What responsibility do stock exchanges have to ensure that investors are not taken for a ride when a new company applies to list? Instinctively, one would guess that exchanges have a high degree of responsibility, but the issue is much more complicated than it seems.
The latest topic du jour is the listing of media company Sagarmatha, due on Friday. Sagarmatha is a competitor to Tiso Blackstar, owners of Business Day, and has accused this newspaper and others of trying to derail its listing for competitive reasons.
Informed investors will take this accusation with a pinch of salt and take careful note of the facts. And those facts make grim reading. Unlike Tiso Blackstar, the Independent group — which along with some small new media entities will make up the Sagarmatha group — has been posting thumping losses.
The JSE generally follows the caveat emptor dictum, with the strict proviso that the prospective listed company makes full disclosure. In the case of Sagarmatha, the JSE imposed an additional disclosure requirement
But the JSE says it is obliged to list a company that meets its listing requirements. For the main board, these are simple: capital of R50m, three years’ audited financial statements and a profit of R15m in its latest results. This last requirement can be waived, in which case the capital requirement rises from R50m to R500m. Sagarmatha aims to raise R3bn in a private placement.
The JSE allows companies that are not profitable to list in these circumstances because of the internet boom phenomenon; many companies with great potential have losses in their start-up phase and yet still turn out to be great investments.
The JSE generally follows the caveat emptor dictum, with the strict proviso that the prospective listed company makes full disclosure. In the case of Sagarmatha, the JSE imposed an additional disclosure requirement — that the company obtain certification of its proposed valuation from a reputable international valuation company, in this case Redwood Valuations, which Sagarmatha did. From there on in, investors must make their own decisions.
The problem is that this is all a bit hands-off. Sagarmatha’s valuation is, by any objective definition, extreme. Sagarmatha’s results, reviewed by auditors BDO Cape Town and issued via Sens on Tuesday, showed the company had a net asset value of 33.92c a share at December 31, less than a 100th of the R39.62 private placement share price. The company is aiming to raise up to R7.5bn for 15% of the shares, which would give it an overall market capitalisation of R48bn. This compares with the about R1bn and less market capitalisation of two other listed media companies, Tiso Blackstar and Caxton. With the Naspers group, the four media companies each control about a quarter of the digital and print-media market in SA.
And there are more problems. Sagarmatha has a price-to-sales ratio of 177 times, a price-to-book of 97 times and a negative free cash flow. It’s obvious that Sagarmatha is listing to escape bankruptcy, which is especially pertinent because it has a raft of debts coming due.
This is not even to mention several ethical red flags that have been disclosed in the prelisting statement.
These include the fact that the founder, Iqbal Surve, bought shares in Sagarmatha in 2016 at R659 per share, compared with the R13.7m per share that the Independent group paid on the same date. Furthermore, the founder’s family vehicle exclusively earns a fee for raising the capital despite the company not being a professional capital-raising entity.
Does the listing agent really have no responsibility or discretion in these circumstances? Legally, apparently, the answer is no. The Financial Services Act discourages listing entities from having discretion about which companies to list and which not because it wants to avoid arbitrary decisions.
Yet, this is all slightly based on a different situation in which investors were almost exclusively professional and the JSE itself was a monopoly. There are now more retail investors who could be duped by an outrageous listing and might want a listing agent with more discretion.
For companies seeking to list, there are now options, so the strict requirements that prevent companies from arbitrary decisions are perhaps no longer necessary.
It may be time to re-examine the act.