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Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements October 2009, Ulaanbaatar, Mongolia Michael.

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Presentation on theme: "Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements October 2009, Ulaanbaatar, Mongolia Michael."— Presentation transcript:

1 Raising Capital - New Opportunities for Mongolian Companies Financial Information & Investor Requirements October 2009, Ulaanbaatar, Mongolia Michael D Lynch-Bell Partner in Charge IPO Services Ernst & Young LLP +44 (0)

2 Ernst & Young in the IPO Space
London is the hub for foreign/inbound IPOs In the last 5 years Ernst & Young was: Number 1 – all IPOs by proceeds value Number 1 – all IPOs by Market Cap Number 1 – all inbound IPOs by Market Cap and Proceeds value Number 1 – FTSE100/250 inbound companies, by auditor Recent IPO experience includes Xstrata, Kazakhmys, Hochschild Mining, Petrofac, Gem Diamonds, Scarborough Minerals, Ferrexpo and Fresñillo plc

3 Is your company ready?  Growth Size Corporate structure
Actual or potential high growth is the main attraction for investors; association with growth industries and regions can attract premiums. Size There is no right size for listing, but companies from emerging markets are usually of high growth potential. A profitable trading record is not a requirement for listing. Corporate structure Clear and transparent shareholder and corporate structures with straightforward business models are more attractive to investors. Use of proceeds The amount of the offering and the use to which the proceeds are put will be evaluated by investors. Forecasts and plans will be required as part of the listing process. Corporate Governance A strong management team with a proven track record and listing experience is preferable. Many listing companies will recruit new independent non-executive directors. Accounts and Information Systems The reporting requirements for listed companies are demanding and will require good accounting and information systems.

4 Why list? Benefits Drawbacks Improved financial position
Opportunities for future financing A path to mergers and acquisitions Greater marketability Improved value Diversification of personal portfolios Realisation of capital gains Enhanced corporate image and morale Drawbacks Loss of control Sharing success Limiting freedom to act Loss of privacy Periodic reporting Initial expense Shareholder expectations Fiduciary responsibilities

5 Issues to address Strategic issues Tactical issues
Attractiveness and marketability Track record Exchange selection IPO structure Size, structure and scale of offering ‘Lock-ins’ of retained interests Use of funds Profile and credibility of board and management in public company arena Management remuneration / incentivisation Governance and transparency Post-float investor relationships and communications Tactical issues Structure Identify what is being floated Pre-float structuring / carve out / combinations “Practical issues” Financial comparability to peers IFRS conversion Accounting policies and impact on analyst coverage Working capital & debt Post float funding for at least 12 months in place Change in control triggers Risk management system and reporting Non execs and governance Forecasting and financial reporting Public v private requirements and deadlines Reduction in post float flexibility Shareholder approvals Pre float dividends unlikely – see article below Private equity-backed IPOs will need a new look By Andrew Hill - Published: June Extract - New Look could suffer by comparison with Debenhams' May 2006 IPO. Debenhams' net debt was 3.4 times current ebitda after flotation. New Look is carrying about £1bn of net debt, 4.6 times ebitda for Three years on, the department store group's shares trade at less than 95p - more than 100p below the IPO price - and it is having to consider raising capital at a discount even to that. The only cause for optimism is that when the demand exists, the City usually finds a way to tap it. Debenhams' private equity backers paid themselves with the now notorious "leveraged recapitalisation" of the retailer before the credit crunch (as did New Look's). They also took more money out of Debenhams with a refinancing before the flotation. That course, widely criticized at the time, would not be open to New Look's owners - nor to other private equity firms seeking to return their portfolio companies to the public markets. Now the same brains that found a way to re-gear private-equity backed companies ahead of IPOs in 2006 and 2007 have to work out how to de-gear companies in time to catch the next wave of flotations in late 2009 or early 2010.

