Many family-owned corporations, some in existence for many generations, choose to stay privately held because they see no compelling need to go public. Some choose to expand organically and, if they have no need for fresh capital, they would rather keep strangers away from their boardrooms.
But there will come a time when aspirations grow bigger or when business environment becomes too competitive that capital spending requirements have to grow exponentially. Sometimes, opportunities for mergers and acquisitions arise and loans from banks, friends and family are just not enough anymore. That’s when they start considering other options, such as going public to fast-track growth.
Apart from funding their expansion plans, going public also opens up family corporations to the possibility of growing and diversifying their markets, especially if they are not confining themselves exclusively to the domestic market.
Being open to greater public and regulator scrutiny, publicly listed companies are presumed to practice higher standards of corporate governance. As such, larger corporations—especially foreign ones—tend to be more comfortable in dealing with listed companies, even if they are relatively small. Going public raises the bar for the company, allowing it to enter a new phase of development and giving it better access to discerning suppliers, trade partners and clients.
“It’s not easy for a family-run business to decide to do an initial public offering (IPO). It takes probably years of getting to the mindset that they want to do it. It’s not something you can do overnight,” said BPI Capital chief operating officer Reginaldo Anthony Cariaso.
One needs to have a “professional” mindset to allow other investors to come in as shareholders. Even if they get to retain the majority of the company, as is usually the case in the Philippines, the accountability becomes greater as the company opens its doors to other shareholders.
“They may have been great at running and operating a business but some of the non-core parts of it, such as finance and investor relations are something that they need to build up,” Cariaso said.
“I think family-run businesses take a longer time to earn the trust of professional managers. It’s not easy for them to just hire anybody. There’s a lot of trust element that’s involved,” he said.
The takeover of the family-owned enterprise by the younger generation, in some cases, becomes a catalyst to going public. The young are usually more open to paradigm shifts, hiring people outside of the family and welcoming new shareholders. Such transition to the new generation results in either the younger generation selling out (if they have no passion for the family business) or moving to grow the business in a bigger way.
What it takes
If and when a company decides to go public, whether through an IPO or backdoor-listing, it has to be ready to do a lot of work to prepare itself. It is not just a matter of simply wanting to go public. First and foremost, it must have a compelling story to pitch to the investing public.
“Many of these family-owned companies were not structured to do IPOs so there’s usually some corporate restructuring to be done, as well as evaluation and auditing of accounts. There’s a lot of friction costs and tax implications to be considered,” Cariaso said, adding that the reason for the IPO must be really compelling.
Cariaso cited the case of Max’s Group Inc., which debuted on the Philippine Stock Exchange after acquiring Pancake House Inc. as its backdoor listing vehicle.
Max’s, a popular Filipino restaurant with fried chicken as its best seller, has been operating a restaurant chain for the last 70 years. Cariaso recalled that Max’s Group was one of those family companies exhibiting good growth trajectory and strong valuations.
“We saw the potential for it to become the largest casual dining restaurant chain in the Philippines and making it available to the investing public. That was the end-game but to get there required pretty complex financial execution,” Cariaso said.
The integration of the Pancake House Group with the Max’s restaurant group in June 2014 allowed the latter to realize this goal of becoming the country’s largest restaurant chain in terms of revenue and store network. Other restaurant brands under the Pancake House group are Dencio’s, Kabisera ng Dencio’s, Sizzlin’ Pepper Steak, Le Coeur De France and Maple. It is also the local operator of Krispy Kreme and foreign fruit smoothie brand Jamba Juice.
“It’s a family business that has gone through many generational changes and is now under the third generation. What’s exciting about it is many Filipino companies such as Max’s are in the midst changing their mindsets. It is professionalizing its mindset, improving corporate governance, taking advantage of the market conditions to grow the business and to do it their (younger generations) way, not necessarily the way lolo or lola (grandfather or grandmother) wants. They want to show their own expertise in running the company and they are quite confident in doing it,” Cariaso said.
Max’s-Pancake House
But while in the midst of IPO discussions, the opportunity to acquire Pancake House, which is already listed on the PSE, came about. As such, the company achieved its twin-pronged goal to grow and access the capital markets in one big sweep.
As of the end of April, the Max’s group had a total of 543 branches. For 2015, it plans to open 80 to 90 new branches and expand its overseas footprint.
