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Raising Capital - New Opportunities for Mongolian
Companies
Financial Information & Investor Requirements
October 2009, Ulaanbaatar, Mongolia
Michael D Lynch-Bell
Partner in Charge
IPO Services
Ernst & Young LLP
+44 (0)20 7951 3064
[email protected]
Ernst & Young in the IPO Space
London is the hub for foreign/inbound IPOs
In the last 5 years Ernst & Young was:
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1 – all IPOs by proceeds value
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1 – all IPOs by Market Cap
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1 – all inbound IPOs by Market Cap and Proceeds value
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1 – FTSE100/250 inbound companies, by auditor
Recent IPO experience includes Xstrata, Kazakhmys, Hochschild Mining, Petrofac, Gem
Diamonds, Scarborough Minerals, Ferrexpo and Fresñillo plc
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Is your company ready?
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Growth
Actual or potential high growth is the main attraction for investors; association with growth industries and regions can attract premiums.
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Size
There is no right size for listing, but companies from emerging markets are usually of high growth potential. A profitable trading record is not a requirement for listing.
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Corporate structure
Clear and transparent shareholder and corporate structures with straightforward business models are more attractive to investors.
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Use of proceeds
The amount of the offering and the use to which the proceeds are put will be evaluated by investors. Forecasts and plans will be required as part of the listing process.
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Corporate Governance
A strong management team with a proven track record and listing experience is preferable. Many listing companies will recruit new independent non-executive directors.
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Accounts and Information Systems
The reporting requirements for listed companies are demanding and will require good accounting and information systems.
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Why list?
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Benefits
Drawbacks
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Improved financial position
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Loss of control
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Opportunities for future financing
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Sharing success
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A path to mergers and acquisitions
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Limiting freedom to act
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Greater marketability
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Loss of privacy
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Improved value
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Periodic reporting
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Diversification of personal portfolios
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Initial expense
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Realisation of capital gains
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Shareholder expectations
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Enhanced corporate image and morale
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Fiduciary responsibilities
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Issues to address
Strategic issues
Tactical issues
1. Attractiveness and marketability
1. Structure
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Track record
Exchange selection
2. IPO structure
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Identify what is being floated
Pre-float structuring / carve out / combinations
“Practical issues”
2. Financial comparability to peers
Size, structure and scale of offering
‘Lock-ins’ of retained interests
Use of funds
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3. Profile and credibility of board and management in public company arena
4. Management remuneration / incentivisation
5. Governance and transparency
IFRS conversion
Accounting policies and impact on analyst coverage
3. Working capital & debt
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Post float funding for at least 12 months in place
Change in control triggers
4. Risk management system and reporting
6. Post-float investor relationships and communications
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Non execs and governance
5. Forecasting and financial reporting
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Public v private requirements and deadlines
6. Reduction in post float flexibility
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Shareholder approvals
IPO advisers
LSE
Candidate
Auditor
Reporting Accountant
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Issue audit opinion on financial statements
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Short form report
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Comfort letter
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Working capital report
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Long form report
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Comfort letters
Other advisers
Sponsor
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Ensure that the directors of the Company have
received satisfactory advice and guidance as to the
nature of their obligations
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Coordinate the work of other professionals – such
as accountants and lawyers who are involved in
preparing a Company for the market
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Issue an opinion that it is satisfied that the
Company applying to LSE is appropriate to be
admitted.
