Backdoor listings: Yowie by any other name is not so sweet
Next week, a new confectionary company will be listed.
The company will be selling Yowie chocolates and various associated merchandise; products which were, at one time, a best-seller for the chocolate company, Cadbury Australia.
What sets apart this listing is that it will be “backdoor”. Yowie Group is not a new company; it’s the new name of a company that is already listed as GSF Corporation (ASX: GSF).
Backdoor listings drift in and out of fashion as an option for private companies that want to go public. Right now, they are an attractive option for several reasons. The process of listing is a quicker and usually easier one. Rather than having to attract retail investors – who are pretty shy of the stock market at the moment – private companies that want to list have only to convince the directors of a listed company to buy them. It’s a lower bar, and that makes it attractive at times when stock markets are lethargic, as they are today.
Clean shell
Listed in 1999, GSF started life as a seafood company, but quickly went off the rails, with its sales and profits results underperforming its prospectus from the first year. After an attempt to reinvent itself by buying a copper mine in Zambia in 2007, the company has been dormant since 2009, and in a trading halt since July 2010. It became a shell company, listed but not operating.
It’s what is known in the game as a “clean shell”, says Peter Lam, a senior lecturer in accounting at the UTS Business School. “They are basically defunct,” says Lam. “There have very few assets, a little cash, a bit of receivables, and no non-current asset, the trading of the shares has been suspended for a long time. That is a clean shell.”
That is a good thing when it comes to a backdoor listing. “If the shell is clean, you don’t have to worry about injecting the private business into this shell, there is no worry about getting rid of unwanted businesses or assets from the old shell company, nor about any hidden liabilities or potential litigation. Of course you have to do due diligence, but chances are there are fewer things to worry about.”
Why do investors keep shells, rather than cutting their losses and winding up a dead company? Lams says a company is always worth more alive than dead. The small price of keeping the company listed is worth it if a successful new opportunity can be found.
Yowie’s weird background
Yowies, back in the day, were a chocolate in the shape of after a mythical creature supposed to lurk in the Australian bush. They came with a toy inside – an Australian or New Zealand native animal or, later, endangered or extinct animals – and became hugely popular. At their height, they achieved annual global sales of $50 million for Cadbury Australia, which introduced them in 1997. But the products were withdrawn by 2005 after Cadbury lost a strange legal battle with Tim the Yowie Man. Cadbury tried to prevent the Canberran, who claims to have seen yowies, from using Yowie in his nickname. Sales were believed to have been falling by this time.
A good match
The secret of a backdoor listing is to put together a good match between the shell company and the private operation. Guy Aird, the CEO of corporate advisors, Kennedy Needham, says: “The perfect situation is where you get a nice [shell] company that has got money and is keen to do a good transaction,” he says. “They are never easy.”
A lot can go wrong. In theory, a listed company that changes its operations substantially, the ASX listing rules require it to go through the whole listing process again. In practice, backdoor listings happen all the time. In the aftermath of the mining boom and bust, shell mining companies became dotcom companies. In the aftermath of the dotcom boom and bust, shell dotcoms became biotechnology companies. Ernst & Young partner, Anne-Maree Keane, says: “Shell companies fall out of what is going on at the time. Companies that have raised money and spent it. We are now seeing more empty resources company shells.”
But the match is not the end of the story. “You still need to perform in the after-market,” Keane says. “At EY, an initial public offer is a journey, not an end in itself.”
In other words, the business that is bought needs to be a good one. In the case of Yowie, there are reasons to be cheerful. Lam says: “Yowie is a well-established brand name, the business is established, and it can create some sort of public image and media attention. And the shell is very clean.”
Yowie did issue a prospectus and allow retail investors the opportunity to buy shares in the company to raise a minimum of $2 million at 20 cents a share. The prospectus is closed and the amount raised exceeded the minimum.
The other risk is that there is a “skeleton” in the closet in the shell company, a legal issue or financial obligation that has not been uncovered in the process of due diligence, that can sabotage the operation from the start.
Other backdoor benefits
Listed companies have an advantage over private ones when bank debt is hard to find: they can use their own scrip instead of cash to buy companies, many of which are currently at very good prices. Keane says: “We are starting to see lower priced acquisitions, and if you are listed you can talk a mixture of cash and shares. That is something that is really attractive.” Keane points to the recent deal where Virgin Airlines bought Tiger Airways as an example.
The backdoor approach also allows companies to list without raising capital – a completely cash-free transaction where the equity in one company is swapped for the equity in the other. “The equity markets now are very quiet,” says Keane. “People can list now, perhaps raise a little money and then, next year, when the market improves, continue to raise money with the listed structure.”
Kennedy Needham’s CEO, Guy Aird, points out that if the company wants some cash, it can take a placement from an institutional investor, boosting the credibility of its share registry as well as getting cash on agreed terms.
Once listed, investors from both sides have the chance to exit the investment and the company can attract fresh, eager shareholders keen to see the operation succeed.
Control
As in most business transactions, the issue of control can be a thorny one, says Lam. A shell company that has directors with skills and experience attractive to the new operation will be in position to get a better deal. Typically, the company being bought ends up with the majority of the share register and the shell company investors with about 30%, as well as control of the operations.
According to its latest schedule, Yowie Group is expected to recommence trading on Friday, November 23.
Kath Walters
Kath Walters is the editor of LeadingCompany and an award-winning journalist of 15 years’ experience. Kath was previously a senior writer and editor at BRW magazine covering management, strategy, finance, entrepreneurship and venture capital across all industry sectors. In 2006, Kath won the Citibank Award for Excellence in Journalism (General Business). Follow her on Twitter @KathWalters
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