WISYNCO IPO – Who Really Benefits?
– Caribbean Value Investor
Wisynco Group Limited – Largest IPO in Jamaican History
The recent issue of shares by Wisynco Group Limited was oversubsribed by as much as 3 times, making it the biggest IPO in Jamaica’s history. NCB Capital Markets last week reported that the offer saw more than 8000 applications totaling nearly 18 Billion Jamaican dollars. On December 1, 2017, The Jamaica Gleaner reported that the “initial public offering is structured to raise $6.1 billion in total as financing for expansion of its [Wisynco Group] manufacturing capacity and acquisitions.” however Caribbean Value Investor suggests that the financial statements for WISYNCO following the IPO will only reflect ~1.1 billion as Proceeds from the sale of shares in IPO. A similar situation for one company sparked concern for CVI in 2016. In this article we hope to offer the rationale for our concern as it relates to the structure of the Wisynco IPO.
Caribbean Value Investor is of the belief that the IPO will be more to the benefit of the Selling Shareholders than to the company. Our basis for this belief lies in the fact that a similar structure has been used in the issue of shares for another company. We were equally skeptical of the company at that time. As you will see, our skepticism has been retroactively justified.
Cause for Concern?
In March 2016, KEY Insurance Company Limited invited investors to purchase shares in the company. The Company offered 92, 115, 215 shares at $2.27 per share. However, and this is the “key”, of the 92,115,215 shares being offered, 52, 689, 903 were new shares (company shares) whereas 39,425,312 shares were shares being sold “on behalf of the Selling Shareholders”. The IPO was oversubscribed with all shares being taken up. However, the next quarterly statement, and the Audited Financial Statement (2016) reflected only $107, 955, 000 as “Net Proceeds From The Issue of Shares” Now if all proceeds from the shares sold was attributable to the company, the company would have recorded $209,101,538.05 (92,115,215 shares multiplied by $2.27 per share) minus the amount for fees associated with the issue. This was not the case and in all honesty, it is not surprising since the “company” really only sold 52,689,903 shares. The sale of these shares would have grossed $119,606,079.81. Further to this, the fees associated with the issue ($11,611,078.81) were paid from the gross sum just quoted justifying the $107,955,000 reported in the financials.
KEY Insurance – IPO Exit Strategy
In the structure put forward in KEY’s prospectus, the company sold 39,425,312 shares on behalf of the Selling Shareholders. The $89,495,458.24 earned from the sale of those shares was therefore a cash asset for the Selling Shareholders themselves and NOT the company. I will go as far to say the IPO in the case of KEY Insurance was an exit strategy for the Directors given that they later resigned at an additional cost of $36,000,000 to the company (severance packages). They retain majority shareholdings but without the portfolios. The move by management was sold to investors as a method of restructuring necessary for the company to be in a position to deliver better value to shareholders. We will see.
Wisynco Group IPO Structure too similar
In the case of WISYNCO, the disparity is vastly more significant. Wisynco (the company) offered only 149,414,576 shares whereas 635,085,424 shares were being sold on behalf of the “Selling Shareholders”. With the offer being oversubscribed, we can be certain that the company will record approximately $1,175,892,719.12 as Proceeds from the sale of shares in IPO in the first annual report. Our expectations ought to be lower in actuality since the costs associated with the sale of the shares will be deducted this amount.
On the other hand, the “Selling Shareholders” will amass a whopping $4,998,122,298.75. Note that the $4,998,122,298.75 raised by the Selling Shareholders will be their money and they will be not be obligated to put back any of it into the company. In fact, this is a very similar situation as occurs with Investors who sell their shares after an IPO or in regular trading. The company does not benefit directly from the profits reaped from those transactions.
Caribbean Value Investor fears that the Selling Shareholders used the current level of optimism in the market more to their benefit than to that of the company, much like the Selling Shareholders in the case of KEY Insurance. Note also, our totals stated are a bit off (though not by much) since we only used the ordinary share price of $7.87 in our calculations. The precise numbers can be obtained by applying the appropriate discounts to the units being offered as per page 3 of the prospectus. We do believe you get the picture nonetheless.
An Exit… but for Who?
Page 64 of the prospectus breaks down the ownership of the Wisynco Group (the company) detailing that Andrew Mahfood, Joseph Mahfood, and William Mahfood, have “beneficial holdings” in Wisynco Group Caribbean, the company which owns 93.93% of the Wisynco Group. Caribbean Value Investor cannot be certain that the Mahfoods are amoung the “Selling Shareholders” given that Wisynco Group Caribbean is a private company incorporated in Barbados as a Barbados International Business Company. Moreover, the ultimate parent company of Wisynco Group Limited is Evesam Investments Holdings Limited, a company incorporated in, and resident in the Cayman Islands.What we can say with certainty is that the Company will not be getting 6 billion dollars (Jamaican) from this IPO as reported by popular media.
Wisynco has so much potential, Why Exit?
This would mean that similarly to the KEY Insurance case, this IPO was used mainly as an exit strategy for the Selling Shareholders, which breeds the question, why make such a sizable exit if the company is doing so well and has so much potential for growth and expansion? It should also be noted that after the IPO Wisynco Group Caribbean will still retain more than 77.01% of the Wisynco Group (the now public entity) under its ownership.
One may ask, who does the IPO really serve? As shareholders, we will be watching rather closely to see what action the key players in the company make after the IPO. Caribbean Value Investor will be monitoring the use of the funds raised in the IPO to assess how management will use just over $1,000,000,000 JMD to execute on all the plans laid out in the Prospectus.