Broker/NOMAD
• Test marketing
• Identify investors
• Valuation benchmarking
• Marketing roadshow
• Book-building and pricing
Lawyers
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Analysis and optimization of key business processes, KPIs
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Development of IFRS compliant reporting policy & procedures
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Legal Due Diligence
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Definition of internal controls framework
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Verification notes
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IT Audit & Security
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Material contracts
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Tax structuring & transfer pricing
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Underwriting agreement
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Management incentive schemes, Non-executive directors system
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Environmental Due Diligence
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Actuarial
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Mineral expert
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Financial PR
Registrars
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Accounts preparation
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Financial deliverables
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Historical financial information
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Financial reporting readiness
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Financial reporting procedures
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Accounting issues
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Financial deliverables
 Partial  Full × Prohibited
Pre float services
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Reporting accountant
Other advisor
Financial reporting procedures – advice
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Financial reporting procedures – implementation
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Tax structuring
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Project management support
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IFRS conversion/financial reporting advice
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Process improvement (financial, business, IT)
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Forecasting / modelling support
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Corporate governance design
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Corporate governance implementation
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NED programme
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Sustainability and environmental advisory
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Executive performance and compensation
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Carve out support
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Float services
Reporting accountant
Other advisor
Reporting on accounts, pro forma and forecast (if required)
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Long form report
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Working capital report
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Financial reporting procedures – reporting
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Financial deliverables – Main Market
Public reporting
Private reporting
‘Short form report’
‘Long form report’
• Historical financial track record
• Description of the business
• Contains financial data on at least 75% of the business for all periods
• 'Go forward' accounting basis.
• Financial analysis including normalised earnings
• Key issues impacting earnings or valuation
• ‘New' opinion in accountant’s report
• Key areas of judgement underlying the financial info
• Pro forma
Financial Reporting Procedures Report
• Adjusted balance sheet and P&L to reflect the Group as it will be organised on IPO
• Financial Reporting procedures and internal controls
• Established and implemented procedures
• Proposed procedures
Working capital report
• Review of assumptions
• Description of the forecast
• Sensitivity analysis based on identified risks
Comfort letters
• Prospectus financial contents
• Significant change
• SAS72 for rule 144a
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Historical financial information for equity listings
Requirement
• Three year financial track record – last two years under IFRS
Main Market
AIM
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... or shorter period
• Track record to cover 75% of group at IPO
• Age of last audited period
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Listing Rule
.. but PD Regulation
6 months
9 months
15/18 months with interim
• US offering under rule 144a – 135 day rule
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• Clean audit opinion
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… but market practice?
• Other acceptable GAAPs for financial periods expiring no later than 31 Dec 2011
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US, Canadian, Japanese
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Third country issuer has publicly stated convergence with IFRS by 31 Dec 2011
• Accountant’s report
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Raising Capital – New Opportunities for Mongolian Companies
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Assessing financial reporting readiness
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Initiation
Mid-stage
IPO ready
Financial history & “carve out”
Local GAAP
Consolidated accounts
IFRS 3-year record
Structure
Legacy businesses
Rationalised
Efficient tax and legal structure
Related parties
Overlap and confusion
Company accountability
Clean full year
Forecasting
Cash based annual plan
Accrual based forecasting
Reliable working capital forecasts
Taxation
Unidentified risks
Assessed risks
Mitigation and disclosure strategy
Legal title to assets
Assumed
Assessed
Attested
Financial control and governance
Proprietor discipline
Professional management
Governance procedures
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Issues that may be encountered
The Reporting Accountant may need to deal with issues in the following areas:
Taxation
The evolving nature of tax legislation of many countries may mean that changes are required to meet Sponsor and market expectations
Documentation
Local historical audit evidence available may not be sufficient to enable sign-off. This may require significant rework
Accounting policies
The historical accounting policies may not be in line with your peer group and may need to be amended
Related party disclosures
There will be a series of related party transactions and balances that need to be
appropriately disclosed
Legal title to assets
Demonstrable unencumbered title to assets (throughout their operating life) needs to be demonstrated
Higher burden of
transparency and disclosure
Public companies have additional disclosure obligations
Our approach and early issues review is designed to identify these potential issues, enabling us to design solutions which can then be implemented without disruption to the timetable.
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Raising Capital – New Opportunities for Mongolian Companies
Financial Reporting Procedures review process
Reporting Accountants’ area of focus:
• high level financial controls
• budgeting and forecasting
• accounting policies
• information systems
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October 2009
Raising Capital – New Opportunities for Mongolian Companies
Level of implementation required
Systems
Internal Audit
Board Committees & Processes
Controls
Risk Management
Financial Reporting
IFRS
Title of
Assets
Business Controls
Management Reporting
Accounts Assurance
October 2009
Treasury
Training and Culture
Joint Venture
Strategic Investor
Time
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Regulatory
Budgeting/Forecasting
Financial controls
Cash
Tax Structuring
Raising Capital – New Opportunities for Mongolian Companies
Float
Post Float
Indicative flotation timetable
An indicative timetable of work streams that a company would follow in order to prepare for a major market listing.
