Meet the king of the backdoor listing

By Brian Gaynor

Nick and Tim Wood of Ihug are receiving huge publicity, particularly over their proposed backdoor listing through Force Corporation. But the story of Peter Francis, who sits on the other side of this transaction, is just as interesting.

Mr Francis has had a colourful, and sometimes controversial, 17-year association with the sharearket. During this time he has established himself as king of the backdoor listing.

He and the rest of the team at Chase, his previous corporate vehicle, first became involved with the sharemarket in 1983. They bought a shareholding in Fountain Corporation.

Fountain, a struggling radio manufacturer, was an ideal backdoor vehicle because it had only 972,000 shares on issue, 500 shareholders and a market value of just $1.3 million.

The new investors backed their property assets and Amalgamated Theatres (which controlled 32 cinemas) into Fountain and changed its name to Chase Corporation.

The National Business Review summed up the deal as follows: "The Chase 'boys' did a reverse takeover of Fountain Corporation and gained backdoor listing, without the irksome requirements of a public float and the registration of a prospectus."

Chase captured the market's attention after publication of an optimistic research report by sharebrokers Morrow & Benjamin in May 1983. The report, written by Mike Daniel, declared "the market is valuing the stock totally incorrectly" and "the company justifies a price in excess of $4 in the short term and a price of $6 in the medium term."

Mr Daniel's assessment was astute. By the end of 1983 the group's share price was the equivalent of $10.40 and the company had a market value of $65 million. At the end of 1986 Chase was the third largest listed company with a market capitalisation of $2.1 billion.

The rest is history. Chase imploded after the October 1987 sharemarket crash and its shares were worthless when it was removed from the stock exchange list in September 1990.

Unlike most other shareholders, Mr Francis came out relatively unscathed. He had severed links with the company and sold most of his shares at the beginning of 1990.

He re-entered the sharemarket in January 1995 when he announced he would sell his property and cinema interests to Ascot Management.

Ascot was also an ideal backdoor listing vehicle as it was a cash box with only 340 shareholders, 16.6 million shares on issue and a market value of $5.8 million.

The deal involved Ascot issuing 99.6 million shares (at a nominal value of 20.68c each) to Mr Francis and his associates. One of these associates was Mike Daniel, the former broker.

After the share issue Ascot changed its name to Force Corporation and Mr Francis had a 79.3 per cent shareholding.

The backdoor listing is a particularly attractive mechanism for the controlling shareholders because the limited supply of shares available to the public has a positive impact on the price.

Force was no exception. By mid-May 1995 its share price had climbed to 50c and at the end of the year it had reached 67c. In less than 12 months Mr Francis and his associates had an unrealised profit of 224 per cent.

The performance of Mr Francis' second backdoor listing has been less than spectacular. Its share price reached a high of 88c cents in 1997 but has steadily declined since. The number of shareholders has risen from 350 to 1300 but at the end of 1999 interest in the stock was limited and it finished the year at 58c.

Force's disappointing performance can be attributed to three main factors:

\EE Reduced growth in the domestic cinema industry.

\EE Investor unease over the group's Argentinian investments.

\EE Continuing delays over the sale of its flagship project, the Force Entertainment Centre.

The Entertainment Centre, which is next to the Civic Theatre in Queen St, was approved by shareholders in 1997. The estimated cost of the scheme was $60 million and Colliers Jardine predicted it would be worth $73 million on completion in mid-1999. In June 1998 the development was sold to MTM Property Trust of Australia with the final sale price to be based on an "independent valuation on completion."

Concerns are held over the project because its total cost has climbed well above $60 million, the rise in interest rates has adversely affected the final sale price, and the independent valuation has been continually delayed because the building is still unfinished.

The huge uncertainty over the centre weighed heavily on Force's share price until February 3 when the company issued a "don't sell" notice. Its share price rose from 58c to 85c over the next few days.

On February 8 Mr Francis announced his third big backdoor listing. Force would buy the internet service provider Ihug by issuing 210 million shares (at a nominal value of 57.14c each) to Ihug's existing shareholders and the listed company would change its name to Ihug. After the transaction, Ihug shareholders will own 57.6 per cent of the new group, Mr Francis 21.3 per cent (77.7 million shares) and other former Force shareholders 21.1 per cent.

A new board of directors will be appointed which includes Mike Smith, the former Lion Nathan executive, as chairman, the Wood brothers, Mr Francis and his long-time supporter Mr Daniel.

The response to the announceent was immediate and predictable. Two days after the announcement Force's shares closed at 91c and the value of Mr Francis' shareholding had risen by $26 million.

But the Force/Ihug transaction raises two important questions:

\EE Why are all the internet-related listings in this country through backdoor vehicles instead of public floats?

\EE Why did Ihug choose a backdoor listing instead of a conventional public offering?

It can be argued that the main purpose of a backdoor listing is to make money for the controlling shareholders and little else. These promoters acquire their shares at a very attractive price whereas the public is forced to pay a premium because of the shortage of supply.

Mr Francis effectively acquired his Force shares for 20.68c whereas the public has never had the opportunity to buy any for less than 40c.

One attraction of a public offering is that new money can be raised to fund a company's growth and expansion whereas no new funds are raised in a backdoor listing.

In view of this, it is not surprising that although the number of backdoor listings in New Zealand over the past 20 years has been huge, not one has been a long-term stockmarket success.

All the successful new listings, which include Mainfreight, Sky TV and The Warehouse, have been conventional public offerings.

Finally, Ihug would appear to be an extremely attractive public issue for a several reasons:

\EE It is an established high-profile company in the fashionable IT sector.

\EE It has ambitious expansion plans which will require a large amount of funding;

\EE Ihug has no synergies with Force's cinema and property development activities.

If Ihug has a positive story to tell, why is it not being spelt out in a prospectus under a public offering?

Huge question marks hang over the company's approach to listing, because many companies that take the backdoor route do not want to be subjected to the full disclosure requirements of a prospectus.

One of the biggest questions surrounding the Force/Ihug deal are the restraints, if any, on the sale of shares by the Wood family and Mr Francis. If they are restricted, then investors can feel more confident that this is not just another get-rich-quick scheme for the controlling shareholders.

The only indication so far of Mr Francis' intentions came in a statement to the stock exchange on February 14 by Francis Securities, one of Mr Francis' vehicles. It said it planned to remain a "substantial security holder" in Force/Ihug.

But under stock exchange rules, a substantial holder is an investor owning a minimum of 5 per cent of a stock. So under the February 14 declaration, Mr Francis could, if he wished, reduce his holding in Force/Ihug from 21.3 per cent to 5 per cent.

* Disclosure of interest: none.