Should you Invest in “Backdoor Listing” of Stocks?



What is “Backdoor Listing” of stocks in the Philippine Stock Exchange (PSE)?

You’re probably not aware of it, but there are three (3) common ways a company can list its stocks and begin trading in the Philippine Stock Exchange (PSE).

The most basic method is through Initial Public Offering (IPO), wherein a company offers its shares to the public for the very first time after undergoing a rigorous application and vetting process conducted by the Securities and Exchange Commission (SEC) and the PSE.

An alternative method is to List by Way of Introduction, wherein a company no longer has to undergo the lengthy book building, underwriting, and public offer process as long as they meet any of the five (5) scenarios under the amended rules on Listing by Way of Introduction.

The third method, which is currently gaining prominence among companies interested to quickly list their stocks in the PSE, is through Backdoor Listing.

What is Backdoor Listing?

Backdoor listing, as defined by the PSE, occurs in this scenario:

“When a listed company acquires or merges or combines with an unlisted company, or when a listed company is acquired by, merged or combined with an unlisted company, and which acquisition, merger or combination results in a substantial change in the business, membership or the board of directors, or voting structure of the listed company.”

This means backdoor listing happens when a publicly traded company (that is, a company listed in the PSE) enters into a merger, acquisition, or combination transaction with an unlisted company that results in a significant overhaul of the listed company’s business, membership or board of directors or voting structure.

Simply put, backdoor listing in the Philippines occurs when an unlisted company acquires, merges with, or takes over a listed company whose shares are typically relatively dormant (that is, not actively traded in the PSE) with the unlisted company ending up as the surviving entity, enabling it to list its own shares in the stock exchange.

Reverse Takeover

Backdoor listing in other countries is called “reverse takeover” since the private company takes over a company listed in the stock exchange, acquiring majority or full control of it, causing a major overhaul of the listed company’s shareholder structure. The private company emerges as the surviving entity and its shares are now listed in the stock exchange bypassing the stringent IPO application process.

In some cases, however, an unlisted company in a group of companies may transfer its shares to a listed company that ultimately becomes the controlling entity or “parent company” of the group.

This is actually another form of backdoor listing which is why in 2013, the PSE added another official definition of backdoor listing:

“Any reorganization or transactions involving a group of companies where a listed company is a member of the group or when the transactions result in the listed company becoming the controlling shareholder of the members of the group of companies.”

The new parent company then grows its market capitalization and can now offer new shares to the public (using shares of the unlisted company) — again bypassing the stringent requirements of IPO issuance imposed by the PSE.

What is backdoor listing in the PSE?

Examples of Backdoor Listings in the Philippines

Here are cases of companies that recently used backdoor listing, enabling them to have their shares listed in the PSE without needing to undergo an IPO.

PH Resorts (PHR) and Udenna Backdoor Listing

(1) Dennis Uy’s Udenna Corp. listed via backdoor listing through Philippine H20 Ventures Corp. (H20) in 2018. H2O has since been renamed PH Resorts Group Holdings Inc. (PHR).

On December 19, 2017, H2O was notified by Jolliville Holdings Corporation (JOH), former parent company of H2O, that JOH together with its subsidiaries and related parties will be selling all their shareholder interests in H2O, representing 62.006% of the outstanding capital of H2O to Udenna Development Corporation (UDEVCO).

On February 28, 2018, JOH and UDEVCO entered into a Share Purchase Agreement (SPA) to acquire 150.8 million common shares of H2O for a total purchase price of P647.9 million or P4.30 per share.

On April 25, 2018, UDEVCO subsequently assigned all of its rights and obligations under the SPA to Udenna Corp. Subsequently, H2O became a holding company for the gaming and tourism-related businesses of Dennis Uy’s holding firm Udenna.

On June 25, 2018, Philippine H2O Ventures Corp. (H2O) was renamed PH Resorts Group Holdings, Inc. (PHR).

LT Group (LTG) and Tanduay Holdings Backdoor Listing

(2) Lucio Tan’s holding firm LT Group Inc. (LTG) listed via backdoor listing through Tanduay Holdings, Inc. in 2012.