12 months+
before admission
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6-12 months
before admission
6-24 weeks
before admission
0-6 weeks
before admission
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Appoint advisors
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Commence initial due diligence
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Agree final timetable
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Commence formal marketing
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Develop a robust business plan
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Consider investor relations strategy
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Review and resolve problem areas
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Pricing and allocation of the offer
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Adopt best practice for corporate governance
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Commission specialist reports if required
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Register prospectus/admission document
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Ensure compliance with laws and regulations
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Make necessary changes to the Executive
Board
Produce draft prospectus and other
documents
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Initial review of pricing issues
Admission granted and trading commences
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Appoint Non-Executive Directors
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Review public relations presentations
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Implement financial reporting procedures
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Discuss transaction with the Exchange
Commence initial marketing (analyst
presentations and roadshows)
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Agree draft timetable
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Complete strategic initiatives, e.g. acquisitions
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Establish financial reporting procedures
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Review MIS and operational and compliance controls
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Consider ownership and tax issues
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Management - what you need to get right pre-IPO
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Compelling investment case to market (management/strategy/financial performance)
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Executive support for process
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Early preparation to resolve all issues pre float
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Adequate resources available to run the process
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Fully resourced programme management
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Rapid communication of issues to nominated decision makers
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Nominated decision maker with authority to commit the company
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Communications between all parties
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Realistic initial view on status of preparation to inform planning process
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Experts/advisors with relevant experience and adequate resource committed
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Case study: CIS mining co.
Prior to IPO Process
Making it work
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Standard cash-based accounting model as used across CIS
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Robust and pragmatic client acceptance
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Existing KPIs were cash and production metrics,
not EBITDA
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150+ Ernst & Young people on the ground in Kazakhstan
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Lack of knowledge of accruals accounting and IFRS
Seven Ernst & Young partners spent over two months in Kazakhstan overseeing final stages
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Locally ‘audited’ accounts aren’t necessarily fit for LSE
Simultaneously did reporting accountants work as local KPMG Kazakhstan conducted audit
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Lack of appropriately skilled staff with huge burden placed on them
Dedicated senior UK team exclusively engaged for nine months working across UK, Kazakhstan
and Germany
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Inexperience of LSE regulations
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Multiple solutions provided for potential ‘deal stoppers’
Successful IPO
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Listed on main market in October 2005
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Entered the FTSE 100 in December 2005
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Employs 65,000 people
October 2009
Raising Capital – New Opportunities for Mongolian Companies
Case study: CIS mining co.
Prior to IPO Process
Making it work
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Significant number of related party transactions with companies connected to the selling
shareholder. Disclosure and transparency key
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Group and its governance structure was focused on the needs of the selling shareholder. Tougher
governance required to ensure Group independently run
FRP
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IFRS
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Management reporting based on local GAAP
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Due diligence
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Local IFRS accounts required enhancement for UK listing purposes
Successful IPO
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Listed on main market in June 2007
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Approx $420m raised of which some $220m went to the selling shareholder
October 2009
Raising Capital – New Opportunities for Mongolian Companies
IPO process lasted over 12 months. E&Y actively involved in preparing the company for listing:
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Robust advice on IPO tax structure
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E&Y teams across UK, Ukraine and Russia involved over the IPO process
Selected LSE Inbound IPO experience
Main Market
AIM
GDR
• Xstrata
• Highland Gold
• Rosneft OJSC
• Kazakhmys
• Frontier Mining
• Kazmunaigas
• Hochschild Mining
• Asia Energy
• TMK
• Gem Diamonds
• Indago Petroleum Holdings Ltd
• VTB Bank
• Ferrexpo
• Absolute Capital Management
• Investcorp Bank
• Fresñillo plc
• Ishaan Real Estate
• Pharmstandard
• Global MENA Financial Assets
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October 2009
• Global Investment House
Raising Capital – New Opportunities for Mongolian Companies
Thank you
October 2009, Ulaanbaatar, Mongolia
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