The recent RTO would be of ACE Market-listed information technology solutions provider, I-Power Bhd which involves the injection of Instacom Engineering Sdn Bhd, a design and engineering solutions provider for telecommunications network.
The RTO process generally involves the purchase of assets owned by the unlisted company for a consideration which is generally settled by the issuance of substantial amount of new shares of the listed company to the unlisted company, diluting the base of existing shares.
After the takeover, the unlisted company will become the major shareholder with a controlling interest in the listed company.
A major reorganisation involving changes in the company's top management and operations may follow suit with the possibility of the revamped company taking on a new name, usually the name of the unlisted company.
Eventually, Instacom will emerge as the controlling shareholder of I-Power, with some 71% of the company's expanded issued share base of 1.23 billion shares.
Usually undervalued and poorly-managed listed companies are the primary targets for these parties seeking entry into the capital market.
According to analysts, there are generally two motives for parties launching the RTOs first, the unlisted parties seek near instant access to the capital market by controlling a listed company, and second, a backdoor listing in contrast to the run-of-the-mill initial public offering (IPO) method.
A conventional IPO may be more complicated and expensive, as investment banks are hired by private companies to underwrite and issue shares of the soon-to-be public company.
For some companies, the IPO process may be a long and tedious process which involves major restructuring in ownership and management. Hence an RTO may be the easiest way to enter the market.
“These formerly private companies would benefit by being a listed entity, assuming all the advantages of being listed, especially the ability to tap public funds,” said private equity firm NewAsia Capital Sdn Bhd associate director Sherilyn Foong.
She said these parties were compelled to follow the obligations of being listed as set by the Securities Commission.
“As with all capital market exercises and transactions, investors would need to do their own homework and due diligence on the injected asset or company. However, RTOs are (still) subject to authorities' scrutiny,” she said.
A backdoor listing relates to significant change in the business direction of the listed company, whereby it acquires the unlisted assets or businesses by a cash consideration or the issuance of new securities.
The change in business direction could happen due to the disposal of existing core assets and subsidiaries of the listed company upon acquisition of the new assets.
This can be seen in Bina Puri Bhd's RTO launched on digital media provider Oriented Media Bhd (OMedia), whereby the former is injecting its Indonesian power generation company into OMedia.
The asset being injected into OMedia is an 80% stake in PT Megapower Makmur, valued at RM19.2mil which will give Bina Puri's 100% unit Bina Puri Power Sdn Bhd 55% of OMedia, whereby OMedia is paying for the asset via the issuance of 192 million new OMedia shares at a price of 10 sen each.
The move makes perfect sense for the construction giant as its non-core assets are insignificant compared to its core operations as reflected in its financial results. With the move, its assets would be featured more prominently rather than being overshadowed by its main construction business.
However, some may argue that the ACE Market is aimed at providing a nurturing ground for fledgling entrepreneur-like companies to grow, and it would defeat the purpose when these companies are turned into listing vehicles for big unlisted or listed companies.
Another deal involved the RM69.8mil RTO by R&A Telecommunications Sdn Bhd on KZEN Solutions Bhd, which sees R&A emerging as the substantial shareholder with the issuance of 698 million shares constituting a 91.45% stake in KZEN.
It has since said that its major shareholders planned to sell down their stakes to eligible investors with another 10% of KZEN shares to be placed out via a private placement exercise upon completion of the takeover exercise.
With the RTO, R&A had basically bypassed the lengthy and complex process of going public and is hoping that with the increased visibility from the RTO, it will help the group raise funds and expand its business in Malaysia and abroad.
R&A's main business is the fabrication and installation of 2G, 2.5G and 3G telecommunication infrastructures and is recognised as a Tier-1 market player in the telecommunications industry with a 13-year record in the business. Since then, KZEN has been renamed R&A Telecommunications Group Bhd.
Responding to queries from StarBiz, Bursa Malaysia said assets to be injected for all RTO applications must comply with the IPO criteria of appointing a sponsor for at least three years after the RTO implementation.
The sponsor needs to have an assessment on the asset to be injected by considering, among others, the business prospects, adequacy of internal controls and corporate conducts of board of directors and key management, along with a satisfactory corporate governance record, as well as in compliance with the Listing Requirements.
“For RTOs undertaken by financially distressed company under Guidance Note 3 (GN3), as part of restructuring scheme, the scheme together with the new assets must be able to resolve problems that led to the listed company being classified as a GN3 company,” it said.
Since the launch of the ACE Market on Aug 3, 2009, there has been up to six RTO applications, with three applications to date in 2011.
Meanwhile, the Minority Shareholders Watch Group said that though minority shareholders' shareholdings would be diluted under a RTO, the pertinent issues would be on the valuation of the assets to be injected into the company, the value per share adopted for the shares to be issued, as well as the rationale of the RTO, either due to PN17 or GN3, or other conditions.
“Each scenario has its own pros and cons,” the group said.
With a RTO appearing to be a convenient and attractive way for parties to seek listing and tap public funds, would the authorities ensure closer scrutiny before approving any RTO?
Source: The Star
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