On September 24, 2012, the company changed its corporate name from “Tanduay Holdings, Inc.” to “LT Group, Inc.” (LTG) which was approved by the Philippine SEC on September 28, 2012. The change allowed LTG to bring into its fold the beverages, tobacco, property development, and banking businesses of Lucio Tan and family.

Prior to the backdoor listing, Tanduay Holdings acquired 90% of Asia Brewery Inc., 83% of Fortune Tobacco, 98% of Eton Properties, 49.84% of Philippine Airline (PAL), and 50.97% of Air Philippines — completing the transfer of these companies to the Lucio Tan holding firm, Tanduay Holdings, which was eventually renamed LT Group Inc. (LTG)

Cosco Capital (Cosco) and Alcorn Backdoor Listing

(3) Lucio Co’s Cosco Capital Inc. (COSCO) conducted backdoor listing in 2012 through Alcorn Gold Resources Corp.

In May 2010, Alcorn Gold Resources Corp. increased its authorized capital stock from P700 million to P3 billion, with Puregold owner Lucio Co taking over the company after securing a 66% equity stake in Alcorn.

The holding firm held interests in grocery retail, real estate and property leasing, liquor distribution, oil and mining, and specialty retail. Included in the company’s subsidiaries are Puregold Price Club, Inc., S&R Membership Shopping, Ellimac Prime Holdings, Inc., Liquigaz Philippine Corporation, and Office Warehouse, Inc.

In December 2012, Alcorn Gold Resources Corp. was renamed Cosco Capital (COSCO), marking the completion of the backdoor listing for Lucio Co’s group of companies.

AC Energy (ACEN) and Phinma Energy Backdoor Listing

(4) AC Energy, Inc., a subsidiary of Ayala Corporation, took over Phinma Energy Inc. (PHEN) to use it as backdoor listing vehicle of AC Energy in 2019.

On February 7, 2019, AC Energy, Inc. signed an investment agreement to acquire Philippine Investment Management (PHINMA) Inc. and PHINMA Corporation’s combined 51.476% stake in listed company Phinma Energy Inc. (PHEN). PHEN was subsequently renamed AC Energy Philippines Inc. and PHEN’s stock code was also changed to ACEPH.

AC Energy Inc., ACEPH’s parent company, made a tender offer to other ACEPH shareholders from May to June 2019, with a total of 156,476 public shares tendered during the offer period. On June 24, 2019, AC Energy Inc. subscribed to 2.632 billion shares of ACEPH, reaching 66.34% equity stake as of December 31, 2019.

During the Annual Stockholders’ Meeting of ACEPH held on 20 April 2020, stockholders approved the change in company’s name from “AC Energy Philippines, Inc.” to “AC Energy Corporation”.

Effective August 14, 2020, the company’s stock code in the PSE was also changed from ACEPH to ACEN.

Melco Resorts Phils. (MRP) and Manchester Holdings Backdoor Listing

(5) Melco Crown Philippines Resorts Corp. (MCP) which listed via Manchester International Holdings Corp. in 2013.

Macau-based casino operator Melco Crown Entertainment Ltd. acquired 93% percent of listed Philippine firm, Manchester International Holdings Corp., a pharmaceuticals manufacturer and property management firm, for P1.259 billion, in 2013.

Manchester International was subsequently renamed Melco Crown Philippines Resorts Corp. (MCP) and served as the vehicle for MCP to be listed in the Philippine Stock Exchange. In 2017, Melco Crown Resorts Corporation (MCP) again changed its name to Melco Resorts and Entertainment Corporation (MRP).

The listed company, MRP, managed and continue to manage “City of Dreams Manila”, a casino joint venture with Belle Corp., but decided to delist its stocks from the PSE in 2018, in order to gain more flexibility in running the “City of Dreams” casino business.

Stock Price Increases in Backdoor Listing

Can you make money trading stocks rumored to be part of potential backdoor listings?

