NZAX: Lose the listing fear

Brynn Gilbertson, Partner | September 2003

Lose the listing fear - that was the clear message from The New Zealand Stock Exchange (NZX) on its plans for the New Zealand Alternative Market (NZAX) at its information seminars held around the country this winter.

Bell Gully attended and has prepared the following summary of the NZX's Auckland presentation.

Why does New Zealand need the NZAX?

NZX Chief Executive Mark Weldon described his initial impressions of the market landscape when he arrived at the exchange last year - and two anomalies stood out.

With only 4 million people, New Zealand had three capital markets - the main board, the small-cap New Capital Market and the unlisted market.

Secondly, the company sector was oddly inverted, with a very small middle market supporting a disproportionately large number of top-end companies.

Some of this structural problem he attributes to lending practices in New Zealand coupled with the country's own intrinsic characteristics - it's well educated, safe, English speaking, politically stable and boasts a high degree of ingenuity.

As a result, he believes, the country generates great ideas - which are increasingly attractive to offshore investors.

In the exchange's eyes, New Zealand has become the world's ingenuity incubator. While this is an attractive global solution, Weldon feels it does little for New Zealand, as the country doesn't retain the wealth generated by our ingenuity.

After research and analysis of other market structures around the world, the NZAX was designed to sit halfway between the main board and the unlisted market.

It also involves a wider range of market sponsors - accountants and lawyers for instance - who will benefit from a long-term relationship with a successful growing company.

In measuring the success of the market, Weldon says the NZX is looking at a five-year timeframe. At the of this period, he hopes that more companies will be worth more - and more of that value will be retained in New Zealand.

Weldon believes that two types of companies are key targets for the market:

• stable operators: stable companies with high company values and incremental growth prospects; and
  
  
• high aspirers: high-potential companies that need access to capital to fund growth.

What will NZAX deliver?

NZX Market Development Manager Geoff Brown believes the NZAX "will deliver New Zealand's future".

In particular, he believes that the NZAX will deliver key benefits to listing companies:

• Low-cost access to capital
  
  
• Greater liquidity
  
  
• Increased profile
  
  
• Positive impact on culture
  
  
• More financing options

Low-cost access to capital

Global research shows that the cost of raising capital ranges between 7-12%.

Brown says that New Zealand is internationally competitive in this area but experience shows that it can be lower - during its recent float, the NZX raised capital at a total cost of 3.3%.

To reduce listing preparation costs, the exchange is proposing one single NZAX listing document.

It is also planning that prospective financial information will not be required, as financial forecasts can account for up to 40% of IPO costs and the exchange is unsure of the benefits of such information for companies of this size.

Greater liquidity

NZAX operations have been designed to deliver enhanced liquidity. Trading hours - 11am-4pm - will avoid the peak hours of the main board, while the tick size (the step in which share prices go up or down) has been increased to encourage trading.

Information is also vital to encourage trading and therefore liquidity. Each NZAX company will contribute information to a company webpage and will be encouraged to display their share price online.

Research will be encouraged in these stocks and a solid marketing campaign will promote the first listings.

As an example, Brown described the experience of property company Urbus, which recently listed on the NZX main board after a number of years on the unlisted market. Since listing, its daily trading volumes have risen from 10,000 to 31,000 and its shareholder base has grown.

Increased profile

As well as increasing profile with the financial community, a listing will be a point of difference over similar sized or types of companies.

It can enhance a company's credibility, especially when tackling overseas markets or seeking out partnerships.

Positive impact on culture

Listing can also have a positive impact on company culture. It builds an ownership mentality among employees and can increase the liquidity of their shareholdings. Shares can also be offered as a motivational incentive or reward.

Another added benefit is the internal discipline that a listing can bring to a company's processes and management.

More financing options

Listing provides a new range of strategic financing options, avoiding reliance solely on bank financing.

This gives companies a greater ability to raise money to invest in and expand their businesses, either through organic growth, acquisition or merger.

Conclusion

The exchange believes that many NZ companies are ready to list now.

At the seminars, speakers were keen to emphasise that listing did not increase workload. In terms of the corporate governance requirements created by a listing, speakers said that, "if you're already doing what you should be doing, then those requirements are not onerous".

And if you're not doing what you should be doing, they added, should you be in business at all?

Advice and information

Bell Gully has been involved in developing the NZAX Listing Rules and is currently advising on some of the new market's first listings.

Combined with our expertise in capital raisings, main board listings and exchange compliance procedures, we are ideally placed to advise you on all aspects of an NZAX listing.

For further information, please contact Brynn Gilbertson, David Flacks or Clive Taylor in Auckland, or Andrew Brown or Mark Freeman in Wellington.

Disclaimer: Information on the NZAX structure and rules is subject to change and entirely dependent
on the outcome of the NZAX Listing Rule approval process and the Securities Act 1978 Exemption Application.