Journey to the IPO. Considerations relating to the issuance of securities to the public and listing on the Malta Stock Exchange.

Transcription

1 Journey to the IPO Considerations relating to the issuance of securities to the public and listing on the Malta Stock Exchange August

2 Why go public? Reasons for going public what our clients say: Reputation Publicity Liquidity Increased financing options and access to finance Valuation and M&A Managing succession An IPO strengthens the company s reputation. Public companies are required to disclose ongoing information as well as to abide at all times with the principles of good corporate governance. For this reason public companies are perceived to be more stable than private companies, more transparent to investors and a safer choice for customers and may benefit from better credit risk ratings from suppliers and lenders. Hence, going public may lead to increased business and improved credit terms. Public companies receive more attention from the financial press and business community at large than most private companies. The publicity received from a public offering: encourages new business development / relationships; can attract the attention of potential partners or merger candidates; and can attract high calibre people to the company, thereby gaining competitive advantage. By going public, a company creates a market for its shares, which makes them more liquid than shares in a private entity. This liquidity: allows the company to attract and retain management and employees by offering employee / executive share option schemes; and provides shareholders or investors with an exit strategy, also allowing for the possibility of liquidating the investment. Once it goes public, a company s financing alternatives are increased: A publicly traded company can return to the market for additional capital via a further equity offering or even a bond issue. Public status can also enable the obtainment of favourable terms for alternative financing from both public and private investors. Some companies also value features afforded by corporate listed debt, versus say vanilla bank borrowing arrangements. In particular, a corporate bond will provide a company with the benefit of: a fixed rate of interest (if desired); borrowing over a longer term than that typically provided by a Bank. a bullet repayment upon maturity when compared to monthly capital repayments. An IPO provides a readily available public valuation of the company. A successful IPO will increase a company s valuation to reflect liquidity while supporting a variety of opportunities for mergers and acquisitions. With easier access to additional capital a public company could be able to finance a cash acquisition or alternatively use its shares to finance such investment. The corporate governance structures in place for a public company together with the marketability of its shares would help in managing ownership and management succession of the company. Tax Gains arising on the transfer of shares in a company listed on a stock exchange recognised under the Financial Markets Act are generally exempt from tax on capital gains, provided that the transferred shares were not held by the shareholder immediately prior to their listing. While pre-ipo shareholders do not qualify for this exemption they benefit from a reduced tax rate of 15% on such capital gains. Investment income provisions (i.e. 15% withholding tax) are generally available on interest income paid to the holder of any listed debt securities issued by a company. Efficiency The capital market offers a very efficient way (though subject to specific costs) of borrowing capital. By issuing bonds, a borrower is spared the task of undergoing a number of separate negotiations and exercises to raise the capital it needs Control A minimum of 25% of the Company s shares must be offered to the public upon an IPO, thus enabling the existing shareholders to retain majority control. Corporate governance requirements of a listed entity would need to be followed, translating into structures which ultimately also have value preservation at the core. A corporate bond issue enables a company to raise capital without diluting current shareholder s equity. 2

3 The issue process & listing obligations Continuing listing obligations the issue process is thorough and can take between 6 to 8 months Company Announcements Corporate Governance Following listing of its securities on the MSE, the Company must at all times endeavour to make a Company Announcement without delay through the Recognised Investment Exchange to bring any useful and relevant facts to the attention of the market. A Company whose securities are listed on the MSE should endeavour to adopt the Principles of Good Corporate Governance outlined in Appendix 8.1 to the Listing Rules. The Company would be required to include in its annual report: a statement of compliance providing an explanation of the extent to which it has adopted the aforementioned principles; the effective measures that it has taken to ensure compliance throughout the accounting period with the said principles; and a report on the statement of compliance and the report to shareholders made by the Company and the board of Directors of the Company respectively. Audit Committee The Company is required to establish and maintain an Audit Committee composed of at least three members, the majority of whom shall be non-executive Directors. The Committee s primary purpose is to protect the interests of the Company s shareholders and assist the Directors in conducting their role effectively so that the Company s decision-making capability and the accuracy of its reporting and financial results are maintained at a high level at all times. The committee shall be chaired by a non-executive Director. Other The Company is required to comply with other continuing obligations relating to the following: Requirements to publish information; Interests of directors and connected persons; Transactions by the Company s directors and officers; Transactions with related parties; Memorandum and Articles of Association; Acquisitions and realisations; Transactions involving substantial shareholdings; Notification of the acquisition or disposal of major holdings to which voting rights are attached; Use of languages; and Amalgamations. 3

