companies. It is extremely difficult to grow a company when it is small and doesn't have much money in the bank.



Brian Gaynor is an executive director of Milford Asset Management which holds shares in Abano, Dorchester Pacific, Millennium & Copthorne, Pharmacybrands, Sealegs and Smartpay on behalf of clients.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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