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Disillusioned companies are looking to move out of the stock market
A number of Yorkshire companies are expected to turn their back on the stock market this year following the decision by Sheffield United and Omega International to go private.
Companies are becoming increasingly frustrated by low share prices and many are asking why they should hold on to an expensive listing on the London Stock Exchange when it brings them few rewards.
According to a survey by accountants BDO Stoy Hayward, a third of the UK's smaller listed companies now wish they had never floated in the first place. Many will consider private equity buyouts this year, suggesting that the mid-market buyout houses may enjoy a busier 2009 than larger private equity firms.
BDO found that 69 per cent of companies with a market value of less than 250m believe their stock is undervalued. Nearly a third – 32 per cent – said they are "fairly" or "very likely" to consider a public-to-private deal within the next few years.
"Our survey is further evidence that a majority of smaller quoted companies are very frustrated about their place on the public markets," said BDO Corporate Finance Partner Michael Cobb.
"A significant number of directors feel that it is in their company's best interest to explore coming off the market and obtaining private equity funding," he added.
Other considerations may also play a part. Two thirds of the respondents said the private equity funding model, which can lead to equity stakes and hefty payouts for managers, is "generally better than the public markets at incentivising management".
As the credit crunch took hold of the market last year, the FTSE-250 index fell by more than 40 per cent while the FTSE Small Cap index lost almost half its value.
Sheffield United decided that going private would be its best option bearing in mind the stock's limited liquidity, the cost of being a listed company and the belief that in the current economic environment there is more to be gained from being private.
Plus the group doesn't owe its stock listing any favours – Sheffield United has seen its market capitalisation fall below 10m in spite of a return to profit.
Chairman Kevin McCabe initially wanted to use the group's AIM listing in order to raise the finance needed to expand the group beyond football and into other leisure areas, but he now says a delisting will make it easier to realise the company's ambitions.
"By delisting we will reduce costs and will make it easier to reposition the company to better achieve our aspirations, which include promotion back to the Premier League," he said.
Doncaster-based kitchen manufacturer Omega was taken private by its management team earlier this month in a deal that values the company at 31m.
Chairman Bob Murray said the management team decided to launch the bid as it believed the company would be better off in private hands.
"We couldn't use our listing, it was no advantage to us to be a public company," said Mr Murray.
"The share price has gone down following the deterioration in the market. While we are expecting a tougher year next year we are doing extremely well in this market."
Martin Shaw, head of corporate, Europe at Pinsent Masons in Leeds, who advised Omega's management on the deal, believes more AIM companies will go private this year as their share prices have been particularly hit by the downturn.
"Smaller companies are particularly vulnerable to a downturn in demand," he said.
"Their quotation provides very little benefit – it's just a cost. Many companies are thinking: 'The listing is too expensive, we get no benefit and the market doesn't understand us, we'd be better off going private'."
But this is not as easy as it sounds. Huge costs are involved in taking a company back into private ownership.
Shareholders will demand a decent premium to the current share price, money is needed to fund an ongoing business plan and advisers have to be paid – deal costs for both sides can easily add up to 2m.
However there is a new vehicle that could offer distressed companies a way out without the high expense – the "Take Private Lite".
If the party funding the deal is prepared to allow existing shareholders to stay on board, there can be a delisting followed by a share buyback.
This is done by way of a tender offer, with new investors taking up additional shares.
The buyback takes place at a fair price, usually a little more than the current share price.
"I think we will see a Take Private Lite in Yorkshire before long," said Mr Shaw.
"We are currently looking at two, maybe three.
"The big benefit is that the usual takeover costs are avoided."
At a time when many companies are struggling to stay afloat, the Take Private Lite could be a very useful way for companies to ditch their stock market listing without the enormous costs usually involved with going private.
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Wednesday 23 May 2012
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