A lift in reverse takeovers or so-called ‘backdoor listings’ on ASX this year is creating opportunity for eagle-eyed investors who are comfortable with micro-cap stocks.
Unlike initial public offerings (IPOs), backdoor listings usually have little fanfare and speculators can easily overlook them. There is no central source of public information on backdoor listings, meaning market mavens have to scour company announcements to find them, or rely on stockbroking firms that are visited by backdoor hopefuls.
Reverse takeovers are typically between struggling small listed companies and private business looking to list on ASX without the potential cost, offer or time complications of an IPO.
The listed shell buys the private business or its assets and issues vendors with shares and/or cash. Typically, the backdoor listing changes the company’s operations and ownership and makes management changes. Sometimes a capital raising accompanies the takeover.
The backdoor listing still requires shareholder approval and must re-comply with ASX admission requirements and Listing Rules. In many ways, the rules and potential complications of a backdoor listing are the same as an IPO, or front-door listing. They can easily cost as much and take as long as some IPOs.
The main advantage is the backdoor listing already has sufficient shareholder spread to meet ASX Listing Rules, it can issue shares below 20 cents, and the shell might already have cash in it that the new management can put to work. The disadvantage is the shell can come with baggage, and capital reconstructions and capital raisings can cause problems for existing shareholders if they are diluted.
Nevertheless, expect more companies to purse backdoor listings this year. The end of the mining investment boom and share sell-off in micro-cap resource stocks has left the market with dozens of failed explorers that have some cash and suit vendors looking to list.
At the same time, interest in small information technology companies and, to a lesser extent, life sciences companies, is rapidly rising. Tech companies such as the well-performed Rhipe have listed on ASX in the past 12 months through reverse takeovers and I hear more are on the way.
Techies with good prospects
This column last week identified the promising cloud computing service provider, Bulletproof Group, which raised $2.85 million and listed in January 2014 through the shell of Spencer Resources.
Another backdoor listing worth watching is Covata, a fast-growing global data security company. It listed on ASX in November through an off-market takeover bid by Prime Minerals for all the issued shares and options of Cocoon Limited. The new entity was renamed Covata.
It raised $15 million and had a $76-million capitalisation upon listing, making it one the largest tech companies to list last year.
Covata has rallied from 23 cents in January to 48 cents and has good long-term prospects. Like Bulletproof Group, it is heavily involved in cloud computing services, although its operations are broader and have a data-security focus.
Chart 1: Covata
Source: Yahoo Finance
Covata announced an important deal in March with European partner NSC Global telecommunications company T-Systems, to distribute Safe Share within the T-Systems Enterprise Marketplace and to Deutsche Telekom’s customers.
According to Covata, Safe Share is targeted at T-Systems’ clients, including the top 400 enterprise companies and a further 7,000 medium-to-large companies that sit within Deutsche Telekom’s customer base.
Covata says these companies together employ more than six million staff and will subscribe to Safe Share to secure their data in the cloud.
It also announced in March a licensing agreement with Cisco for the Covata platform and related products, to deliver this technology to Cisco clients. These are impressive deals and partners for a company of Covata’s size.
As I wrote last week for The Bull, it is easy to like the prospects for cloud computing and service providers who can help companies “lift and shift” to the cloud and store, control and protect data while it is there. The challenge is finding providers with realistic valuations.
Another backdoor listing attracting attention is the geo-mapping service, Spookfish. It listed on ASX in February after White Star Resources acquired the shares of Spookfish and Geospatial Investments, and raised $5 million.
Chart 2: Spookfish
Source: Yahoo Finance
Spookfish designs, manufactures and tests next-generation aerial camera systems. This column has had a favourable view on a more-established mapping provider, Nearmap, for the past two years and likes the prospects for aerial mapping, despite it being a crowded market.
Spookfish announced in March that Nearmap founder, Stuart Nixon, had joined as a strategic adviser and top-20 shareholder. Some good judges I know believe Spookfish has a valuable technology advantage, and it has a few well-known investors behind it. But the Perth-based company suits experienced speculators comfortable with higher-risk micro-cap ventures and thinly traded stocks.
After an initial share price spike in February to 8 cents, Spookfish has eased to 6 cents.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at May 13, 2015.