Joining one of London’s public markets is a natural step in the development of many successful privately-owned companies in Africa. An IPO maximises liquidity for shareholders and provides the company with greater access to investment capital in order to continue on its growth trajectory and to take advantage of opportunities on the continent. It can also provide a suitable and realisable exit to early investors in the company, such as the private equity investors, family offices and development finance institutions.
A public quotation on a London market will also enhance a company’s profile, and potentially boost its credibility amongst investors and business partners. London is one of the world's most outward looking financial centres, with the London Stock Exchange home to more than 700 international companies from over 70 different countries, including many African nations.
Many of the world’s leading financial institutions have their base in London. It is home to sophisticated professional investors who can provide companies from around the world with cost-effective access to a deep pool of investment capital.
Historically, there has been a strong affinity by the London-based investment community for capital raising for African companies and projects, particularly in the natural resources, financial services, infrastructure and telecommunications sectors.
Many of the leading South African and Nigerian banks, insurance companies and corporate groups are listed or dual-listed in London (there is a “fast-track” procedure for listing Johannesburg Stock Exchange listed companies)) as well as many African targeted investment groups. Atlas-Mara Co-Nvest raised c.US$325 million on listing (and has since raised a further US$300 million through a placement as well as new debt) for financial services in Africa, a recent success story. New targets for London listings are being actively pursued.
Of course, in considering the potential attractions of a listing, one should not lose sight of the challenges involved in getting to market. In this article we set out some practical considerations for companies in Africa who are preparing for – or contemplating – an IPO in London.
Adopting the corporate governance standards expected of listed companies can involve a difficult shift in culture for many private companies in Africa and their management. In particular, the emphasis on openness and engagement with the market, and ensuring that management power is not over centralised, can seem perverse for companies that value confidentiality and decisive management. However, in the wake of the perceived failures of corporate governance in certain emerging markets companies, in particular in Africa (the Nigerian oil explorer Afren plc, being a well-known example) good corporate governance standards will be essential to ensure a successful IPO. Enhanced scrutiny by investors of these areas is to be expected for the foreseeable future.
A number of practical steps are likely to be required to ensure corporate governance compliance. If not already in place, board committees will need to be constituted – audit, remuneration and nominations – and given appropriate powers. The constitution of the company may need to be changed to ensure consistency with corporate governance standards and in any event is likely to need updating to ensure suitability for a listed company.
Anti-bribery compliance is a key aspect of good corporate governance and is an area where management have a personal interest in ensuring best practice is followed, given the increasing zeal with which many law enforcement bodies are pursuing wrongdoers.
The first question to ask is whether existing management is appropriate for a LSE-listed company, including consideration of their skill sets, profile and the balance of power on the board. The market will want to see sufficient non-executives on the board and the roles of chairman and chief executive split (if they are not already). The process of ensuring the suitability of the management team is likely to involve due diligence on the background of each director. It should be borne in mind that any required changes to management may delay listing, to allow for a period of stability.
Management and other key personnel should be issued with appropriate employment contracts to ensure that the terms of their legal relationship with the company is clear and can, where necessary, be properly described in the prospectus. Management incentivisation arrangements are very common for LSE-listed companies but need to be carefully crafted to balance the rewards for management with demanding performance targets that satisfy investors.
The company’s existing shareholders will need to decide what they want to achieve from a London listing. Some may wish to sell some or all of their stake – however, sales may be constrained by commercial or regulatory considerations and a “lock-in” agreement required. Such an agreement imposes limitations on the timing of share sales and how many may be sold and are typically required to ensure stability in the market for the company's shares.
Shareholders who remain committed to the company (in whole or part) will wish to assess how any proposed share issues and share sales will affect voting control over the company.
A great deal of thought and planning can be involved in reorganising a company in preparation for a listing. The reorganisation may go as far as entirely re-domiciling the company to a jurisdiction more appropriate for the chosen market or which is more attractive to investors. It may also be necessary to “spin off” assets which will not form part of the listed group, thus adding an additional M&A dimension to the listing process.
Other reorganisation steps can be more administrative in nature, such as the formalisation of existing arrangements with third parties or related parties, re-registration as a public company and the putting in place of a capital structure appropriate for a listed company.
For complex groups of companies, “tidying up” the group structure should be considered for the purposes of efficiency and ensuring that no dividend blocks exist.