The simple answer: Yes. Stocks of listed companies being considered as a vehicle for backdoor listing have historically benefited from a short-term price surge.

This is brought about by the buying frenzy among traders speculating on whether the company will indeed be acquired by a company intending a backdoor listing. Here are examples of two stocks that gained short-term price increases due to backdoor listing rumors.

In 2012, the stock of Tanduay Holdings Inc. (THI) surged a massive 224% from P4.50 to a peak of P14.60 when LTG announced it is taking over Tanduay Holdings as a vehicle for LTG’s planned backdoor listing.

Tanduay Holdings Inc. was eventually renamed LT Group Inc. (LTG) after the backdoor listing and became the holding firm for the Lucio Tan group of companies which include, among others, Asia Brewery, Tanduay, Fortune Tobacco, Eton Properties, and Philippine National Bank.

LTG backdoor listing

H2O Ventures (now called PH Resorts Group or PHR) also experienced a short-term price rally when rumors of Udenna Corp.’s potential backdoor listing emerged in 2017.

H2O’s stock went up from P3.51 per share to as high as P10.80 — a 208% price increase — when traders speculated and traded the stock of H2O amid rumors of Dennis Uy considering H2O as potential vehicle for the backdoor listing of his company Udenna Corp.

The backdoor listing materialized and was completed in 2018. H2O’s stock has since been renamed PHR.

PHR backdoor listing of Udenna

Is Backdoor Listing illegal?

Definitely not. In the Philippines, it is legally recognized as a valid way for an unlisted company to start trading shares in the PSE without having to undergo the cumbersome IPO process or comply with stringent requirements associated with an IPO.

Interestingly, the PSE itself discourages backdoor listing. It is seen as a loophole that provides easier and faster alternative for a company to offer shares to the public.

Backdoor listing is not illegal but the PSE is not encouraging backdoor listings either because it supposedly shows the “acquiring entity does not possess the track record and suitability requirements to qualify for listing under existing rules,” as mentioned in a PSE memorandum about backdoor listings in 2013.

PSE Chief Operating Officer Roel Refran, in an interview with the Philippine Star, explains: “We encourage front-door listings so that the registration process precedes the actual transaction. In the case of backdoor listings, there is a takeover first and then the offering will follow.”

Current rules also seem to lack restrictions or requirements in the subsequent modes of fund-raising activities for a listed company that undertook backdoor listing.

Previously, both LT Group Inc. (LTG) and Cosco Capital Inc. (COSCO) conducted private placements exclusive to foreign investors immediately after their backdoor listing.

Lock-up Provisions in Backdoor Listing

The revised PSE rules on backdoor listing included lock-up provisions that prevent related parties and new owners from “selling, assigning, or in any manner disposing of their shares.”

If the listed company belongs to the Main Board of the PSE, the new shares issued to related parties or to new owners who own at least 10% of the outstanding capital stock will be subject to the lock-up provisions. 

The lock-up period is 180 days after the backdoor listing, that is if the firm meets the track record requirement of the PSE, or 365 days if the listed company was exempt from the track record and operating history requirements of the listing rules of the exchange.

If the listed company, meanwhile, belongs to the Small, Medium and Emerging (SME) Board of the exchange, all existing shareholders are barred from selling, assigning or disposing their shares for one year from the backdoor listing.

Should you invest in Backdoor Listings?

Is it a good idea to buy stocks of companies rumored to be involved in backdoor listings?

Well, your decision should depend on the trading and investing philosophy that you follow.

If you’re a short-term and speculative trader comfortable with the risk of losing money associated with speculative trading, you can join the frenzy and hopefully benefit from any short-term price increases of stocks involved in backdoor listing rumors.

But if you’re a long-term or value investor, you could lose money if you’re unable to sell the stock once the speculation has ended and stock prices have stabilized. So as a value investor, stay true to your mindset of investing only in stocks based on their current fundamentals and future earnings cashflow.

At the end of the day, you and only you will make the decision to buy or sell stocks, so be a smart investor and trade wisely!

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