PSE: Backdoor listings

For the past weeks, investors have been waiting for Moses to come down carrying a stone tablet engraved with the name of “The Third Telecom”. Almost every company that could possibly be connected with providing a vehicle for a foreign company has seen its stock price skyrocket.

There is no easier way to become a listed company than through a “backdoor listing,” buying a public company and putting in assets to make a new company. Maybe the most famous—or infamous—example is BW Resources, which was to help Macau gambling magnate Stanley Ho set up shop here.

The general misconception is that finding a company for a backdoor listing is as simple as—forgive my crude analogy—paying a bar fine at your favorite Roxas Boulevard nightclub. Having helped out companies wanting to enter the Philippine Stock Exchange (PSE) this way, it is more like trying to find two matching socks in the dark while hurting from a
massive hangover.

Backdoor listings in various forms are not only to enter the market but for corporate restructuring. The SM group did something similar when its SM Prime Holdings took control and consolidated its previously listed company SM Development Corp.

But the common use is to find a listed company that might be suspended from trading for various reasons, buy out the existing shareholders, and put in assets. It is not as easy as you think. Most often these are “troubled” corporations. One suspended company is carrying P2 billion or P8 billion in unpaid debt depending on who is doing the spreadsheet. Another recently delisted company would have been a great backdoor, except no one could even find a spreadsheet listing its debt.

The ideal backdoor candidate—although not as cheap as a failed company—would be currently operating, making money and with industry credibility. The company should also have assets that would be more desirable and profitable for a new owner and management. Most of the shares would be closely held so dealing with the owners would be uncomplicated. Debt obligations should be reasonable. A company that is debt-free would be a “princess” that would attract many wealthy suitors.

Existing owners that had not been concerned about the stock price would be an advantage to the buyer, especially if the price was near a long-term low. Further, the seller might be motivated if there was only a small, if any, chance that the company was looking at a big future. Boring is best. There are currently a few companies that fit these parameters.

A potential suitor should be cash rich and looking for a new corporate vehicle for quicker expansion in a complementary business. The assets of the takeover company would have to fit cleanly. The purchase price for the stock would have to be sensible, allowing for profitability of the purchased assets.

While the market is looking at backdoors for the telecoms, note that the Villar group just “backdoored” Bria Homes into Golden Haven. This may be a better corporate structure than the somewhat one-size-fits-all property company Vista Land. It is possible that more corporate changes are in the works.

Ayala Land is also a property conglomerate with the full range of its property offerings under one roof. Yet, its Arca South project is so diverse from every price range condominium and office and commercial space, and has a development cost of P80 billion. It could stand completely alone as a publicly listed company. This would be a fresh corporate structure to maximize shareholder value for the mother company, as well.

Backdoor listing can be a form of merger and acquisition. We may see more of these corporate moves in the future.


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