The backdoor listings market on ASX is equal parts fascinating and frustrating. Fascinating because some promising technology companies are listing through the shell of failed miners. Frustrating because there is less information about upcoming listings.
A backdoor listing typically involves a dormant listed company acquiring the shares or assets of an unlisted company, after shareholder approval. An equity capital raising often accompanies the listing and the entity can change its focus, control, management and name.
Consider a junior minerals explorer that raised $5 million through an initial public offering (IPO) in 2010 during the mining investment boom. The miner needs to raise more capital to advance its project, but money for speculative exploration projects is now hard to find. So the miner, with some cash left, looks for a new project.
Meanwhile, a privately owned technology company wants to list on ASX. It can take the traditional path of an IPO, but instead decides to sell its assets to the struggling mining company. Once shareholders approve the miner’s change in activities, the deal is done, the name changed and a new listed tech company is born.
Backdoor listings are booming. The end of the mining investment boom has littered the market with failed junior explorers and the resurgence in Australian tech companies has created strong demand to list on ASX through failed corporate shells. Records are being set, with more than 50 backdoor listings so far in 2015.
Misconceptions abound about backdoor listings. Some companies believe they are faster, cheaper and involve less compliance than IPO or “frontdoor listings”, but this is not always the case. The compliance requirements for backdoor and frontdoor listings are broadly the same.
An attraction for vendors is the listed company wearing the offer costs. For example, if a tech company launches an IPO that does not raise its minimum subscription or secure enough shareholders to meet ASX Listing Rules, it can easily lose $500,000 in IPO offer costs.
If it joins ASX through a backdroor listing, the dormant listed company typically pays the transaction costs out of remaining cash. That is a big advantage for cash-constrained technology companies that cannot risk $500,000 on an IPO.
Another benefit is the ASX can waive the minimum 20-cent share rule for backdoor listings. A backdoor listing can issue shares at 2 cents if ASX approves it; the lowest an IPO can go is 20 cents. Although this makes no difference to an entity’s market capitalisation, issuing shares at 2 cents can attract speculators and please existing shareholders.
I expect many more backdoor listings on ASX this year and next. Dozens, if not hundreds, of junior explorers that raised capital at the peak of the mining boom through IPOs will become fodder for technology and biotech companies. This process of creative destruction in failed listed companies is inevitable as sectors boom and bust.
Keep an eye on the backdoor listings market if you want exposure to early-stage tech companies, many of which are listing earlier than in years past, have had fewer rounds of venture capital and are far less established.
Remember that these companies are usually speculative, sometimes thinly traded, and suit experienced investors who understand the risks of micro-cap stocks.
I identified three backdoor listings for The Bull in May with interesting prospects: Covata, Spookfish and Bulletproof Group. Here are three more that stand out. A fourth, Livetiles, will be covered in an upcoming column for The Bull.
The wholesaler of Microsoft’s public cloud offerings soared from 60 cents in April 2014 when it came to ASX as a backdoor listing, to $1.37 this week.
Rhipe provides Microsoft’s public cloud software offerings, including Microsoft365 and the Windows InTune and Enterprise Mobility Suite, to resellers. It has potential for rapid earnings growth in Australia and, increasingly, South-East Asia, as it secures other global software vendors as clients and expands the range of program licences.
Chart: Rhipe Ltd
Source: The Bull
2. AHALife Holdings
The luxury goods platform merged with the ASX-listed INT Corporation in March. After shareholder approval, a $20.4-million capital raising and a name change, AHALife re-listed on ASX in July.
AHALife shares have eased since the listing, but the online retailer is growing rapidly and has interesting long-term prospects as luxury goods are increasingly bought online.
Chart: AHALife Holdings
Source: The Bull
The social media platform listed on ASX in August 2014 through Latin Gold, raising $10.1 million. Migme shares have more than doubled this year, capitalising it at almost $300 million and making it among the best-performed backdoor listings. Monthly active users of its products have grown from seven million in the third quarter of 2014 to more than 20 million.
Migme’s strategy to develop social networking products for younger consumers in emerging markets, and designed for mobile devices, appeals. It if keeps growing at the current rate, Migme will be worth a lot more in the next few years.
– 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 October 15, 2015.