Second coming. SPO scheme

Julia Feller, IFD RESMI JSC

The issue and placement of shares is one of the main and most popular ways to raise funds. Among the advantages of this method of financing are the following:

· absence of debt burden on the company, in contrast to the case with the issue of bonds;

· the ability not to pay dividends and reinvest all income in the business, while payment of interest on bonds is mandatory;

· increasing the transparency of the company;

· more diversified ownership structure;

· growth of company capitalization.

At the same time, it should be noted that when issuing shares, there may be a threat of loss of control over the company, since in exchange for the funds raised, investors are given the opportunity to participate in it. Therefore, when determining the size of the package to be hosted, this aspect must be taken into account.

Depending on which issue of shares is intended for sale, you can choose one of two types of placement:

· initial public offering - IPO (Initial Public Offering);

· secondary placement of shares - SPO (Second Public Offering).

An IPO involves the placement of a new issue of shares, i.e. when a block of shares is first offered to a wide range of investors (in some sources, an IPO is the placement of shares on a new exchange market for the issuer). As for the SPO, it involves the placement of shares that were already in circulation up to that moment. For example, when one of the owners decides to sell the stake in the company that he owns. Often, an SPO is the next stage after an IPO: initially, a certain block of shares is placed through an IPO, and then, after some time, some of the investors who bought shares in the IPO can sell their blocks through an SPO. It is also possible that a company conducts a “mixed” placement under the “IPO+SPO” scheme, when simultaneously a new issue of shares is offered for placement plus an additional sale of the portion of shares available to shareholders. In this case, the SPO is part of the IPO and is included in its structure. Another feature that distinguishes these two methods of placement is the different direction of the cash flows received from the placement. In the case of an IPO, these funds remain with the company, but in an SPO, only the owner of the securities changes, and accordingly, all settlements occur between the participants in this transaction - shareholders and investors. An example is the secondary offering of shares of Wimm-Bill-Dann, which was held on the Russian stock market in November 2006. Then several shareholders of the company, having sold 10% of shares (4.4 million shares), collectively gained $165 million, which they used to develop their own projects.

The advantages of SPO include the following:

Increasing the liquidity of securities and transparency of the company itself. When placing shares, the ownership structure partially changes, and the arrival of new investors can affect more transparent business conduct.

Increasing the company's capitalization. A secondary public offering is essentially a good tool for the market to revalue a company's securities.

At the same time, it is not entirely correct to consider that an IPO is a more complex process than a secondary placement of securities. Both of these processes require careful analysis and reasonable consideration on the part of shareholders. It should be noted that since a company whose securities have not previously been traded on the stock exchange may enter an IPO, its attractive image in the eyes of investors will be formed practically from scratch. In the case of an SPO, when the company already has some kind of credit history on the stock market, investors have a much greater opportunity for a more in-depth analysis of its activities.

The SPO process is generally similar to the IPO process. It can be divided into three main stages.

1 . Determination of third-party consulting companies that will assist the Issuing Company in organizing the SPO and directly during the placement itself.

This financial advisor or underwriter(which can be a company licensed to engage in brokerage and dealer activities, as well as an investment bank). The functions of a financial consultant are more extensive compared to other participants in the SPO process, since it is he who develops the placement scheme, draws up an order book, interacts with potential investors, etc.

Auditing Company, responsible for auditing the issuer’s financial statements and monitoring compliance with requirements in accordance with international standards.

Legal advisor, whose functions include legal support for the SPO process.

PR agency, providing coverage of the entire process in the media, as well as providing services to create an attractive image of the company in the eyes of investors. The functions of a PR agency and legal consultant are often performed by a financial consultant, since this significantly minimizes the costs of conducting an SPO. However, it must be taken into account that such a decision may reduce the objectivity of the process. We should not forget that investment bank employees may not have proper qualifications in the field of PR, since this activity is not their main activity.

2. Organization and conduct of the preparatory stage.

At this stage, the issuer needs, with the help of hired consultants, to conduct a thorough analysis of its financial activities and business structure from a legal point of view (in particular, whether it is clear to investors and whether changes are required to increase its transparency), as well as assess the principles of corporate governance.

An important stage of secondary placement is information support, which should be provided by a PR agency. Correct coverage of the SPO process in the media affects its success, especially if the majority of potential investors are the so-called. private investors. Don’t forget about a well-executed road show, which also makes a significant contribution to the effectiveness of placement. When choosing an underwriter, the issuer needs to evaluate his experience in organizing the process of interaction with investors for similar issues, and whether he has “established” connections with investors. After all, when preparing a road-show, the underwriter must clearly represent the circle of investors that is most optimal for the company.

The result of the preparatory stage should be complete transparency of the company’s activities, increasing its investment attractiveness, and possibly improving financial performance when optimizing business processes.

