An independent adviser’s report gives the thumbs up to a proposed backdoor listing by property developer brothers NBR Rich Listers John and Michael Chow.
The report says there are benefits to the reverse takeover despite existing shareholders of the shell company RIS Group being heavily diluted and debt increasing substantially.
NZAX-listed RIS Group [NZAX: RIS] has agreed to accept a conditional offer from trusts associated with the Chows. It will buy the shares in the brother’s 135-room Otahuhu-based16 Park Avenue Residence complex, for about $7.5 million.
The purchase price will be met through RIS issuing new shares at 39c each to the Chows, who will own more than 90% of the company after the reverse takeover.
The report from Campbell MacPherson says the proposed transaction has benefits for RIS shareholders because the shell company has limited alternative courses of action and its directors don’t consider its current operating and financial position to be sustainable.
It has minimal net tangible assets, no material revenue, and its shares are traded infrequently.
RIS Group has been in existence as a penny dreadful for a decade. In 2012 the company sold its Retail Information Systems, a payment systems software firm, to USG Tech Solutions for $US1 million, with $US150,000 in cash and the remainder in USG shares, which are listed on the Bombay stock exchange, according to its website.
The shares amount to about 10% of USG but RIS said at the release of its first-half results in March last year that delays in setting up an account in India to trade the shares had left it with “extremely tight” cashflow. Its first-half net operating loss widened to $229,000 from a year-earlier loss of $39,000.
The company had managed to raise $100,000 through a convertible note agreement last November, allowing it to settle some outstanding liabilities.
Under the deal, RIS will enter a five-year contract for services with Chow Group Management worth $150,000 a year or 1% of the value of the property portfolio, which Campbell MacPherson says is on attractive terms.
RIS shares were valued by the independent adviser pre-acquisition in a range of 39-49c, including $300,000 ascribed to the worth of its NZAX listing.
Its directors say the existing value was unlikely to be sustained for long in the absence of any other deal.
Mr MacPherson says negatives of the deal include existing RIS shareholders having their shares diluted by a factor of about 19.5 times, meaning a 10% shareholder will shrink to just 0.51% after the deal.
RIS will substantially increase core debt from $21,000 to at least $7.3 million, half the value of the two Otahuhu buildings it will own.
After the deal, the Chow brothers, along with Clint Webber and Brent King, will be appointed to the board.
The disclosure document says RIS will be reliant on the Chow brothers’ property and business experience with commercial property and the company intends buying further properties to refurbish and add to the company’s portfolio.
An NZX listing is likely to be sought in 2018 though the company will need to grow substantially to meet current listing requirements.
Financial projections include the property company posting a loss of $172,000 in the 2016 financial year, rising to a $1.29 million profit the following year.
The projections are reliant on the 16 Park Avenue Residence complex business achieving an 87% occupancy rate and an average room rate of $45 per night, though the disclosure document says it is yet to achieve that since beginning operations in July last year.
The medium-term accommodation property wasn’t profitable in the 2015 March financial year but hadn’t started trading at that stage while refurbishment of the former IRD building and a neighbouring property was still under way. John Chow says it is now running at more than 80% occupancy.
“The elements of our property success have been quite simple: buy right, manage well and hold long,” he says. “We are holders, not sellers, and we have plans for further expansion into the accommodation and hotel markets in New Zealand.”
RIS chairman Roger Bennett said the directors are recommending shareholders vote in favour of the transaction as it will move RIS from being a shell to immediately becoming an active trading company.
A shareholders’ vote will be held on February 24 in Auckland.