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 RequirementsOctober 2009, Ulaanbaatar, MongoliaMichael D Lynch-BellPartner in ChargeIPO Services Ernst & Young LLP+44 (0)
2 Ernst & Young in the IPO Space London is the hub for foreign/inbound IPOsIn the last 5 years Ernst & Young was:Number 1 – all IPOs by proceeds valueNumber 1 – all IPOs by Market CapNumber 1 – all inbound IPOs by Market Cap and Proceeds valueNumber 1 – FTSE100/250 inbound companies, by auditorRecent 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.SizeThere 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 structureClear and transparent shareholder and corporate structures with straightforward business models are more attractive to investors.Use of proceedsThe 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 GovernanceA 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 SystemsThe 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 financingA path to mergers and acquisitionsGreater marketabilityImproved valueDiversification of personal portfoliosRealisation of capital gainsEnhanced corporate image and moraleDrawbacksLoss of controlSharing successLimiting freedom to actLoss of privacyPeriodic reportingInitial expenseShareholder expectationsFiduciary responsibilities
5 Issues to address Strategic issues Tactical issues Attractiveness and marketabilityTrack recordExchange selectionIPO structureSize, structure and scale of offering‘Lock-ins’ of retained interestsUse of fundsProfile and credibility of board and management in public company arenaManagement remuneration / incentivisationGovernance and transparencyPost-float investor relationships and communicationsTactical issuesStructureIdentify what is being floatedPre-float structuring / carve out / combinations“Practical issues”Financial comparability to peersIFRS conversionAccounting policies and impact on analyst coverageWorking capital & debtPost float funding for at least 12 months in placeChange in control triggersRisk management system and reportingNon execs and governanceForecasting and financial reportingPublic v private requirements and deadlinesReduction in post float flexibilityShareholder approvalsPre float dividends unlikely – see article belowPrivate equity-backed IPOs will need a new lookBy Andrew Hill - Published: JuneExtract - 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/NOMADIssue audit opinion on financial statementsComfort letterShort form reportWorking capital reportLong form reportComfort lettersEnsure that the directors of the Company have received satisfactory advice and guidance as to the nature of their obligationsCoordinate the work of other professionals – such as accountants and lawyers who are involved in preparing a Company for the marketIssue an opinion that it is satisfied that the Company applying to LSE is appropriate to be admitted.Test marketingIdentify investorsValuation benchmarkingMarketing roadshowBook-building and pricingOther advisersLawyersAnalysis and optimization of key business processes, KPIsDevelopment of IFRS compliant reporting policy & proceduresDefinition of internal controls frameworkIT Audit & SecurityTax structuring & transfer pricingManagement incentive schemes, Non-executive directors systemEnvironmental Due DiligenceActuarialMineral expertLegal Due DiligenceVerification notesMaterial contractsUnderwriting agreementFinancial PRRegistrars
8 Financial deliverables Partial Full × ProhibitedPre float servicesReporting accountantOther advisorFinancial reporting procedures – adviceFinancial reporting procedures – implementation×Tax structuringProject management supportIFRS conversion/financial reporting adviceProcess improvement (financial, business, IT)Forecasting / modelling supportCorporate governance designCorporate governance implementationNED programmeSustainability and environmental advisoryExecutive performance and compensationCarve out supportFloat servicesReporting on accounts, pro forma and forecast (if required)Long form reportWorking capital reportFinancial reporting procedures – reporting
9 Financial deliverables – Main Market Public reporting‘Short form report’Historical financial track recordContains financial data on at least 75% of the business for all periods'Go forward' accounting basis.‘New' opinion in accountant’s reportPro formaAdjusted balance sheet and P&L to reflect the Group as it will be organised on IPOPrivate reporting‘Long form report’Description of the businessFinancial analysis including normalised earningsKey issues impacting earnings or valuationKey areas of judgement underlying the financial infoFinancial Reporting Procedures ReportFinancial Reporting procedures and internal controlsEstablished and implemented proceduresProposed proceduresWorking capital reportReview of assumptionsDescription of the forecastSensitivity analysis based on identified risksComfort lettersProspectus financial contentsSignificant changeSAS72 for rule 144a
10 Historical financial information for equity listings RequirementMain MarketAIMThree year financial track record – last two years under IFRS... or shorter periodTrack record to cover 75% of group at IPOListing Rule.. but PD RegulationAge of last audited period6 months9 months15/18 months with interimUS offering under rule 144a – 135 day ruleClean audit opinion… but market practice?Other acceptable GAAPs for financial periods expiring no later than 31 Dec 2011US, Canadian, JapaneseThird country issuer has publicly stated convergence with IFRS by 31 Dec 2011Accountant’s report