4 The considerations Some thoughts relating to your potential IPO Public Company Status Financial information to be included in prospectus Marketing Underwriting and overallotment option Prospectus Before being able to issue securities to the public, the Company has to change its legal status from private to public. This may be done by way of an extraordinary resolution in accordance with Article 79(1) of the Companies Act. In terms of Article 213 of the said Act, the Company may change its status to a public company by altering its Memorandum and Articles of Association and incorporating in such alteration all those changes required by the said Act including the removal of the restrictions on share transfers. The following financial information will either have to be disclosed or should be considered for inclusion in the prospectus: Audited accounts (prepared in accordance with IFRS) for the last three years would be required. In addition, if the audited accounts have been prepared more than nine months before the date of the issue of the registration document, unaudited interim accounts would have to be prepared and published covering at least the first six months of the current financial year. Consider also the inclusion of the following prospective financial information (prepared in monthly or quarterly rests): A forecast of the profit and loss of the Company for the current financial year; and Projected profit and loss account of the Company for the following year. A working capital adequacy statement. In gearing up for the public issue the Company should assess the need to engage in a systematic marketing, and promotion campaign in support of the issue and listing on the Malta Stock Exchange. For this reason it will be useful for the Company to appoint a public relations consultant or marketing agency, who preferably has previous experience in financial marketing, namely in the strategy of communication with potential investors. The level of intensity of the marketing, advertising and promotion campaign is dependent on the size of the issue in question. A public issue of shares or bonds may or may not be underwritten. When underwritten this is usually by one or more financial institutions, that agree to purchase all, or a proportion of, the securities not taken up by the public this to ensure that all securities issued are taken up. Underwriting makes the issue less risky for the Company as it will have a guarantee that the required funds will be raised and therefore does not risk having to return the money back to potential investors in case the issue fails to materialise. At the same time however, underwriting can be costly for the Company. Hence, the issuer may opt to reduce its risk by including an Overallotment Option whereby the issuer retains the right to increase the size of the issue to cover any outstanding applications in the event of over-subscription. The prospectus must include the following: Summary note briefly outlining the essential characteristics and risks associated with the issuer, any guarantor and the securities; Registration document containing information relating to the issuer; and Securities note containing information concerning the securities. Note that the Prospectus approved by the MFSA can be used by the Company in connection with an offer to the public or application for admission of securities to trading on any Regulated Market situated in another EU member state, subject only to the MFSA providing a certificate of approval to the competent authority of that other member state. 4

5 High-level key requirements for a successful IPO A clear and concise story with upside potential What is the market opportunity and how are you going to capitalise on it? What makes your company the right candidate to capitalise on this opportunity? How and when do the investors get their return? What are the return prospects? Experienced and committed project team A cohesive project team with deep experience and expertise to pragmatically handle emerging issues High-level key requirements for a successful IPO Strong senior management team More than anything else, investors are betting on the management team Well defined roles that fit the requisite skill sets Good mix of strategic and operational experience Prior experience raising capital and successfully growing the business is a big plus Solid financials Well supported/reasonable projections with attractive upside Financial statements and models should: - Clearly show historical growth, margins, capital requirements and return to investors - Explain and/or adjust for any historical problems, negative trends or restructurings contemplated as part of the transaction Project team & roles Well-defined capital requirements Amount of money required with well supported financial models Clearly defined ability to generate attractive returns for investors Company Financial advisors / Reporting accountants Sponsoring Stockbrokers Legal Advisors Manager and Registrar Underwriter (if applicable) Advertising and promotion agents Our commitment At KPMG we are strongly committed to supporting the development of our local capital market, having assisted on the route to IPO of around half of the current local equity listed entities. Our professionals have extensive experience in assisting companies tap into the local capital market. We believe that we are well-positioned to deliver lasting and tangible benefits. We bring to the table: a team with extensive local capital market experience a real understanding and deep familiarity with a wide range of industries mature and tested methodologies which can be tailored to your requirements an established track record of successful IPO engagements across diverse organisations in various sectors outstanding value for money with exceptional quality and service 5

6 Tonio Zarb Partner, Head of Advisory David Pace Partner, Deal Advisory David Caruana Partner, Advisory Services Hermione Arciola Director, Deal Advisory kpmg.com.mt Download the KPMG Malta App: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG, a Maltese civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.