Listing lessons from My Food Bag and Rocket Lab
The process of listing on a stock exchange is amajor endeavour, costing the company up to 5 per cent of what it’s worth. In My Food Bag’s case, listing fees were over $16 million.
Why so much? As it’s an offer to the public, the company must ensure the accounts, financial projections and representations are correct. And it needs to be sold to the public. So the process is packed with bankers, stockbrokers, lawyers and accountants, and none of them charge like charity workers.
When I look at a company listing, I don’t pay too much attention to the numbers these professionals produce, or to their research reports. That may sound strange for a Kiwisaver manager, but in reality the listing price has to be within an acceptable range to attract investors. And the research reports are written by stockbrokers keen to get you to buy. They cannot be misleading, like most advertising. But it’s best to read them as advertising anyway.
When deciding to invest in a company being listed on the exchange, I ask three very basic questions.–
The first, and most important, is the motivation for listing. If the owners are selling a small stake, and using the proceeds to expand the business, it’s a very good sign. By staying a major shareholder, they are eating their own cooking, and you are enjoying the same meal.
However, if the purpose of the listing is so owners can sell down most of their stake, that’s a big warning sign. Why would you want to buy something the owners are keen to sell?
In this case, My Food Bag failed the test. The listing was primarily so the founders and private equity investors could sell down their investment, to the tune of $282m. Only $54m (16 per cent) of new shares were issued. The CEO and CFO sold 75 per cent of their shares too, under an interest-free loan and option structure described in the offering document. It appears to have been a windfall for them, at shareholders’ expense.
In contrast, existing Rocket Lab shareholders will keep 82 per cent of their shares once it lists on the Nasdaq, and the proceeds of listing will give it $750m to increase its lifting capacity.
The second question is how stable the board is. If a company changes a lot of directors in the year before the listing, it could be that they are dressing up their board to look credible. This usually involves the appointment of some big-name directors with good reputations. But the problem is, these aren’t the people who grew the company, and they often don’t have the specialist skills required.
My Food Bag failed this test too, with only one director remaining for their IPO. Six directors departed, and four new ones arrived, one month before the IPO. As good as the new directors may be, they aren’t the team that got the company this far.
By contrast, Rocket Lab seems to have retained a stable governance structure. Why change a winning formula just because you’re listing?
The third question is how well equivalent companies performed overseas. It’s rare for a company to do well on the stock exchange here without overseas investors buying too, and they will look at the performance of equivalent companies around the world.
In the case of My Food Bag, its key equivalents had had mixed performances running up to its IPO. Blue Apron, ameal delivery service listed in America with much fanfare in 2017, traded at $140 on day one, and is now less than $9. Hello Fresh, which competes with my Food Bag, has risen from €10 in 2017 to €63 now.
By contrast, Rocket Lab’s comparable is Elon Musk’s Space X. Enough said.
Like Xero and many other Kiwi companies, Rocket Lab have very obviously bypassed the NZX. After decades of poor governance and misaligned priorities, the NZX is desperate for successful listings. In a bull market, seven of their last eight IPOS have lost investors money, with My Food Bag their most visible fail.
This asks questions of our stock exchange. Are they relaxing prudent standards, and thus encouraging substandard listings? Will the NZX become the place companies list when they can’t list anywhere credible?
If so, this would be a tragedy, just as millions of Kiwis have growing Kiwisaver savings, and are embracing direct share ownership via local companies like Sharesies and Hatch. They should be able to invest in a growing pool of quality, locally listed companies, whose prices rise and encourage more investment. The trend has been the opposite.
I’ma customer of My Food Bag, and a big fan of the product. And a poor start doesn’t mean a bad finish. Companies can list poorly and become huge successes, as Mainfreight did in New Zealand.
But to my mind, when it came to their stock exchange listing, the My Food Bag owners weren’t eating their own cooking, and the stock exchange wasn’t ensuring the meal was a good one. The new directors were untried ingredients too, and the share price performance of the sector has left a very average taste in investors’mouths.
So, so far, My Food Bag has failed to get the good-investing seal of approval. By contrast, Rocket Lab owners stayed in, stayed there, and are shooting for the moon.
Sam Stubbs is chief executive of the Simplicity Kiwisaver scheme
In a bull market, seven of the last eight IPOS on the NZX have lost investors money.