A comprehensive legal, financial and business due diligence exercise needs to be undertaken in preparation for a London listing. This is not an exercise that the company can simply hand over to its advisers to undertake and then review the results some months later on completion – collating the information and documentation required for the exercise can represent a major undertaking for the company’s employees and will likely be followed by numerous follow up questions. Not all managers will be used to the degree of scrutiny involved in the diligence process.
The principal purpose of the due diligence exercise is to identify any issues of concern or risk that could jeopardise the listing or affect the marketing of the offer – for example, litigation, relating party arrangements, reliance on third parties. The exercise will also be useful in identifying issues for disclosure in the prospectus, including risk factors.
One of the key advantages of obtaining a listing is the opportunity it presents – at the time of IPO and subsequently – to raise money in exchange for shares in the company. However, for most listed companies, there remains a role for debt funding. The preparations for a listing should include reviewing the company’s bank and other financing arrangements to determine whether they remain suitable in the new listed era. Moreover, many facilities provide for repayment when the borrower undergoes a major change, such as a listing.
An IPO is thus frequently accompanied by a refinancing of the company’s borrowing.
Historical trading and accounts
The company’s trading record and prospects will be a key factor in determining the company’s saleability to the market, affecting the share price and, potentially, whether an IPO is feasible at all. Assuming the company’s financial performance supports a listing, getting that financial information into a form suitable for presentation in the prospectus can be a major undertaking.
This process is particularly significant where the company's accounts have been prepared in accordance with financial reporting standards that differ from those required by the exchange – in this case, the accounts will need to be restated in line with the required standards. It may also be necessary to prepare pro-forma accounts where the company has undergone major change – for example, where significant acquisitions or disposals mean that the historical accounts effectively relate to a different business to that currently carried on.
Finally, if the audit for the company’s last financial year has not yet been completed, this should be finalised as a priority.
The company should consider, alongside its advisers, whether any government approvals are required to secure a listing. If the business of the company is dependent on continued government authorisations or permits, then these should be reviewed in detail to ensure that everything required is in place and will remain in force – change of control provisions should be carefully checked. Clearly, investors will factor in exposure to political risks when considering whether to invest and at what price.
Securities to be offered
The optimal capital structure for the company is a matter for detailed consideration with the banks advising on the listing. A number of factors will influence the choices made, including the market’s appetite for potential alternatives to ordinary shares (such as preference shares), investors’ views regarding the desirability of holding shares directly in an emerging market company (global depository receipts will often be preferred, as these may be better understood and perceived as less risky than shares) and legal and regulatory requirements (which foreign shares may not be able to satisfy).
Preparation of preliminary documents
The key documents required at the planning stage of an IPO will include the following:
- Timetable for the listing. The listing process will stretch over a number of months.
- List of documents required for the listing. Preparation of a list should pull into focus the extent of the task ahead.
- Memorandum on directors’ responsibilities. The directors of the company should follow the guidance contained in the memorandum to avoid breaches of law or regulation in connection with the listing process.
- Publicity guidelines. There are strict controls on what can be said, and when, in connection with a listing and these guidelines will assist with compliance.
- Directors’ IPO questionnaire. This will assist in determining whether existing management is appropriate for a listed company and in checking the suitability of any new candidates.
- Skeleton for the prospectus. The prospectus is, of course, the central document in a listing and the preparation of a skeleton, for various parties to input more detailed information, is the first step in its preparation.
- Verification policy. The contents of the prospectus will require extensive checking (or verification) for accuracy. There are various approaches to verification and the policy will set out the agreed method.
- Warranty scope. Selling shareholders (if any) and directors may be required to give warranties to the underwriting bank/ placing agent in connection with the listing. The scope will set out an agreed position on the range of warranties and any applicable limitations on claims.
The amount of work and degree of scrutiny involved in an IPO is considerable. Selecting the right advisers to guide the company through the process will lessen the burden and add to the certainty of achieving the ultimate aim - a public quotation on a London market.
Our Equity Capital Markets team successfully combines a deep understanding of the relevant rules and regulations with in-depth market knowledge acquired over many years of working at the cutting edge of the markets in London, Europe and the Middle East and now, following our combination with King & Wood Mallesons, brings together experience of the key markets in China, Hong Kong, Australia and the rest of Asia.
Members of our team are actively involved in shaping the constantly changing regulatory environment, which enables us to anticipate issues before they become problems. Much of our capital markets work involves multiple jurisdictions, requiring us to co-ordinate advice from both overseas and domestic specialists in order to deliver a bespoke solution that works on all levels.
Underlying all this is our approach to advice: understanding the risk and focusing on the priority, being achieving the client’s commercial goal.