3. Conducting a stock placement and SPO analysis.

The third stage is the actual secondary placement of shares, during which the underwriter closes the book of applications and determines those that will be satisfied. Here you need to pay special attention to the circle of new investors that is formed as a result of the placement (whether they will be institutional investors or individuals), since the liquidity of the securities being placed depends on this.

The listed stages represent a general layout. On different exchange platforms, this process has its own characteristics, for example, in terms of requirements for issuers and securities, organization of the process of selling shares, etc. The platform for an SPO can be any international exchange (LSE, NYSE, NASDAQ, etc.), it all depends on the which one the issuer will choose. Thus, in March 2007, the Kazakh company Eurasia Gold announced plans to conduct an SPO on the London Stock Exchange. However, later its shareholders decided to postpone the placement until the fall of this year. As a result, the company plans to raise up to $150 million through an SPO.

Thus, an SPO, as a way to raise funds, certainly has its advantages, but requires careful analysis on the part of shareholders and top management, since it is one of the most important stages of the company’s development. After all, an SPO can cause both an increase in the price of the company’s shares if it is successful, and, conversely, its decrease if the placement was carried out without an objective analysis.

Here are a few advantages of public companies whose shares are traded on an organized platform (exchange):

1) The ability to raise money on more favorable terms compared to private companies. Raised funds are needed both for organizing current operating activities and for implementing the strategic investment program of the enterprise.

Public companies have an advantage when rated by rating agencies, which will largely determine the cost of borrowing. Regularity of reports and audits increases transparency and trust in the company, and therefore reduces costs. In addition, the list of types of available funding is expanding.

2) Adequate assessment of the company's value. It is believed that after entering the market, the company acquires a fairer and maximum valuation. This is necessary to maximize proceeds from the further sale of the asset, if the owners deem it necessary. Also, an increase in the cost of capitalization helps to reduce collateral requirements for loans.

In addition, based on the dynamics of quotes, the co-owners of the enterprise can judge how efficiently the company operates, how well the management performs its functions, etc.

3) One of the unobvious reasons for a company to go public is an attempt to increase its image and brand awareness. Also, such a policy is part of corporate governance, when management is also a shareholder of the company and is interested in increasing the value of its own share, and therefore in increasing the efficiency, profitability and other performance indicators of the enterprise.

Thus, when a company first offers its shares on the open market (on an exchange) to all interested investors, it is said to be going public. IPO.

IPO (Initial Public Offering) - the procedure for the initial public offering of shares to an unlimited number of investors at organized auctions by the owners, founders of the company, as well as venture funds. Often the state acts as one of the owners.

If after the IPO the co-owners decide to additionally sell on the market the remaining package of shares they have or part of it, this will already be called SPO.

SPO (Secondary Public Offering) - a secondary public offering of shares, which are usually owned by the company's founders or venture capital funds, in some cases the government.

With this procedure, the number of securities in free circulation (free float) will increase. Typically this isn't a bad thing. The growth of shares in free float helps to increase liquidity and attracts the interest of institutional investors and large investment funds. This, in turn, will reduce volatility and minimize the risks of turbulent stock movements in the market. The total number of issued shares does not change during the SPO procedure.

It's a different matter when it comes to additional issue— issue by the issuer of additional shares to those already available. They can be sold either on the open market or offered by private subscription to a limited circle of investors, including the state. In the West, this procedure is often called FPO.

FPO (Follow-on Public Offering) - additional issue. The issue by the issuer of a block of additional shares for circulation on the market or in favor of certain investors. The share of the enterprise attributable to each shareholder is, in this case, eroded.

An additional issue is almost always bad for a shareholder, with the exception of some situations when the raised capital will be used to reduce debt, or for an attractive investment program. But this, as a rule, does not have a positive impact on stock prices due to the lack of guarantees that debt will not increase again. The investment program may also fail to realize its potential. An additional issue in the banking sector may be caused by the need to increase capital adequacy, which also often finds a positive response in the dynamics of share prices.

It is worth noting that in practice additional issue is often confused with SPO, thereby confusing fundamental differences in procedures. An SPO is essentially the legal right of an owner to sell the shares he or she owns. The shareholders' stake is not diluted.

While FPO (or additional issue) requires repeated underwriting and is subject to the control of regulators. The company's share per share is diluted. Often, “dishonest” issuers resort to additional issues.

BKS Express

Why do companies go public and could it be of interest to a private investor?

The Russian stock market began 2017 with SPO transactions of a number of public companies (TMK, PhosAgro, Severstal issues convertible bonds for $250 million), as well as the emergence of a new participant in the stock market - the Detsky Mir company entered into an IPO. Let's try to figure out what this means and whether it is possible to make money from it.

