Reverse Takeover and Back Door Listing

A reverse takeover or reverse merger is not unusual in the world. Weak or loss making companies merge into stronger publicly traded entities to have their shares listed or issue new shares. The biggest benefit of this method is to bypass the lengthy and complex process of going public and reduce the consulting expense for listing. For investors, this can be understood as an ordinary merger method. However, from another point of view, this is a form of corporate asset restructuring directly related to the interest of shareholders. This forces authorities to impose close management.

 

Vietnam - Italy Steel Joint Stock Company (VIS) and Song Da Steel Joint Stock Company (SDS) are two affiliates of State-owned Song Da Holdings and they both produce construction steel. But, their business pictures are absolutely opposite. In 2011, VIS’s business results would have been much better if it had not set aside VND110 billion for financial investment provisions. Its net profit was just VND27.2 billion, although sales and gross profit margin continued to grow over 2010. This was remarkable as the steel industry was hard hit by the lacklustre real estate market.

 

Contrary to VIS, SDS suffered a net loss of VND275.89 billion in 2011 because borrowing costs amounted to VND232 billion. It was noted that the provision of VND110 billion was allocated to long-term investments in SDS where it held 43.17 percent of stake. It was quite clear that the two sides turned on the green light for VIS’s takeover of SDS. In March 2012, the Annual General Meetings of Shareholders of both companies ratified the merger with a stock swap ratio of 1.31 to 1, or 1.31 SDS shares in exchange for a VIS share. VIS issued 19.22 million shares for the swap (only for SDS shareholders). Perhaps, the most positive point in this deal is the restructuring of companies affiliated to a corporation and the same business scope, which will enhance the competitiveness after the merger. Reshuffle will be strongly applied to State-owned corporations like Song Da Holdings and Vinaconex as they are experiencing numerous challenges in financial management and cumbersome managerial apparatus. Therefore, the amalgamation or dissolution of poor-performing subsidiaries is inevitable. After taking over SDS’s assets, VIS’s responsibility will be heavier as it must bear all liabilities of the acquired company and its employees. SDS’s outstanding debts (short and long-terms) reached VND2,347 billion, mostly short-term debts, which may result to serious financial imbalance.

 

This reverse takeover places VIS shareholders at a disadvantage to SDS shareholders, although the former’s total assets increased extensively. SDS shareholders enjoy the advantage from the exchange for VIS shares which are listed and have much higher liquidity than their old shares. In 2011, SDS shareholders approved stock listing plans and issued shares in private placement for strategic partners at a price of VND13,000 per share. However, because of the prolonged stock market slump and its huge losses, SDS’s listing plans were cancelled until it was incorporated with VIS.

 

In fact, back door listing is becoming increasingly popular. The common, and also key, element to the success is involved companies affiliated to a joint corporation. FLC Group Joint Stock Company ratified the issuance of 60.18 million shares in exchange for 51 million shares of FLC Land, its member company. With the swap ratio of 1 to 1.18, FLC Land will become a limited liability company wholly owned by FLC Group. The new registered capital of Hanoi Stock Exchange (HNX)-listed FLC Group will surge from the current VND170 billion to VND771.8 billion. It is noted that FLC Land, a property developer and financial investor, is the owner of FLC Landmark Tower in My Dinh, Hanoi. FLC Landmark Tower was completed and prepared to hand over to customers. Besides, FLC Landmark said to possess a lot of land (not detailed). In addition, FLC Land was assigned by the Hanoi People's Committee to build a smart parking plot covering 4,646 square metres in My Dinh, Hanoi. The merger between FLC Group and FLC Land proves the naked ambition of the leaders of a corporation with 12 member companies operating in different industries: Finance, real estate, securities, tourism, trade, law consulting, tax consulting, and others. The slump of Vietnamese real estate market prevented FLC Land from raising capital for new real estate projects and dented its revenues as advances from registered buyers were spent. The back door listing of FLC Land only opens up the opportunity of mobilising capital in the name of its parent company. Moreover, its shareholders may sell their shares more easily regardless of the fact that FLC share dilution increased 4.5 times.

 

After all, the biggest risk of back door listing or reverse takeover is the conflict of group interests. As analysed above, SDS shareholders are happy but VIS shareholders are not, although both VIS and SDS are affiliated to Song Da Holdings. From a less positive angle, benefits of public shareholders are generally ignored. The move serves the purpose of the board of directors and the board of management, wanting to ease responsibility to debt obligations or loss-making operations.

 

Strangely, the Vietnamese stock market is very active with reverse takeovers. Acquiring companies like VIS still grow up steadily. Is this a good opportunity for back door listing?