Beforepay does not pay for investors, after float
Everyone involved in the share market understands – or should understand – that pricing an initial public offering (IPO) is not an easy task.
The underwriters or lead managers are trying to ascertain what the market will pay: they will test the marketability of the company by discreetly querying major investors on how much they would pay for the stock. Based on comparative valuations of the company’s peers (if it has any) and the underwriter’s observations of what the market will bear, the underwriter sets the price of the shares in the prospectus.
The underwriter is trying to strike a balance between conflicting interests. The company being floated wants to raise as much money as possible, while the underwriter has to think in terms of satisfying the market. The underwriter wants to get the best possible price for its client (the floating company) while also satisfying its other clients (the investors in the after- market, or the secondary market). The underwriter also receives a fee based on the market capitalisation, so it has a vested interest in pricing the shares as high as the market will bear.
It usually works reasonably smoothly: the company debuts at a decent premium above issue price, the “stags” who sell at that price are happy, and the stock takes to listed life quite respectably.
But every so often, something goes wrong.
It certainly went wrong on Monday, when salary advance fintech Beforepay hit the ASX screens at a 44 per cent discount to the $3.41 issue price, after raising $35 million. At time of writing, on Wednesday, B4P was still 39 per cent down on the issue price, at $2.08.
The company and its lead managers, Shaw and Partners and E&P, now have to wear the disappointment of the IPO subscribers.
It is a terrible look, compounded by the excuse offered-up by chief executive Jamie Twiss that the IPO had been priced “in November under very different trading conditions, and the market has evolved since then.” The S&P/ASX 200 certainly hasn’t fallen 44 per cent since November – it’s up by 0.5 per cent.
If underwriters and lead managers get a feeling that they have mispriced an IPO, the honourable thing to do is to cut the price.
Last March, flower grower and wholesaler Lynch Group was being prepared for IPO by Citi, Jarden and JP Morgan, on behalf of the Lynch family and private equity shareholder Next Capital, at $4.05 a share, to raise $315 million, when the lead managers bit the bullet and repriced the float. The company went back to the market seeking to raise $206 million, at $3.60 a share, with the lead managers agreeing to underwrite the shares.
On listing the shares dropped to $3.50, but by August 2021, they had recovered to $3.80 – however, LGL has subsequently slid to $3.34. The company was hit by COVID-19 slowdowns, and there has also been the “China factor” hanging over any company with a significant business in China. Lynch Group shareholders are no doubt disappointed, but not as dismayed as they would have been had they paid $4.05.
In November, the owners of infrastructure maintenance company Ventia Services Group, CIMIC and Apollo Global Management and their lead managers, Barrenjoey and JP Morgan, realised that interest in the IPO of Ventia was not there at their preferred price range of $2.75 to $3.15, so they slashed the price to $1.70, and ditched plans for a big sell-down. They were rewarded with a 25 per cent premium on debut – a first trade at $2.08, and a first-day close at $2.10 – and Ventia shares now change hands $2.27. If anything, in restructuring their deal, CIMIC and Apollo and their lead managers erred on the side of under-valuation.
The reduced offer price was not an ideal outcome for CIMIC and Apollo: in fact, instead of a major sell-down of their roughly 90% combined shareholding, the pair sold just 2 per cent of Ventia each, leaving them holding 65.6 per cent of the company.
Instead of raising $1.1 billion–$1.2 billion at 12.5 times to 14 times forecast profit as targeted, CIMIC and Apollo settled on a $458 million raising, at 8.5 times forecast profit; and they wound-back their combined sell-downs from $753.9 million to just $64 million.
But if the experience of their IPO subscribers was important to them, and if Barrenjoey and JP Morgan wanted to retain a good reputation, they were all willing to cop the haircut – because the market had “evolved” for them, too.
Of course, Beforepay is not the only company to over-price its shares. It falls a long way of the lingering sour taste left by department store chain Myer, which was floated at $4.10 in November 2009 in a $2.3 billion IPO; in more than 13 years on the market, has never traded at or above its issue price. At 38 cents, Myer is down 91 per cent on that valuation.
Only six months after the float, Myer cut prospectus sales growth guidance, and chief executive Bernie Brookes admitted the float could have been better timed.
What irritated Myer subscribers was that private equity firms Blum Capital and TPG Capital, sold all their shares in the retailer for a profit of $1.5 billion, or almost six times their original equity investment, after talking-up its growth prospects.
Two weeks after the float, the Australian Taxation Office sought court orders to freeze TPG’s bank accounts in an attempt to recover $678 million in tax and penalties, only to discover $1.5 billion in profits had been transferred to tax havens in Luxembourg and the Cayman Islands.
A huge haircut on debut is not necessarily a death sentence for the company.
In July 2016, shares in online electronics retailer Kogan.com slumped more than 12 per cent on their market debut, from the issue price of $1.80 to $1.49 – but the shares almost touched $25 last year (they have retreated to $7.27). And Meta Platforms – the artist formerly known as Facebook – has recovered from a disastrous IPO in May 2012: priced at US$38, Facebook slid 52 per cent in its first three months, to US$18.06. That is a mere footnote to history given that Meta Platforms now trades at US$318.15.
In fact, the flipside of an IPO savaging is that it gives other investors the chance to pick the stock up on the cheap; with one very big caveat. That being, that the company proves to be a strong business and rises in price in the long run.
That is what the pissed-off Beforepay investors will be hoping. Otherwise, there could well be stirrings in the litigation funding world, about advertising for a class action for aggrieved investors. A class action is yet to investigate specifically the pricing of any IPO in Australia, but there is no real reason why one could not, as part of a broader interrogation of the prospectus information and figures. In the US, Uber has faced shareholder class actions over the financial information in its prospectus, of which the IPO price is the sum. (Uber ended its first day of trading, in May 2019, 7 per cent below the US$45 IPO price, and by the bottom of the COVID Crash, in March 2020, the stock was down almost 53 per cent. At US$38.41, Uber is trading well below the IPO price, although it has traded above it.)
At least, Beforepay co-founders and largest shareholders, Tarek Ayoub and Guo Fang (Dean) Mao, who own more than 20 per cent of the listed company, have agreed to an escrow period, as is now standard. That at least lessens the pain for IPO subscribers, mugged by the reality of the market.