IPO (Initial Public Offering)- procedure for public offering of shares of a joint-stock company for an unlimited number of investors. The transition of a company from private to public provides a number of advantages, for example:

Raising money on more favorable terms than private companies. Public status not only opens up the company's access to a new source of financing - the market, but also makes it easier to obtain traditional credit resources
- Maximization and assessment of company value. When a company's shares are traded on a stock exchange, the company's value is assessed by the market in stock quotes. If a company operates efficiently, shows high growth rates in both production and financial indicators, is open and transparent, its shares are attractive to investors, which means they increase in price, which leads to an increase in the value of the company and an increase in the shares of each shareholder in absolute terms.
- Increased recognition and prestige. A high level of corporate governance in public companies increases its value and, as a result, increases the recognition and image of such a company. A public company is required by law to conduct regular audits, which means its financial activities are more transparent; companies often have an independent member of the board of directors, which gives foreign investors additional confidence in the company

In addition, there are a number of disadvantages:

The cost of an IPO. Before entering the stock exchange, the organizers of the placement (underwriters, bookrunners, co-managers of the exchange, etc.) carry out a huge amount of work, on which the success of the placement of shares depends, so this is a costly undertaking and it will not be possible to save money here without losing quality.
- Provision of information. Publicity means openness for the company; the company will have to disclose data on the shareholder structure, provide quarterly and annual reports, conduct audits, meet and communicate with minority shareholders

Preparing for an IPO often takes a year or more, and with careful planning and the involvement of qualified, experienced consultants, the positive factors can easily overshadow the costs and inconveniences associated with IPO costs and disclosures.

For investors, it cannot be said unequivocally that participation in an IPO is a good way to make money. There are both positive examples (Moscow Exchange, ALROSA, Magnit) and negative ones (VTB, TMK, FESCO). When making a decision, the investor must analyze the quality of the issuer, its credit metrics, the state of the industry, the state of the IPO market as a whole, the economic and political situation in the country, and other factors. It is not possible for an ordinary investor to do this, so there is a team of analysts (usually from the trade organizers) who conduct the analysis and present it to a wide range of potential investors.

The first IPO of an oil company in 10 years, Russneft, which took place in November 2016, has not yet brought fruit to investors, the share price for 2 months is approximately equal to the offering price (550 rubles) and so far we are quite cautious in our forecasts for this issuer . The IPO of Detsky Mir looks much more interesting, in which we recommended our clients to participate. The company is the largest retail chain of children's goods with a wide geography and high growth rates (revenue CAGR 2011-2015 137%, growth in the number of stores CAGR 2012-2016 25%). We recommend buying Detsky Mir shares with a target of 95-100 rubles by the end of 2017.

SPO (Secondary Public Offering)- public placement of shares that belong to existing shareholders. Thanks to this placement, the number of free-float shares increases, because the total number of shares does not change, and one of the shareholders sells his shares to an unlimited number of investors. Let's look at this from an investor's point of view and make the assumption that an SPO may be a trigger for an increase in stock prices. A secondary public offering increases the number of shares in free float, increases liquidity and increases interest from foreign investors.

For example, on November 15, 2016, InterRAO was included in the calculation of the MSCI Russia index (a stock index of the Russian market, part of the MSCI Emerging Markets group of emerging market indices), and Megafon was excluded from it. As a result, over the next five trading days, shares of the first company rose by 7.5%, while shares of the second fell by 6.5%. But it is more important for an investor to predict these events rather than buy shares “after the fact,” when most of the stock movement has already been played out and is included in market expectations. One of the tools is precisely the conduct of an SPO and its assessment in the form of a possible further impact on changes in the number of shares in free float.

A relevant idea from the point of view of SPO, an increase in shares in free float, subsequent interest from foreign investors (focusing on global indices, for example MSCI) and, as a result, an increase in quotations, may be shares of NLMK. The main shareholder of the company, Vladimir Lisin, announced in December the sale of 1.5% of shares, this will increase the free-float to 16%, which gives the company a chance of being included in the above-mentioned index, in accordance with their calculation methodology. So in 2017, the MSCI index will be revised on February 9, May 15, August 10 and November 13, usually semi-annual revisions (May and November) are more dramatic, so we recommend buying NLMK shares for the period until May 15, 2017 under the idea of ​​a return securities to the MSCI Russia index after 4 years.

A repeated public offering of shares on the stock market is, according to international terminology, an SPO (secondary public offering). In fact, these securities belong to the shareholders and have previously been placed at public auction. Holders of “secondary” shares are mainly large holdings, financial structures or persons representing their interests.

The secondary sale of shares does not provide for an increase in the company's main assets. This event is carried out in order to declare the issuer public, that is, to demonstrate the freely traded shares of this company at auction.

