Listing on the sharemarket takes a company into another league, gives it a precise value and its owner a clear exit strategy. But there are costs. JAMES DUNN reports.
One downside of listing is that business owners cede some control to shareholders. There are many benefits, including being able to use scrip as a currency in takeover offers.
By James Dunn
Business owners who have sweated and toiled their way up the funding hierarchy for business – starting at the credit card and the ‘family, friends and fools’ level of grassroots private funding, moving through the banks, government grants, business angels and possibly venture capital firms – often decide they are ready for the sharemarket.
The instant, anonymous liquidity of the sharemarket, with certainty of settlement, is attractive to many business owners. Selling a stake in a business or a partnership can be as time-consuming as selling a house – offers are made, haggled over and refused. But on the sharemarket, the business is priced to the cent at any second – giving a business owner a clear exit strategy.
If you are willing to cede some control of the business to other shareholders, equity has many attractions. Unlike debt, equity does not have to be serviced, and eventually paid back. Equity can be used as a currency: you can offer your scrip as consideration to buy other companies, without cash changing hands, a form of currency not available to an unlisted company.
And equity is in demand. Every week, more than $460 million is pumped into the Australian stockmarket by the superannuation industry alone. Demand for equity outstrips supply. In 2006, according to Credit Suisse, there was $62 billion in demand for Australian shares from domestic institutional investors, and $52 billion in supply ($17 billion of which came from Telstra 3), for a $10 billion mismatch. This year, Credit Suisse expects that demand over-bite to increase to $44 billion.
Some of that excess equity capital floating around looking for a home could find its way to your business if it is listed on a stock exchange.
Australia has four stock exchanges: the $1.6 trillion behemoth of the Australian Securities Exchange (ASX), and the much smaller trio of the National Stock Exchange of Australia (NSXA), Bendigo Stock Exchange (BSX) and the Australian Pacific Exchange (APX). To confuse the issue, the BSX is owned by the NSXA, which is owned by NSX Limited, which is listed on the ASX.
To list on the ASX, a company must agree to abide by the ASX Listing Rules, and meet at least one of the following conditions. It must have:
- Market capitalisation of at least $10 million.
- At least $2 million in net tangible assets.
- At least 500 shareholders, who own at least $2000 worth of shares each.
- $1 million in net profit after tax over the past three years.
- More than $400,000 in net profit in the past 12 months.
The smaller exchanges have much friendlier criteria, as befits their SME focus. NSXA requires a shareholder spread of 50 and a market capitalisation of $500,000. The BSX requires aggregated profit for the last three full financial years of at least $500,000; net tangible assets of at least $500,000; and a likely market capitalisation of at least $1 million (after deducting the costs of fund-raising) and at least 50 shareholders with at least $2000 worth of shares.
The APX requires a $2 million market capitalisation or $2 million in net tangible assets, and at least 50 shareholders with a shareholding of at least $2000 each.
In reality, say corporate advisers, if a company does not have a market capitalisation of $40–50 million, a ‘starter’ exchange is where it should be. ASX listing at that size is too expensive and the company simply will not get any institutional interest: far better to gain experience in the listed environment on a smaller bourse and graduate to the ASX.
To float on the ASX, the underwriting broker will charge 5–7% of the capital raising, payable out of the proceeds. Before that, there are the out-of-pocket expenses of the ASX and Australian Securities & Investments Commission (ASIC) registration, the fees paid to the lawyers for preparing the prospectus, fees for reports by the investigating accountants and any other independent experts and the printing fees. The total cost of the pre-listing process is rarely less than $150,000.
On the ASX a $2 million company could be listed for an initial fee of $13,310 and an annual listing fee of $7450, plus a fee of $6650 if the company raises additional capital once listed.
On the smaller exchanges, listing is much cheaper. For example, for a $2 million company, the NSXA application fee is $5000 plus the CHESS (Clearing House Electronic Sub-register System) fee plus GST comes to $7250; and the annual listing fee is about half that.
On the NSXA, you will need a nominating adviser (nomad), usually a legal or corporate advisory firm, to act as an ongoing conduit with the exchange, which generally costs $15,000–25,000 a year, but on the BSX that isn’t required.
“Listing gives a company the credibility and the transparency of a listed environment, with all of its reporting and compliance discipline,” says Richard Symon, chief executive officer of NSXA.
“But after listing, it’s up to the company to get the shareholders to support it with patient capital. If the fortunes of the company progress over time and the earnings grow, the price that people are prepared to pay for the shares will increase. The sky’s the limit.”