Last year was a less than stellar year for the Jamaica Stock Exchange (JSE) where public offers of equity were concerned. This was likely as a result of a depressed stock market which provided low valuation multiples for those companies which braved the market.

The only issuers were Supreme Ventures Limited and NCB Capital Markets Limited, which conducted an Ordinary Share, Initial Public Offering (IPO) and Preference Share IPO respectively. Both Offers were arranged by NCB Capital Markets Limited.

Perhaps as a result of analysts' views that the stock market has bottomed out and that it is likely poised for a rise, there seems to be a vigorously renewed interest in IPOs and other equity issues. The media and companies alike seem once again to be focusing on issues which brought companies to the market in 2004/2005 and had so many companies contemplating IPOs for 2006.

The question is: What are the benefits of being a listed company on the JSE and why should savvy CEOs and CFOs take the time to give serious thought to an IPO?

Raising capital:
One of the main benefits of an IPO is that it provides a company and/or its shareholders with an opportunity to raise capital either by way of an Offer of Shares or a Sale of Shares respectively. Equity raised by a company in an IPO is primarily used to shore up the balance sheet, retire existing debt, fund expansion and for research & development. Though equity capital is ultimately more expensive to the owners of a company than debt, unlike a loan, this money does not have to be paid back and has no interest component. This, in particular, can give a company a tremendous amount of leverage to grow and unfold its business model.

Once a company has listed on the JSE, it can raise further capital by way of a Rights Issue or a secondary Issue of Equity. A Rights Issue is simply an Offer of Shares (by the company) to existing shareholders. Existing shareholders may exercise their "rights" to purchase the shares or, in what is known as a "renounceable" rights issue, may turn down the Offer and sell the shares to another person. Capital and Credit Merchant Bank Limited, for example, raised over a billion dollars in its 2005 Rights Issue. A secondary Issue of shares would be where the Company sells shares from its existing pool of shares to the public exclusive of the existing shareholders. This route is far less common.

Typical IPO size
The rules of the JSE stipulate that at least 20 per cent of a company listing on the exchange must be held in the hands of a minimum of 100 investors. Ideally, any company going public should be putting somewhere between 20 and 30 per cent of its issued shares up for sale. This can represent a substantial capital raise for the company's principals without surrendering control. The size of an IPO in absolute dollars should be a function of the company's size and the strength of the market at the time of the offer.

Taking cash off the table
Many business owners will realise at some point that the value of their business is all tied up in equity which they cannot monetise. Because these companies are private, there is almost no basis to sell some of their shareholding without selling the whole company. Furthermore, as the number of family members (who have claim to ownership of the company) grows from generation to generation, amicably dividing what is due can be complicated and burdensome for all concerned. By having the shares in the company listed on an exchange, there is always a ready and liquid market for the shares in the event that any or all want partial or full exit. Additionally, the public status with a defined valuation gives the owners of the equity the ability to leverage the shares, an option otherwise unavailable in a private company setting.

Basis for valuation
A very difficult task for business owners can be to accurately value their business. In trying to ascertain a valuation, business owners often spend considerable sums. At other times they simply use unconventional methods to estimate the worth of their companies. This often leads to unrealistic price expectations and a disconnect between stakeholders in the business.

The single best basis for valuation is the market! The market looks at all the fundamentals surrounding the company and its environment and applies tried and proven valuation methodologies for the business. This imputed valuation is often used as a proxy for valuation of the company as a whole and is usually very close to the realised sale price for the going concern. This can be seen with the recent sales of Courts Jamaica Limited or Dehring, Bunting and Golding Limited. Companies going public in Jamaica today should expect to list at a P/E multiple of about 6 - 8 times trailing EPS.

Mergers and acquisitions:
Similarly, companies seeking to grow through acquisition can find the power of its shares to be an incredible source of currency not available to its private competitors. In a US context it is often the case that shares in a public company are used as acquisition currency. In Jamaica today this is definitely also becoming more the case as was demonstrated in RJR's recent acquisition of shares in JNN and RETV which were partly paid for in RJR shares.

Widening the company's investor base
A very important feature of public companies is the wide investor base that they enjoy. For a private company going public, this serves to increase the number of stakeholders exponentially, thereby significantly increasing the chances for survival of the entity. Technically, every single shareholder in the entity has a vested interest in the company's survival and most treat and think about the company as being their own (in a sense) and tend to support the company in any way they can (mainly through the purchase of it's goods and services).

This is especially so for employees of the company who usually get ownership in the company on a preferential basis at IPO. With employee fortunes directly tied to the performance of the company's equity, motivation and productivity in the company can skyrocket. In a small economy like Jamaica this can be an incredibly useful tool for any company.

Additionally, this widened investor base serves to lower the company's cost of capital as financial institutions place value on the strength of the brand. The greater that strength, the greater the chance of longevity and ability to repay in the minds of bankers. often leading to a lower cost of capital for public companies over their private rivals.

From a debt/quasi-debt perspective there is also the real advantage of being able to raise financing through the issue of Preference Shares on the JSE. Preference shares combine attributes of both debt and equity. They provide dividends (tax-free to investors) which take precedence over common shares dividends but can be treated by the company as interest payments for tax purposes. Therefore, while investors get a security that is freely tradable on the JSE (liquid) and that provides tax-free dividends, issuers benefit from the fact that, by issuing a tax-free security, their cost of funds will be significantly lower without necessarily losing the tax advantages of debt.

Tax advantages:
Because dividends paid over the Stock Exchange are tax-free, the company will be able to pay its shareholders dividends, without those shareholders having to pay income tax on those dividends. unlike shareholders in private companies.
Shares listed on the Exchange do not attract either transfer tax or stamp duty when they are traded. This can be especially useful to Shareholders holding large blocks of shares that wish to dispose of their holdings without incurring burdensome peripheral costs. A recent example is that of Dehring Bunting & Golding Limited, which was listed in 1992, and whose principals recently sold their shares in the company.

Exposure & prestige:
Another advantage of conducting an IPO is that it can be a powerful marketing tool for the company. As we have all seen, IPOs are usually accompanied by tremendous media attention. This is fuelled by the distribution of the prospectus, the placing of ads on the radio, on television and in the newspapers. The is also keen scrutiny of investors and financial analysts as they evaluate the company and the merits of the offer. This scrutiny will, of course, draw attention to the products and services offered by the company. It should also be noted that this close observation would never completely fade as the company will continue to receive close attention when it distributes its annual and quarterly results.

Along with the inevitable exposure that a listed company receives, there will also be a certain prestige that comes from having successfully completed an IPO and from being associated with an institution with the stature of the JSE.

Contributed by Dylan Coke, Attorney-at-Law, Corporate Finance Unit, NCB Capital Markets Limited (NCBCML).
NCB Capital Markets Limited through its representative(s) has provided information to you on various financial products and services and investment opportunities for information and educational purposes only. While NCBCML has made every effort to ensure that the information provided to you is accurate and based on research and analysis that we have carried out or derived from sources that we believe to be accurate and reliable, NCBCML makes no representations or warranties about the accuracy, completeness or suitability for any purpose of the information published and will not be liable for any loss which you or anyone else may suffer in reliance on the information we have provided to you.

The Corporate Finance Unit of NCB Capital Markets is comprised of Charles Chambers, Dylan Coke and Toni-Tanille Kerr. It is responsible for the origination, structuring and execution of Corporate Finance engagements on behalf of the firm. Contact them at 1-888-4WEALTH or corpfin@ncbcapitalmarkets.com

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