BACK DOOR LISTINGS

an alternative means to achieve a public listing
on the Australian Stock Exchange

Venture Capital

Companies seeking to access the Australian Stock Exchange (ASX) to list their businesses could consider achieving this by way of a "reverse takeover" or back door listing, by a merger or reverse takeover with an existing listed entity.

Back door listings (reverse takeovers ), often involve a stock that has fallen on hard times, and that has lost most of its shareholder value, announcing a new venture into a completely different industry.

A business seeking to achieve a back door listing must firstly identify a suitable vehicle with which to do so. Whilst some prefer to use an already listed company, a suspended company can on occasions also be used.

There are two methods to achieve this;

The first is to target a company that is trading and the second is to target a company that is Voluntary Administration (VA).

A company in VA which is probably suspended on the ASX, can often be easier to deal with, but usually is more involved and could take more time than dealing with a company that is still trading.

The target company often but not always, has some cash and a shareholder base who will vote in favour of the reverse merger. The new business can then be sold into the listed vehicle and paid for by cash, shares or debt or any combination of these.

The value that is ascribed to the listed vehicle is agreed between the parties and usually includes a hefty amount of goodwill to compensate for the existing listed status.

This goodwill valuation often is based on supply and demand ,depending on the availability of such vehicles.

The shareholder base , often referred to as the 'spread" is usually a real concern , as on many occasions this spread turns out to be nonexistent due to dilution of the old shareholders once the new business is vended in . If this is the case, additional shareholders must be found, often by a new share issue, to satisfy the ASX requirements. If these issues arise then the value in doing a back door listing to achieve a short cut to an IPO, can turn out to be illusory.

Other issues that are common to a back door listing are the need to raise additional capital, and to satisfy the ASX, particularly where the new business constitutes a change of business for the listed company. In both these cases extensive and expensive documentation and professional services are required.

Whilst some claim that a reverse takeover is quicker than an IPO and involves "less red tape", on some occasions it takes longer , is more complicated and costs more Additionally a back door listing can sometimes lead to traps because inappropriate due diligence is conducted with the result that unintended results can surface.

A person contemplating a back door listing needs to plan for how much money is needed to firstly pay for all the costs associated with the reverse takeover and the costs to keep the listed business running.

Backdoor deals are often subject to difficult negotiations relating to the terms and relative value of the deal, which may include a combination of cash, board seats and equity.

There are numerous examples of successful back door listings, as well as numerous examples of bad ones, nevertheless under the right combination of circumstances a backdoor listing can be effective alternative to an IPO.

 


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