6 IPO advisers LSE Candidate Auditor Reporting Accountant Sponsor
Broker/NOMAD Issue audit opinion on financial statements Comfort letter Short form report Working capital report Long form report Comfort letters Ensure that the directors of the Company have received satisfactory advice and guidance as to the nature of their obligations Coordinate the work of other professionals – such as accountants and lawyers who are involved in preparing a Company for the market Issue an opinion that it is satisfied that the Company applying to LSE is appropriate to be admitted. Test marketing Identify investors Valuation benchmarking Marketing roadshow Book-building and pricing Other advisers Lawyers Analysis and optimization of key business processes, KPIs Development of IFRS compliant reporting policy & procedures Definition of internal controls framework IT Audit & Security Tax structuring & transfer pricing Management incentive schemes, Non-executive directors system Environmental Due Diligence Actuarial Mineral expert Legal Due Diligence Verification notes Material contracts Underwriting agreement Financial PR Registrars

7 Accounts preparation Financial deliverables
Historical financial information Financial reporting readiness Financial reporting procedures Accounting issues

8 Financial deliverables
 Partial  Full × Prohibited Pre float services Reporting accountant Other advisor Financial reporting procedures – advice Financial reporting procedures – implementation × Tax structuring Project management support IFRS conversion/financial reporting advice Process improvement (financial, business, IT) Forecasting / modelling support Corporate governance design Corporate governance implementation NED programme Sustainability and environmental advisory Executive performance and compensation Carve out support Float services Reporting on accounts, pro forma and forecast (if required) Long form report Working capital report Financial reporting procedures – reporting

9 Financial deliverables – Main Market
Public reporting ‘Short form report’ Historical financial track record Contains financial data on at least 75% of the business for all periods 'Go forward' accounting basis. ‘New' opinion in accountant’s report Pro forma Adjusted balance sheet and P&L to reflect the Group as it will be organised on IPO Private reporting ‘Long form report’ Description of the business Financial analysis including normalised earnings Key issues impacting earnings or valuation Key areas of judgement underlying the financial info Financial Reporting Procedures Report Financial Reporting procedures and internal controls Established and implemented procedures Proposed procedures Working capital report Review of assumptions Description of the forecast Sensitivity analysis based on identified risks Comfort letters Prospectus financial contents Significant change SAS72 for rule 144a

10 Historical financial information for equity listings
Requirement Main Market AIM Three year financial track record – last two years under IFRS ... or shorter period Track record to cover 75% of group at IPO Listing Rule .. but PD Regulation Age of last audited period 6 months 9 months 15/18 months with interim US offering under rule 144a – 135 day rule Clean audit opinion … but market practice? Other acceptable GAAPs for financial periods expiring no later than 31 Dec 2011 US, Canadian, Japanese Third country issuer has publicly stated convergence with IFRS by 31 Dec 2011 Accountant’s report

11 Assessing financial reporting readiness
Initiation Mid-stage IPO ready Financial history & “carve out” Local GAAP Consolidated accounts IFRS 3-year record Structure Legacy businesses Rationalised Efficient tax and legal structure Related parties Overlap and confusion Company accountability Clean full year Forecasting Cash based annual plan Accrual based forecasting Reliable working capital forecasts Taxation Unidentified risks Assessed risks Mitigation and disclosure strategy Legal title to assets Assumed Assessed Attested Financial control and governance Proprietor discipline Professional management Governance procedures

12 Issues that may be encountered
The Reporting Accountant may need to deal with issues in the following areas: Taxation The evolving nature of tax legislation of many countries may mean that changes are required to meet Sponsor and market expectations Documentation Local historical audit evidence available may not be sufficient to enable sign-off. This may require significant rework Accounting policies The historical accounting policies may not be in line with your peer group and may need to be amended Related party disclosures There will be a series of related party transactions and balances that need to be appropriately disclosed Legal title to assets Demonstrable unencumbered title to assets (throughout their operating life) needs to be demonstrated Higher burden of transparency and disclosure Public companies have additional disclosure obligations Our approach and early issues review is designed to identify these potential issues, enabling us to design solutions which can then be implemented without disruption to the timetable.

