Reverse takeover transaction (反收购交易） – 3 Key Issues to know when structuring a deal on the Singapore Exchange Securities Trading Limited (SGX-ST)

Listing via a reverse takeover transaction (RTO):  We have covered in a separate article on “RTO: How to list your SME company on the Singapore Exchange Securities Trading Limited via a reverse takeover transaction”.  This article instead covers three key issues that business owners should consider about RTOs taking into account the latest alternative on the SGX-ST, namely SPAC (Special Purpose Acquisition Companies).

#1: Valuation of the target company for a reverse takeover transaction

Companies listing on the SGX-ST have traditionally been dividend play type companies.  Many investors both institutional and retail tend to invest into dividend stocks and those companies have growing share prices on the SFX-ST.  Some clients have asked us then what is the reason why business ventures choose to list via, listing via introduction, via an RTO versus say an IPO or a SPAC acquisition.  To answer this lets us discuss each of these listing methods in turn:

Listing via introduction

This usually happens when you are a shareholder of a conglomerate company and the conglomerate lists one of its subsidiaries and the conglomerate just issues shares in the subsidiary directly to its shareholders and no fund raising is carried out at the IPO.  Google listed on the NYSE in this way.

Listing via an initial public offering

After discussing with investment bankers on which option allows for a better valuation, some companies choose to list via an initial public offering.  Companies that opt for an IPO are usually leaders in their fields and as such fund raising via the underwriters from their investor base is quite easy.  Such companies love to go on global road shows to raise funding.

Listing via a reverse takeover transaction

Some companies are asset heavy like real estate companies and they have very large valuations of their underlying assets.  Given that the key different between a RTO transaction and an IPO transaction is that in an RTO transaction most of the fund raising is carried out at the target business level so at the point of acquisition by the listed company of the target company, the target company would usually have fund raised.  Thus there is no uncertainty of underwriting risk where the investment bankers are unable to fund raise and thus call off the IPO.

Listing via a de-SPAC transaction

This is a very interesting alternative for business owners.  The typical SPAC is looking for a target with good and potentially growing valuation to merge with.  But the benefit is that like a RTO its between two related parties (the SPAC and the target business) and does not have any fund raising or underwriting risk (like in an IPO).

Firstly, from an asset owner’s perspective you need to find out whether your business falls within the investment thesis of the target SPAC Company.

Secondly, you need to know that most companies that are suitable for a SPAC de-merger need to have base net profit with growth (usually fast growth).

Thirdly, the business owner needs to work with the SPAC to have a good growth story (which in turn signals to the market that the share price after de-SPAC may have a good chance of rising) so that at the point of a de-SPAC transaction, most of the investors sitting in the SPAC will not redeem their investments.  Do comment below if you would like us to explain more about de-SPAC route of listing.

#2: A good target business that generates strong cash flow for a reverse takeover transaction

Most of the companies on the SGX that do well are dividend stocks.  We would suggest that the owners of the companies should aim to list companies that generate strong consistent cash flow and  issue as much dividends as possible from the underlying business once listed as this fulfils two objectives:

• It gives the controlling shareholder a strong cash flow position in Singapore to build a family office; and
• It gives confidence to shareholders and in turn the share price will tend to rise based on its historical good dividend yield.

#3: A strong board of directors to drive growth for the company post the reverse takeover transaction

Many traditional business owners think that entrepreneurial led growth is key to expansion of a business.  While that is true at the early stage of a business, it is less so when the company lists and expands.  For a company to grow from a startup/owner led business model to a proper corporate conglomerate like 3M or Procter and Gamble, a company needs to appoint suitable key management with a diversified skillset.

How to appoint such key management?  The start of this is for the business owner to design a diversified board of directors.  A board with suitable diversified talent will allow the company to formulate a good 5 year business plan for growth and expansion.  Once this business plan is formulated, the company will know what its fund raising objectives are and what key management it needs to acquire to hit its operating and financial milestones.

Companies should aim to use the cash flow from fund raising and business profits to carry out merger and acquisition activity to do horizontal integration or vertical integration.

The board of directors needs to lead by example to drive its global expansion dreams so needs to be staffed with the correct board composition.  It should have directors with experience in corporate strategy, mergers and acquisition and finance and if possible have directors with experience running companies much larger then the current scale of the listed company.

In conclusion, in the greater scheme of things, it is important to speak to a specialist Corporate Law Practitioner to learn about the various alternatives that your business can be listed and/or raise funding to propel its global expansion and growth.

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Click here to speak to a specialist Corporate Law Practitioner today to advise you on your corporate transaction today.  The corporate law team has acted for a diversified client base including transactions involving several hundred startups across the startup eco-system in Singapore and for private equity fund deals and is well placed to help you in your corporate transactions.

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