RTO:  How to list your SME company on the Singapore Exchange Securities Trading Limited via a reverse takeover transaction

Updated on 9^th Oct 2023

Reverse Takeover Transaction Singapore – There are 4 ways for a business to be listed on the Singapore stock exchange (SGX).  Listing by way of introduction, listing by way of an initial public offering, via a backdoor listing (also known as a reverse takeover) and SPAC de-merger exercise.

Listing via an initial public offering means that the company undergoes the underwriting process and goes for a listing on the stock exchange and its shares are marketed to investors directly.  Companies that wish to list via this way usually have good price to earnings ration or revenue multiples (i.e. tech firms).

Listing by way of an introduction happens when for example, in the case of some companies, there is a subsidiary that wants to be listed and its parents are also listed so at the point of listing of the subsidiary its shares are distributed to the shareholders of the parent company and there is no fund raising at the point of the listing.

Listing by way of a backdoor listing occurs when two groups of parties come together.  An existing company that is listed on the exchange and a target group company.  Both of them agree on the combination valuation of the target company and undergo a merger and acquisition exercise.  Most of the companies that choose to list via this method have high asset valuation.  In a low interest environment, this usually happens for real estate heavy companies/ real estate developers or other asset heavy companies as they can mark up the value of their assets at the point of combination since it’s a willing seller willing buyer scenario.

Similar but not the same as a reverse takeover, there is a De-SPAC merger.  Similar to a RTO, there is a shell listed company but this listed company has cash upfront at the point of listing but no business.  The target group merges with the listed company and completes the de-space exercise.  Listing via this method is good as the target company mergers with a company that has cash so does not need to do fund raising later.  The difference with the RTO scenario is that the promoter of the SPAC has to be independent from the target company controlling shareholder.  An example of this is the proposed de-spac between the Vertex listed SPAC and M17 (the live streaming company founded by Joseph Phua).

 

This article looks at how a business can list on the SGX using a RTO as opposed to the other means of listing on the SGX.

#1: What is a Reverse Takeover Transaction (RTO)

A RTO transaction involves a target company owner (Target Shareholder) selling the shares of the target company to a listed company and in connection with this, the listed company will issue shares to the Target Shareholder and the target company owner will become the  controlling shareholder of the target company.  Thus each party will have to do a respective valuation and agree on an agreed valuation of each of them.

From the perspective of the listed company, the key terms negotiated would be: (i) the valuation of the target entity; (ii) the projected dilutive effect on the existing listed company shareholders.

From the perspective of the target company, the Target Shareholder will need to ascertain whether the listed company shell is clean (largely free of debt) or has a lot of liabilities or potential liabilities and therefore the Target Shareholder will decide if he wishes to negotiate whether to ask for a discount on the valuation of the target company.

#2: From a Target Owner’s perspective, what are the reasons to choose an RTO over an IPO?

From a target owner’s perspective, there are reasons not to go through an IPO process and typically the key reason would be that either the sponsor does not want to make extensive disclosures in the prospectus about how they started the business for privacy reasons or the business being injected in is a newly acquired business or real estate portfolio so better suited for RTO.

If your asset is suitable for asset inflation and you think your market capitalization of the listed company would be higher in a RTO than in an IPO, then you would choose this lsiting option for your business.

 

#3: From a business owner’s perspective what companies are good to inject into a listed shell company

 

In recent times, asset owners of real estate or mining assets were able to acquire assets on the cheap and then revalued those assets for injection into listed companies.  The SGX has noticed this and has also taken steps to tighten the rules on valuation for such assets.

That said, if certain hard assets are acquired cheaply and there are ways to justify a good market valuation, such assets may on a deal by deal basis make good targets for RTO deals.

Operating companies and asset heavy companies like oil refineries, real estate development, wind farms, solar farms all make good target assets for a RTO transaction.  Finding your Weighted Cost of Capital (WACC) and blending your debt to equity ratios and you would be able to design a good target group that would attract good valuations on the SGX for such a RTO transaction.

 

#4: Post RTO share economics

 

Most target assets have large valuations so as a result the Target Shareholder will usually hold about 99.9% of the shares of the potential target listed company.  As a result, the SGX listing rules which mandate that the company have a 10% to 15% market capitalization will kick in and the listed company needs to undergo a share placement to ensure that the public float requirement is met.

The key to this is to ensure that there is enough market float otherwise your share price will be non liquid and trading will be moribund.

#4: How to scale your company properly using the capital markets

 

A good company for listing on the SGX would be one that has a stable business that can generate good dividend yield and have a large growth story.  For a large listed company, the growth story can be attributed to either organic growth (normal business operational expansion) or inorganic growth (mergers and acquisitions).  A good business owner should spend his focus on both angles to grow the business of the company so that the market capitalization of his listed company can continue to increase.  A good listed company should have a solid base of profits and a division that can show growth.  Your company should then also do financial PR to garner investor support.

 

In conclusion, listing a company on the SGX via a RTO is useful if the economics of the deal allow the Target Shareholder to get a better valuation than listing the company directly on the SGX.  Building a good market capitalization on the SGX is a good aspiration and business growth is necessary for long term earnings per share growth of listed companies.  Carrying out a RTO transaction can be a complex affair as the controlling shareholder of the target company needs to gain control of a Singapore listed shell.  There have been cases where a target group was injected into a listed company and the target group controlling shareholders lost control of the target asset in the listed company.  Thus, getting good legal counsel for such a transaction is important.  Contact us if you are interested in a RTO Transaction.

 

If you have any comments on our article, please leave a comment below.

 

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