13 Financial Reporting Procedures review process
Reporting Accountants’ area of focus: high level financial controls budgeting and forecasting accounting policies information systems

14 Level of implementation required
Systems Internal Audit Board Committees & Processes Revisit Strategy & Corporate Governance Framework Level of implementation Risk Management Controls Financial Reporting Tax Structuring IFRS Business Controls Title of Assets Regulatory Treasury Management Reporting Budgeting/Forecasting Financial controls Training and Culture Accounts Assurance Cash Joint Venture Strategic Investor Float Post Float Time

15 Indicative flotation timetable
An indicative timetable of work streams that a company would follow in order to prepare for a major market listing. 12 months+ before admission 6-12 months before admission 6-24 weeks before admission 0-6 weeks before admission Appoint advisors Develop a robust business plan Adopt best practice for corporate governance Ensure compliance with laws and regulations Complete strategic initiatives, e.g. acquisitions Establish financial reporting procedures Review MIS and operational and compliance controls Consider ownership and tax issues Commence initial due diligence Consider investor relations strategy Commission specialist reports if required Make necessary changes to the Executive Board Appoint Non-Executive Directors Implement financial reporting procedures Discuss transaction with the Exchange Agree draft timetable Agree final timetable Review and resolve problem areas Produce draft prospectus and other documents Initial review of pricing issues Review public relations presentations Commence initial marketing (analyst presentations and roadshows) Commence formal marketing Pricing and allocation of the offer Register prospectus/admission document Admission granted and trading commences

16 Management - what you need to get right pre-IPO
Compelling investment case to market (management/strategy/financial performance) Executive support for process Early preparation to resolve all issues pre float Adequate resources available to run the process Fully resourced programme management Rapid communication of issues to nominated decision makers Nominated decision maker with authority to commit the company Communications between all parties Realistic initial view on status of preparation to inform planning process Experts/advisors with relevant experience and adequate resource committed

17 Case study: CIS mining co.
Prior to IPO Process Standard cash-based accounting model as used across CIS Existing KPIs were cash and production metrics, not EBITDA Lack of knowledge of accruals accounting and IFRS Locally ‘audited’ accounts aren’t necessarily fit for LSE Lack of appropriately skilled staff with huge burden placed on them Inexperience of LSE regulations Making it work Robust and pragmatic client acceptance 150+ Ernst & Young people on the ground in Kazakhstan Seven Ernst & Young partners spent over two months in Kazakhstan overseeing final stages Simultaneously did reporting accountants work as local KPMG Kazakhstan conducted audit Dedicated senior UK team exclusively engaged for nine months working across UK, Kazakhstan and Germany Multiple solutions provided for potential ‘deal stoppers’ Successful IPO Listed on main market in October 2005 Entered the FTSE 100 in December 2005 Employs 65,000 people

18 Case study: CIS mining co.
Prior to IPO Process Significant number of related party transactions with companies connected to the selling shareholder. Disclosure and transparency key Group and its governance structure was focused on the needs of the selling shareholder. Tougher governance required to ensure Group independently run Management reporting based on local GAAP Local IFRS accounts required enhancement for UK listing purposes Making it work IPO process lasted over 12 months. E&Y actively involved in preparing the company for listing: FRP IFRS Due diligence Robust advice on IPO tax structure E&Y teams across UK, Ukraine and Russia involved over the IPO process Successful IPO Listed on main market in June 2007 Approx $420m raised of which some $220m went to the selling shareholder

19 Selected LSE Inbound IPO experience
Main Market Xstrata Kazakhmys Hochschild Mining Gem Diamonds Ferrexpo Fresñillo plc Global MENA Financial Assets AIM Highland Gold Frontier Mining Asia Energy Indago Petroleum Holdings Ltd Absolute Capital Management Ishaan Real Estate GDR Rosneft OJSC Kazmunaigas TMK VTB Bank Investcorp Bank Pharmstandard Global Investment House

20 Thank you October 2009, Ulaanbaatar, Mongolia Disclaimer
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for loss arising from any action taken or not taken by anyone using this publication. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London SE1 2AF. © Ernst & Young LLP 2009. Published in the UK. All rights reserved.

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