11 Assessing financial reporting readiness InitiationMid-stageIPO readyFinancial history & “carve out”Local GAAPConsolidated accountsIFRS 3-year recordStructureLegacy businessesRationalisedEfficient tax and legal structureRelated partiesOverlap and confusionCompany accountabilityClean full yearForecastingCash based annual planAccrual based forecastingReliable working capital forecastsTaxationUnidentified risksAssessed risksMitigation and disclosure strategyLegal title to assetsAssumedAssessedAttestedFinancial control and governanceProprietor disciplineProfessional managementGovernance procedures
12 Issues that may be encountered The Reporting Accountant may need to deal with issues in the following areas:TaxationThe evolving nature of tax legislation of many countries may mean that changes are required to meet Sponsor and market expectationsDocumentationLocal historical audit evidence available may not be sufficient to enable sign-off. This may require significant reworkAccounting policiesThe historical accounting policies may not be in line with your peer group and may need to be amendedRelated party disclosuresThere will be a series of related party transactions and balances that need to be appropriately disclosedLegal title to assetsDemonstrable unencumbered title to assets (throughout their operating life) needs to be demonstratedHigher burden of transparency and disclosurePublic companies have additional disclosure obligationsOur 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 controlsbudgeting and forecastingaccounting policiesinformation systems
14 Level of implementation required SystemsInternal AuditBoard Committees & ProcessesRevisit Strategy & Corporate Governance FrameworkLevel of implementationRisk ManagementControlsFinancial ReportingTax StructuringIFRSBusiness ControlsTitle of AssetsRegulatoryTreasuryManagement ReportingBudgeting/ForecastingFinancial controlsTraining and CultureAccounts AssuranceCashJoint VentureStrategic InvestorFloatPost FloatTime
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 admission6-12 months before admission6-24 weeks before admission0-6 weeks before admissionAppoint advisorsDevelop a robust business planAdopt best practice for corporate governanceEnsure compliance with laws and regulationsComplete strategic initiatives, e.g. acquisitionsEstablish financial reporting proceduresReview MIS and operational and compliance controlsConsider ownership and tax issuesCommence initial due diligenceConsider investor relations strategyCommission specialist reports if requiredMake necessary changes to the Executive BoardAppoint Non-Executive DirectorsImplement financial reporting proceduresDiscuss transaction with the ExchangeAgree draft timetableAgree final timetableReview and resolve problem areasProduce draft prospectus and other documentsInitial review of pricing issuesReview public relations presentationsCommence initial marketing (analyst presentations and roadshows)Commence formal marketingPricing and allocation of the offerRegister prospectus/admission documentAdmission 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 processEarly preparation to resolve all issues pre floatAdequate resources available to run the processFully resourced programme managementRapid communication of issues to nominated decision makersNominated decision maker with authority to commit the companyCommunications between all partiesRealistic initial view on status of preparation to inform planning processExperts/advisors with relevant experience and adequate resource committed
17 Case study: CIS mining co. Prior to IPO ProcessStandard cash-based accounting model as used across CISExisting KPIs were cash and production metrics, not EBITDALack of knowledge of accruals accounting and IFRSLocally ‘audited’ accounts aren’t necessarily fit for LSELack of appropriately skilled staff with huge burden placed on themInexperience of LSE regulationsMaking it workRobust and pragmatic client acceptance150+ Ernst & Young people on the ground in KazakhstanSeven Ernst & Young partners spent over two months in Kazakhstan overseeing final stagesSimultaneously did reporting accountants work as local KPMG Kazakhstan conducted auditDedicated senior UK team exclusively engaged for nine months working across UK, Kazakhstan and GermanyMultiple solutions provided for potential ‘deal stoppers’Successful IPOListed on main market in October 2005Entered the FTSE 100 in December 2005Employs 65,000 people
18 Case study: CIS mining co. Prior to IPO ProcessSignificant number of related party transactions with companies connected to the selling shareholder. Disclosure and transparency keyGroup and its governance structure was focused on the needs of the selling shareholder. Tougher governance required to ensure Group independently runManagement reporting based on local GAAPLocal IFRS accounts required enhancement for UK listing purposesMaking it workIPO process lasted over 12 months. E&Y actively involved in preparing the company for listing:FRPIFRSDue diligenceRobust advice on IPO tax structureE&Y teams across UK, Ukraine and Russia involved over the IPO processSuccessful IPOListed on main market in June 2007Approx $420m raised of which some $220m went to the selling shareholder
19 Selected LSE Inbound IPO experience Main MarketXstrataKazakhmysHochschild MiningGem DiamondsFerrexpoFresñillo plcGlobal MENA Financial AssetsAIMHighland GoldFrontier MiningAsia EnergyIndago Petroleum Holdings LtdAbsolute Capital ManagementIshaan Real EstateGDRRosneft OJSCKazmunaigasTMKVTB BankInvestcorp BankPharmstandardGlobal Investment House