Max’s and BPI, both known for their conservative way of doing business, thus embarked on what Cariaso described as the most complex transaction he had seen in his career. Cariaso, who has been in investment banking for 17 years, worked for JP Morgan and Nomura before joining BPI.
BPI provided Max’s the financing for a leveraged buyout of Pancake House, helped arrange the tender offering to minority shareholders of the latter, and advised on the merger and acquisition. It also helped the consolidated group raise fresh capital to pay back debts incurred during the buyout.
The Max’s group signed a deal to buy a controlling stake in Pancake House Inc. for as much as P3.9 billion in 2013 and completed last year the tender offer as well as the P3.5-billion follow-on offering.
The deal catapulted the Max’s Group to the forefront of the casual dining space and put it in a better position to grow its brand. It also enabled the group to simplify its ownership structure.
Prior to the transaction, the group had a complicated ownership structure. Shares held through layers of holding companies were brought “all the way to the top,” creating a “cleaner” ownership structure, he said.
As such, the deal did not only involve the consolidation of Pancake House into Max’s Group but the consolidation of all shareholdings in a single holding firm. Overseas franchising units, particular those in North America and Middle East, were likewise included in the consolidation of assets.
SSI Group
Another long-running family corporation that recently made its stock market debut through an IPO was specialty retailer SSI Group.
Cariaso said this was the first local IPO to attract domestic institutions as cornerstone investors.
SSI Group began its rapid expansion in 2012, during which it opened 13,000 square meters of new retail space, followed by another 15,000 sqms in 2013. But the most aggressive expansion done in a single year was in 2014 when SSI opened additional 36,000 sqms in retail space. Prior to 2012, its annual expansion in terms of physical footprint was less than 5,000 sqms.
SSI expanded not only its retail space but also its portfolio by bringing in new foreign brands that cater not just to discerning consumers but to the emergent middle class.
As of end-March this year, SSI Group had a nationwide store footprint of 138,000 sqms. About 74 percent of its stores are in Metro Manila. In the past several years, however, the group has been expanding to other key growth areas like Cebu, Davao, Cagayan de Oro and General Santos.
“The market is just ripe for these kinds of transactions,” Cariaso said.
Key steps
To qualify for listing on the PSE, a company must have a positive stockholders’ equity in the fiscal year immediately preceding the filing of the listing application. It must have an operating history of at least three years prior to its listing application. It must also ensure that all its subscribed shares of the same type and class applied for listing had been paid in full.
The applicant company is required to cede to public hands a minimum percentage of ownership. The smaller the post-IPO market capitalization, the larger the minimum public ownership required. (See table on B5-1)
When required by the PSE, the applicant company should engage the services of an independent appraiser duly accredited by the exchange and the Securities and Exchange Commission in determining the value of their assets.
The applicant company must also put in place an investor relation program to ensure that information affecting the company are communicated effectively to investors. Such program should include, at the minimum, a corporate website that contains vital information on organizational structure, board of directors, analyst briefing report, latest news, press releases, newsletter (if any), annual and quarterly financial reports at least for the past two years, recent disclosures, investor FAQs (frequently asked questions), investor contact and key stock information such as dividends and key figures.
On the three-year track record requirement, the IPO candidate must show a cumulative cash flow—as measured by consolidated earnings before interest, taxes, depreciation and amortization (Ebitda), excluding non-recurring items—of at least P50 million for three full fiscal years immediately preceding the application for listing. For each of the three fiscal years, the minimum Ebitda required is P10 million.
The prospective PSE debutante must be in the same business/es and must have a proven track record of management throughout the last three years prior to the filing of the application.
The exceptions to the three-year track record requirement are as follows:
The company has been operating for at least 10 years prior to the filing of the application and has a cumulative Ebitda of at least P50 million for at least two of the three fiscal years immediately preceding the filing of the listing application The company is a newly formed holding company which uses the operational track record of its subsidiary, for as long as the newly formed holding company is prohibited from divesting its shareholdings for a period of three years from the listing of its securities.
Applicants that are exempted from the three-year earnings track record requirement must still show an Ebitda of at least P15 million for three fiscal years immediately preceding the application for listing and a positive Ebitda in at least two of the last fiscal years, including the fiscal year immediately preceding the filing of the application. The applicant must be engaged in materially the same business and must have a proven track record of management throughout the last three years prior to the filing of the application for listing.