Stock Takes: Staggered sell-down a solution

Tourism Holdings is on the road to success but its share price is down.

Chapman Tripp idea seems sensible — but would it fly?

On the face of it, Chapman Tripp's answer for assuaging market concerns stemming from the Dick Smith disaster seems sensible.

In a report released this week, the law firm said retail investors would be wary of upcoming private equity-backed initial public offerings following the electronics retailer's collapse, including an expected float of New Zealand chicken producer Tegel Foods, currently owned by Affinity Equity Partners.

The potential pitfalls of private equity-backed IPOs have been hotly debated in the wake of the Dick Smith receivership, which began last month, roughly two years after Anchorage Capital floated it on the ASX.

Chapman Tripp says a possible solution lies in structuring deals to allow for a staggered sell-down post-IPO and no reduction in vendor shareholdings at the time of the float, as is common in the United States.

But would it fly?

Making sure vendors keep all of their skin in the game could bolster the investor confidence, but it remains to be seen whether private equity firms will be willing to pass over the immediate gratification of selling down at least a portion of their shares at listing.

The Tegel offer is expected to raise up to $500 million. Given that's unlikely to be all new capital, there's a good chance that some kind of sell-down by Affinity will take place.

Sharemarket floats are, after all, an exit strategy for private equity investors.

And even when a sell-down takes place as part of an IPO, it can take years for the private equity-backers of offers to offload their entire holdings.

"It would defeat the purpose of coming to market," one market source said of Chapman Tripp's suggestion this week. "You need some liquidity."

Cost pressure?

The underwhelming start of NZX's new NXT market - which has seen two listings since going live in June - has attracted plenty of comment.

Also in its report, Chapman Tripp said the primary cause of the lack of activity was the expenses involved in listing on NXT, which is targeted at small and medium-sized, fast-growing businesses.

"Cost is a factor," said Chapman Tripp partner Rachel Dunne. "Even though the market has elements which are designed to simplify it for issuers and reduce compliance costs once they're on the market, getting on to the market is always going to have a baseline of costs issuers have to be prepared to spend." In addition to legal and advisory expenses and other costs linked with listing, NXT firms pay annual listing fees of $30,000.

Room for competition

Diligent Corporation investor Peter Huljich sounded more than ready to offload his shares in the software firm last week after a takeover from US-based Insight Venture Partners emerged.

"I'll be selling," he told the Business Herald on the day of the announcement. "Obviously, it's been a bit of a roller-coaster ride and we're quite happy to get off here."

But late last week he contacted Stock Takes to clarify his position, saying there was potential for competing bids to emerge and "we of course would welcome this".

Under corporation law in the US state of Delaware, where New York-based Diligent is incorporated, only 50 per cent of shareholders must accept an offer before the remaining shares can be compulsorily acquired.

"Given the structure of the offer, the level of required acceptance and support there is very little other shareholders can do to extract a higher price," said Huljich, whose associated entities own about 4 per cent of Diligent. "I feel that same structure is potentially likely to lead to competing offers."

Tourism Holdings profit up but shares dip

Sharemarkets can work in mysterious ways.

Tourism Holdings reported a 45 per cent lift in interim profit on Tuesday, to $8.2 million, and upgraded full-year profit guidance to around $24 million from a previous forecast of $22 million. It also declared a half-year dividend of 9c a share.

But did those good tidings boost the share price? No, the stock fell 2.4 per cent on the day of the result, to close at $2.48.

Maybe a few investors decided it was time to jump out and bank some profits, following a 40 per cent gain in Tourism Holdings shares - which closed $2.35 last night - over the past year.

The Auckland-based firm, once a perennial sharemarket underperformer, has been riding high on a tourism boom aided by weakness in the Kiwi dollar and cheap fuel prices.

Its businesses include Maui and Kea campervan rentals and Kiwi Experience guided bus tours.