What is a reverse IPO (back-door listing) and 5 companies that took this unconventional path

Nick Sundich Nick Sundich, December 12, 2023

Chemist Warehouse has hit the go button on its IPO ambitions, but it is listing via reverse IPO (or back-door listing) rather than the conventional way. It goes without saying that Chemist Warehouse is undertaking the easier route here, but just how and why is it easier? And how many other companies undertake it? We thought we’d take a stab at this question.

 

What is a reverse IPO?

A reverse IPO refers to the process of a private company listing on the stock exchange by purchasing a publicly traded company that is already listed on a stock exchange. This allows the private company to become public without going through the traditional initial public offering (IPO) process.

In this scenario, the private company acquires a controlling stake in the publicly traded company, thereby gaining access to its stock market listing. This is often done by purchasing a majority of shares from existing shareholders or through a share swap agreement. In the proposed deal, you have Sigma Healthcare listed and Chemist Warehouse will buy Sigma’s shares and list on the ASX.

Back-door listings are becoming increasingly popular, both among small and medium-sized enterprises (SMEs) that may not have the resources or name recognition to go public through an IPO, but even among larger companies like Newmont and Block that listed after acquiring Newcrest and Afterpay respectively.

 

Why Back-Door listings are preferable for companies?

There are several reasons why back-door listings may be a better option for companies compared to traditional IPOs. One of the most important is time and cost savings. Going public through an IPO can be a lengthy and expensive process, involving underwriting fees, legal fees, and other costs. In contrast, a back-door listing can be completed in a matter of months and at a lower cost. Another is access to capital – by acquiring a publicly traded company, the private company gains access to its cash reserves, which can provide a source of immediate funding for growth and expansion.

Other important benefits include reduced regulatory requirements – as the public company is already listed and subject to ongoing reporting and disclosure obligations – as well as greater control over the listing process.

 

The downsides of Back-Door listings

While back-door listings have several advantages, there are also potential risks that companies should consider, but may not always.

First, Dilution of ownership: By acquiring a controlling stake in the publicly traded company, the private company’s existing shareholders may see their ownership diluted. Second, a Lack of public interest: The publicly traded company may have a history or reputation that does not align with the private company’s goals and values, which could negatively impact public perception and investor interest. And third, Market volatility: The stock price of the publicly traded company may be volatile, which could result in significant fluctuations in the value of the private company’s shares.

 

Examples of reverse IPOs
Block/Afterpay

This was the largest corporate takeover in Australia’s history, with US$29bn changing hands between Afterpay and Jack Dorsey’s payments fintech. But rather than take the shares and run, Block opted to maintain a secondary listing on the ASX. Unfortunately, shares have plunged throughout the Tech Wreck and are little over a half of what they were in early 2022.

 

Newmont/Newcrest

A more recent example here, only completed during the current quarter. Newmont was not just content with being one of the world’s largest gold miners, it wanted to be the world’s largest gold miner. And the A$26.6bn merger with Newcrest has made it so. The company now has a combined 19 gold assets. The best news for Australian investors is you can buy these shares on the ASX too, with Newmont taking over the ASX listing. Newmont shares are flat since its ASX listing, but it is too early to judge given it has only been 6 weeks since the lisitng.

 

Douugh/Ziptel

On to smaller caps here, Douugh is an app-based investmemtn platform that chose to list through the reverse takeover of telco Ziptel. The deal was a $8.3m deal, pricing shares at 3c each. Within just two weeks, shares peaked at 32.5c per share. If there’s a better example of how crazy the post-Corona Crash market was, let’s hear about it.

Unfortunately for investors who bought in at that high price, it crashed back to earth with investors remembering it was not profitable, that millennial and Gen Z investors haven’t got any money as well as raising eyebrows over its relationship with the ASX regulatory department.

 

LiveTiles/Modun

It is common for companies to use ‘shells’ of failed resources explorers to attempt a reverse IPO. This is just what LiveTiles did in late 2015. This company is an employee experience software company that has plenty of clients…but not many that are willing to put their names to it. Botched attempts to sell the company or shift it to the NASDAQ have depicted that its marriage with the ASX is all but dead.

 

Aminoca Brands

This company too listed via the shell of a resources explorer (Black Fire Minerals) and did not ultimately work out. However, this story has a happy ending, because it kept raising money privately and was valued at nearly US$6bn in July 2022. Whether or not it will list on any exchange again is uncertain at this stage.

 

Conclusion

Back-door listings can be a viable option for companies looking to raise capital and increase their visibility in the market. With proper planning and careful consideration of all factors involved, it can be a beneficial strategy for companies looking to grow and expand. Nonetheless, as the examples we have shown have demonstrated, it does not mean companies can get away with still acting like a private company.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

 

Recent Posts

how to read stock charts

Want to know how to read stock charts well? Here’s your ultimate guide to Technical analysis of stocks

So many investors will know technical analysis has become an increasingly important part of stock analysis, but they may not…

ASX coal stocks in 2024

Want to invest in ASX coal stocks in 2024? Here’s what you need to know

Investing in ASX coal stocks in 2024 is not at all vogue or woke, but could it be moneymaking? Not…

asx stocks in voluntary administration

ASX stocks in voluntary administration: Here are 4 that have bitten the dust recently

There are a number of ASX stocks in voluntary administration right now. For varying reasons, the utopia promised by company’s…