On March 29, PG plc issued a Formal Notice confirming an offer of 27 million shares of €1 each by Paul Gauci.
This is a positive development for the equity market since it is the first Initial Public Offering (IPO) in four years (the last public offering was that of Tigné Mall plc in March 2013) and also comes on the back of a number of delistings in recent years. In fact, Crimsonwing plc was delisted in May 2015 followed by Island Hotels Group Holdings plc in October 2015 while 6PM Holdings plc recently confirmed that it is in the process of being delisted after Idox acquired the company’s entire issued share capital.
My article today is not intended to provide an operational and financial review of PG. Instead, the aim is to delve into the main reasons for an IPO and how such an initiative by Gauci should also be looked into by a number of other Maltese companies.
Prior to the IPO, Gauci held 99.99 per cent of the entire share capital of PG plc, the holding company of Pavi Supermarkets, Pama Shopping Village and the Alhambra Centre which houses the Zara and Zara Home franchises in Malta.
It is very evident that the main aim of the PG public offer was for succession planning purposes and to create the governance structures to ensure a proper distinction between the board of directors and the management of the company. In fact, ahead of the IPO, Gauci engaged a number of non-executive directors to the board and also carried out a number of managerial appointments including a chief executive officer, a chief financial officer, a chief operations officer and a chief business development officer. Gauci will be retaining 75 per cent of the issued share capital of PG plc and will take up the role as an executive vice chairman.
Naturally, there are also other advantages that come with an equity listing on the Malta Stock Exchange. Following the changes to the 2017 Budget, no capital gains tax is levied upon the sale of shares to the public via a listing on the MSE. This could represent a sizeable saving for shareholders of companies of a certain size – especially when compared to a trade sale (not via a stock exchange listing) which would then attract tax on the capital gain made by each of the shareholders.
A listing also creates an accessible and transparent market for the shares. This is an important consideration, especially for family companies whose shareholding may have been split among numerous family members over generations. A stock exchange listing could thus prove to be the only exit route for shareholders in such companies. The recent takeovers of Crimsonwing, Island Hotels Group Holdings and 6PM Holdings are very clear examples of how a stock exchange listing can lead to an exit route for shareholders.
Another benefit that may go unnoticed is the access to a diverse pool of funding upon listing. Although several Maltese companies have so far only considered the bond market for funding purposes, at times certain projects or acquisitions need to be undertaken via an equity injection in order to maintain a reasonable level of leverage. The growth in International Hotel Investments over the years was managed through a series of bond issues but also via the injection of additional equity, mainly through placements with international sovereign wealth funds and institutional investors. Last year’s fund raising exercise by Medserv plc for a $45 million company acquisition in the Middle East is another good case study of how to conduct an acquisition financed through both the bond market and a new issue of shares. This enabled Medserv to conclude a milestone acquisition which should prove to be very beneficial following the sizeable five-year contract announced a few weeks ago.
The Maltese equity market is in dire need of new equity listings
A stock exchange listing also facilitates merger and acquisition activity. In recent years there were several examples where a number of companies utilised the capital markets to conduct an acquisition partially financed via the issuance of new shares in the listed company. As an example, Island Hotels Group Holdings had acquired Buttigieg Holdings Ltd and the consideration to the shareholders of Buttigieg Holdings was via the issuance of new shares in Island Hotels Group Holdings. The fact that Island Hotels Group Holdings had its equity listed on the MSE must have surely contributed to the positive conclusion of this transaction since it gave the shareholders of Buttigieg Holdings a possible exit route via the listing.
Later, International Hotel Investments acquired Island Hotels Group Holdings which was funded partly via cash and partly via the issuance of new shares in IHI.
There are some disadvantages that so far may have prohibited or put-off a number of companies from seeking a listing. It can be a costly and time-consuming exercise involving lengthy meetings with a team of advisors to draw up a prospectus and obtain regulatory approval. However, this must be viewed in the context of the longer-term benefits arising from an IPO as described above.
Some shareholders of private companies cite the loss of control as one of the disadvantages of a listing. However, this is very much dependent on the extent of the shareholding being offered. As an example, Simonds Farsons Cisk plc has been a public company for a very long number of years (well before the MSE commenced trading in 1992) and the three dominant shareholders who have a combined stake of just over 80 per cent of the total issued share capital still in effect have overall control over the company. Likewise, although Gauci is disposing of 25 per cent of his shareholding in PG, he will retain majority control with 75 per cent of the total share capital. This could actually be looked upon positively since Gauci’s interests are aligned with those of other investors.
The more common disadvantage mentioned by various potential candidates is the regular disclosure of information required via company announcements (including the publication of financial statements on a semi-annual basis) and the scrutiny from the media and financial journalists (including through this weekly column) that such disclosure brings within the context of new procedures that need to be adopted by publicly traded companies.
Although it is fair to say that the number of equity listings on the MSE since inception 25 years ago is rather disappointing, it is worth highlighting that many companies on an international scale invariably carry out a stock exchange listing for the numerous benefits highlighted above. Hopefully, this philosophy will also become more prominent among Maltese companies. PG’s IPO may prove to be a very important precursor that will lead to owners of other private companies to consider the public route and satisfy the investment appetite of a growing number of Maltese investors seeking new investment opportunities to continue to diversify their Malta investment portfolios.
The fiscal initiatives announced in the last Budget should help instigate companies to consider the IPO route as a means of strategic planning although the longer-term benefits should prove to be much more rewarding than the immediate short-term fiscal considerations.
The Maltese equity market is in dire need of new equity listings in view of the significant amount of investible funds seeking a home. All stakeholders should ensure that following the IPO of PG, the numerous benefits that can be obtained are brought to the attention of potential candidates for a listing.
Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (Rizzo Farrugia) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2017 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.