Second Advent. Scheme for Placing SPO
Yuliya Feller, the RESMI Finance & Investment House
Issuing and placing shares are the most basic and popular means of attracting money. The advantages of this are:
· the absence of a debt burden on the company, in contrast to issuing bonds;
· the possibility of not paying dividends but reinvesting the entire revenue in the company, whereas paying premium on bonds is mandatory;
· increasing the company’s transparency;
· a more diversified structure of shareholders;
· a growth in the company’s capitalisation.
However, it should be noted that when issuing shares there is a risk of losing control of the company, because in return for funds raised investors are offered the possibility of having shares in it. That is why when specifying the size of a stake designated for floating this aspect should be taken into account.
There are two types of share placement, depending on their turn:
· Initial public offering – IPO;
· Second public offering – SPO;
An IPO means issuing new shares, i.e. when shares are offered to a wide range of investors for the first time (according to some sources, an IPO is the placing of shares in a stock market which the issuer has not placed shares in before). An SPO involves placing shares that have already been in circulation, for example when one of the shareholders decides to sell their shares in the company. Often, an SPO is a stage that follows an IPO: an initially specified stake of shares is offered as an IPO, but some time later some investors who bought shares during the IPO may sell their stakes as an SPO. Also, it is possible for the company to conduct a “mixed” offering along the IPO+SPO scheme, when a new issue of shares and some of the shareholders’ shares are offered at one time. In this case, the SPO is part of the IPO and is part of its structure. Another distinction between these two means of placing is the different movement of funds raised from the placing. In the case of an IPO, these funds remain with the company, but in the case of an SPO only the owner of shares is changed and, accordingly, all the settlements take place between the parties involved in this deal – shareholders and investors. The Wimm-Bill-Dann company’s SPO, placed on the Russian stock market in November 2006, can serve as an excellent example here. At that time several shareholders of the company sold 10% of shares (4.4 million shares) for a combined $165m, which they spent on developing their own projects.
These are the advantages of an SPO:
· Increasing the liquidity of shares and the transparency of the company. When selling shares the structure of shareholders changes partly and results in the arrival of new investors who may demand a more transparent conduct of the business.
· Increasing the company’s capitalisation. An SPO is, in essence, a good instrument for a reassessment of the company’s shares by the market.
However, it is not quite correct that an IPO is more complicated process than an SPO. Both processes demand thorough analysis and a wise approach by shareholders. It should be noted that as a company whose shares have not been circulating on the stock market can place an IPO, the attractiveness of its reputation in the eyes of investors will be built “from scratch”. On the other hand, in an SPO, the company has already acquired some kind of credit history on the stock market so investors have much wider possibilities for a more thorough analysis of its activities.
The scheme of placing an SPO is, as a whole, similar to that of an IPO. It can be divided into three main stages:
1. Finding external consultants, which will help the company-issuer organise the SPO and, at the relevant stage, the placing.
A financial consultant or underwriter(a company which has a licence to conduct broker and dealer’s activities or an investment bank). The functions of a financial consultant are wider than those of other participants in the SPO process, because it is precisely they who develop the scheme of placing, compile the book-building and interact with potential investors, and so on.
An auditing company, which is responsible for the financial audit of the issue and ensures the fulfilment of requirements in line with international standards.
A legal consultant, whose functions are to provide legal support for the SPO process.
A PR agency, which ensures coverage of the entire process in the media and provides services to build an attractive image of the company in the eyes of investors. The functions of a PR agency and those of a legal consultant are often fulfilled by a financial consultant because this significantly cuts the cost of placing an SPO. However, it should be noted that this decision may reduce the objectivity of the process. It should not be forgotten either that staff members of an investment bank may not have proper skills in PR because this is not the main sphere of their activities.
2. Organising and conducting the preparation stage.
At this stage of the offering, the issuer, with the help of external consultants, has to conduct a thorough analysis of its financial activities and the structure of its business from the legal point of view (in particular, whether the business is understandable to investors and whether changes are needed to boost its transparency), and assess the principles of corporate governance.
An important stage of an SPO is information support, provided by a PR agency. The correct coverage of the SPO process in the media affects its result, especially if most potential investors are private investors. The quality of any roadshow conducted should not be undermined because this makes a significant contribution to the efficiency of the offering. While choosing an underwriter the issuer should assess its experience in establishing relations with investors in similar offerings, whether it has “established” relations with investors, because while preparing a roadshow the underwriter should clearly understand the very circle of investors who may suit the company best.
The preparation stage should result in increasing the transparency of the company’s activities and its investment attractiveness and, possibly, improving financial indicators while optimising business processes.
3. Placing shares and the analysis of the SPO.
The third stage is the very process of a second public offering, during which the underwriter closes the book-building and defines investors whose bids will be satisfied. Special attention should be paid here to the circle of new investors that formed as the result of bidding (whether it will be institutional buyers or individuals) because this has an impact on the liquidity of the shares offered.
These stages represent the whole scheme of the second public offering. At different stock exchanges this process has its own specific form, for example in terms of requirements set for issuers and shares, organising the process of selling shares and so on. Any international stock exchange (LSE, NYSE, NASDAQ and others) can become a floor for an SPO – everything depends on the issuer’s choice. For example, the Kazakh Eurasia Gold company announced its plans to place an SPO at the London Stock Exchange in March 2007, however later its shareholders decided to postpone it until autumn. The company intends to raise up to $150m by offering an SPO.
Thus, SPO, as a means of attracting money, of course, has its advantages, but it demands a thorough analysis of the company by shareholders and top management, because it is an important chapter of the company’s development, since SPO may do both – push the price of shares up in case of a success, or down, if the placement was carried out without an objective analysis.
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