How NOT to make an IPO

The ongoing saga of BrisConnections is coming to a head. There's a good background piece in the Sydney Morning Herald (here).

BrisConnections is a highly leveraged business, established to build a toll road out to Brisbane Airport. The business went public last year -- in fact, their ASX debut was on the day I did my IPO lecture last semester. The units (legally it appears to be a trust structure rather than a corporation) were issued at A$1 each, with an obligation to make two further A$1 payments per unit. The first of these payments is due 29 April 2009. The ASX code (BCSCA) hints at the additional payments as fully paid shares generally have a three letter code.

By the close of the first day of trading, the units had lost half their value. The 52 week high price is 79cents, so they never traded at anything near their issue price. Currently, they are listed at 0.1cents per unit -- the lowest price allowed by the ASX. Looking at the current Market Depth on Commsec (account required), shows that there are sell orders for 33million units at that price, and no buy orders. Today's volume is almost completely accounted for by the 31million+ units purchased by Macquarie Bank (ASX announcement here).

Estimates I've heard are that AFTER paying the next $1 installment, the units will be worth 60cents (or less). This explains why some of the major unitholders are trying to have the trust wound up BEFORE the installment is due.

The most worrying part of the whole saga is the stories of retail investors who have bought the units without realizing that there is an obligation to make the additional payments. These investors owe thousands or millions on units that cost them very little. At the current price, a $500 investment comes with a liability to make two additional payments of $500,000!

Debt and Corporate Control

Robert Gottliebson has an interesting article over at Business Spectator about Centro. For those of you who haven't been following it, Centro is a high profile Australian casualty of the US credit crisis. Centro Properties (ASX:CNP) manages retail properties in Australia and the US. The properties themselves are owned by various trusts, the largest of which is Centro Retail Trust (ASX:CER). In December it became clear that Centro was going to have trouble re-financing a large portion of its debt, and the price plummeted. Clearly the underlying assets (management contracts for CNP and real estate for CER) have not dropped nearly as much in value as the share prices have. Gottliebson points out that the way the debt is structured (unsecured loans to CNP) makes it difficult for the banks to foreclose because CNP's management contracts are written to require shareholder approval in the event of a change in control. The banks will collect much more if they work with Centro to re-finance the debt rather than force Centro into administration.

For my students, this is a good illustration of the effects of debt on corporate control, and how clever structuring can change the usual dynamics between debtholders and shareholders.

(Disclosure: the author has a small financial interest in CER)

Inside Business

Last week I showed a video from the ABC show Inside Business. Alan Kohler interviewed Chip Goodyear and Marius Kloppers from BHP Billiton. I thought the interview was a good demonstration of how "real world" business people thought about dividend payout ratios, mergers, and corporate finance in general. This week's show featured an interview with Grant King from Origin Energy. Much of the interview covers the financial incentives required to reduce carbon emissions, but one part of the discussion was quite relevant to corporate finance. When asked whether Origin would be investing directly in alternative energy sources, Mr King responded:

You tend to find these assets are geared up essentially in a sort of financial manner, much more highly geared than our balance sheet, so whether we put them on our balance sheet or they sit on someone else's balance sheet is a capital structure issue and efficiency of capital issue...

How does this statement compare to the conclusions on capital structure made by Modigliani and Miller? And what M&M assumption violations would lead to this statement being a correct statement on capital structure?

Merger Mania

This week we're talking about mergers and acquisitions in class. Talk about good timing!! For the Tuesday night group -- it now looks like the News/Dow Jones deal will go through. There was a lot of last minute horsetrading, but both boards have now approved the deal. The Wall Street Journal has a short video explaining the deal that I'm going to try to play in class Wednesday and Thursday. Here's a link. The WSJ coverage of the deal is pretty extensive. Here are some articles to check out for more info:

• Dow Jones Deal Gets Closer (31 July) (UQ Library Link)
• News Corp is Poised to Win Dow Jones (1 August)

The other deal I discussed in last night's class was Wesfarmer's proposed takeover of Coles. You can read more about that deal at the Sydney Morning Herald website.

Fictional IPO

If you want to learn a bit about the process (at least in the US) of taking a company public, check out the "podiobook" hackoff.com. The description is a bit long-winded (I must admit that I only made it halfway through myself), but seems very realistic. The book is essentially a murder mystery set in a company that has just gone public. It discusses the whole process of selecting the underwriter, writing up the prospectus, and all the way up to trading on the market. While most of the book focuses on the deal, be aware that some chapters are R-rated -- I guess the author thought that some racy scenes were necessary to "sell" the book.

Ready, Set, Go!

Semester has started. My first class is tomorrow night. I thought I'd start the week out with a post on some news items that are relevant to this week's lecture topic -- Initial Public Offerings (IPOs).

• First, while IPOs tend to be under-priced on average, there are some dogs out there. The Wall Street Journal recently reported on two financial IPOs that performed poorly on their first day of trading (Financial IPOs Want for Love - subscription required. [UQ Library users can get the full text here]). I suppose this isn't really surprising with the turmoil in US credit markets due to the sub-prime mortage meltdown (ABC news article here).
• And, the New York Times reports that some Italian luxury designers are considering public offerings.

For students who want some study tips, check out Diablo Valley College's Learning Styles Survey (hat tip: Lifehacker)