SPO shares

The repeated offering of securities, that is, the SPO of shares, is aimed at increasing the number of shareholders of the issuer, which directly affects the liquidity of its securities.

Secondary sales of securities are carried out by investor banks. The price for a block of shares is agreed upon in advance and purchased from a wholesaler. Then they offer this package at publicly offered prices. The difference between the wholesale and public prices, called the spread, is the profit of the investing bank. Such a business is beneficial not only to sellers, but also to buyers, since additional fees from the transaction, such as commissions, are borne by the sellers.

If you follow news from the world of finance, business and technology, you have probably heard similar formulations: “The company held an IPO”, “The concern entered into an IPO”, “The company’s shares passed the IPO procedure” and the like. Probably, those who have already encountered such information have a rough idea that we are talking about putting the company's shares up for public trading, but do not think about the details that this process entails. Other people may simply skip such information without bothering too much about it.

For those who would like to know more about what these mysterious three letters are, closely associated with large companies, successful businesses and world exchanges, we are writing this article. In it we will try to provide as much information as possible on this topic.

What is an IPO?

So, let's start by deciphering those very “three letters”. IPO in English means the following phrase: “initial public offering,” which translates as “initial public offering.” In simple terms, the procedure consists of bringing shares of a particular company to open trading on the stock exchange. Sounds simple, doesn't it? However, such a process entails a number of consequences, which we will discuss in this article. After all, to answer the question “What is an IPO?” is impossible in a few sentences: this process may turn out to be an order of magnitude more complicated than it seems.

Preparation for an IPO

So, in order to better understand the essence of the operation that this article is devoted to, let’s start with a detailed description of the procedure for preparing company shares for their listing on the stock exchange.

In fact, it is quite difficult to legally bring a company to an IPO. It is necessary to fully disclose the financial indicators of a legal entity, show all the processes that take place in the company, and provide public access to information related to financial statements. Not only does it take a lot of time and effort to prepare all this data, the disclosure of such information can also harm some types of businesses, since it will quickly become the property of competitors. That's why not everyone is in a hurry to launch their company for an IPO.

Also, when asked by the owner of the company “What is an IPO?” should be answered: openness and responsibility. Regarding the first, we have already clarified that all information about the activities of the business will be available. You should also add here information about the owner and founder of the business, and about the publicity of his person. In addition, an IPO is a liability. After all, now the company, whose shareholders could only include trusted people, is becoming public - and anyone can purchase its shares. Can you imagine the pressure a business owner feels when taking a company public?

Who is preparing the IPO?

You should also pay attention to who exactly is preparing the company for public listing on the stock exchange. It would seem, why can’t the owner do this? But not everything is so simple. No, theoretically, of course, he could do this too, but in practice this would never happen. The preparation of a company for such an important event as an IPO is entrusted to specialists who deal with this on a professional basis and have some experience in this matter. Most often, such activities are carried out by the largest banks, for example, Morgan Stanley. It is quite possible for large audit companies to do the preparation; this practice also exists.

Preparations for an IPO are most often done by banks due to, firstly, extensive experience in collecting financial statements, working with large amounts of data and organizing them; secondly, due to the possible repurchase by such a bank of part of the shares of the company that is being auctioned. In this case, it is profitable for the bank to prepare for the reason that it can buy the package at a price lower than it will cost in the future. Of course, the details of such a transaction (including the volume of shares that can be purchased) are discussed in the contract.

Where do IPOs take place?

So, we discussed what an IPO is and why it is carried out. Now let's look at where exactly companies exhibit and how they look for investors. It should be noted that there are only a few largest exchanges in the world - these are New York, London, Moscow, Warsaw and others. The first serves as a platform for American technology companies to enter (Twitter, for example, was put up for auction in New York). Now you understand what an IPO is, Twitter cannot help but know it too. You see, as you read, you begin to understand this topic more and more!

The second exchange, London, is also a platform for large exits, including IPOs of Russian companies. For example, Rosneft, Lenta, VTB, Megafon were presented in the capital of England.

The Moscow Exchange, logically, should serve as a launch platform for domestic companies, and there actually are such examples. But the practice, alas, is not as widespread as we would like, for the reason that in the Russian Federation there is not such a volume of capital as is present in the West. Even Russian companies prefer to keep money in Western banks, so it is more logical to look for investors “there” than “here”.

Advantages of the IPO procedure

We have looked at what a company’s IPO is and where it is held. Now we will try to briefly outline the main advantages that going public gives a business.

Firstly, it is prestige. Yes, not even additional funds, but prestige! One of the main “advantages” for which companies agree to enter the open market of public trading in securities is the IPO and SPO procedure (you ask: “What is this?” IPO and SPO are similar phenomena, only SPO is secondary raising funds through shares that are already owned by investors, but it does not affect the total amount of capital of the company).