Company Reporting Australia Essay Example

INITIAL PUBLIC OFFER 6

Initial Public Offer: Book Building Method

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11/05/ 2011

Executive Summary

The Book Building Method is a price discovery method where the issuing company does not dictate or assign a price for the shares to be issued. The issuing company provides a price range for investors to bid a price from. The demand for issue shares under the Book Building method is higher than with the Fixed Price Offers. Valemus Limited is one of the Australian companies that issued an IPO in the year 2010 using the Book Building Method. The costs associated with issuance or acquiring of equity are accounted for as deductions from the equity as provided in the various accounting standards.

Introduction

The Initial Public Offer (IPO) can be made through the book building method or the fixed price method or a combination of the two. A company intending to raise extra capital to finance its operations can sell its shares to the members of the public. The Initial Public Offer is the selling of securities to the members of public in the primary market, while subsequent selling in the secondary market is referred to as Follow-on Public Offers (FPOs). For a company to be allowed to make a public offering it becomes a listed company in the country’s stock exchange. Only public companies are allowed to issue or sell shares to the members of public (Cotter, Goyen and Hegarty, 2005).

Discussion

The Book Building Method is in essence a price discovery method since with this method the company does not fix up a particular price for the shares, but instead it gives a price range. This is achieved through bidding where the investors have to decide at which price they intend to bid for the shares. The investors are provided with a price range where they can bid for the shares within the range. The lowest price in the range is referred to as ‘floor price’, while the highest price is referred to as the ‘cap price’. The insiders and underwriters determine the final IPO issue price based on the demand and supply of the shares (Greg, 2006). The issue price will always be lower than the cap price. For example, the floor price may be $2, while the cap price is $5; hence the issue price might be $3.7.

The IPO issue price using the Book Building Method is more likely to be influenced by market demand relative to the fixed method because the demand in the former is known everyday during the offer period, while in the latter demand is known after the issue closes. The demand is relatively higher because many kinds of investors are involved including corporate bodies in addition to private individuals. Draho (2004) adds that the Book Building Method depicts a high demand for the issue price since it is based on auction theory where the potential investors are used to discover the issue price.

The Book Building Method is considered more transparent and market determined since all interests groups are involved unlike where issue price is determined by the issuing company in the Fixed Price. This is because the issuing price is not pre-determined but discovered only after closing of the bidding period. The investors decide on what price they are willing to buy the security; hence this increases the demand for the issue price because it will depend on the demand and supply forces. The Book Building Method is influenced by market demand since the potential investors and the insiders do not have the knowledge of the issue price until it is discovered during the bidding period (Fan, 2007).

Among the companies listed in the Australian Securities Exchange (ASX) during the year 2010 was Valemus Limited. Valemus Limited is one of the largest engineering and Construction Company in Australia. Valemus Limited issuing period was between 16thJune, 2010 and 2nd July, 2010 while it was listed on 9th July, 2010. Valemus Limited expected to raise $1.2210 billion to $1.388 billion capital through the Initial Public Offer. There were 555 million shares on offer to potential investors. Valemus Limited used the Book Building Method of issuing or selling the securities as evidenced in the article presenting the Valemus Limited IPO Prospectus. The issue price range of the securities was $2.20- $2.50 per share; hence the floor price was $2.20 and the cap price was $2.50. In addition to this, the minimum number of shares subscription was 2000 shares (Anonymous, 2010).

Conclusion

A company incurs various costs when issuing or acquiring its own equity instruments such as issue of shares during an IPO or FPO. The Australia Accounting Standard Board (AASB) 132.35: Financial Instruments requires that transaction costs associated with the issue of equity to be accounted for as a deduction from the equity, net of any related income tax benefit since the transactions costs are necessary part of the equity. On the other hand, International Accounting Standard (IAS) 32.37: Financial Instruments adds that these costs include registration and regulatory fees, legal, accounting and other professional advisers, printing and stamp duties costs. The equity transactions costs are accounted for as deduction from the equity to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. Therefore, the accounting treatment of the IPO costs as provided by AASB 132 complies with IAS 32 with emphasize on these costs to be deducted from the equity since they are part of equity.

References

Anonymous. (2010). Valemus Float Now Under Way, Retrieved at

http://australiansharefloats.blogspot.com/

Cotter, J., Goyen, M., & Hegarty, S. (2005). Offer Pricing of Australian Industrial Initial Public

Offers, Accounting and Finance, Vol 45, Issue 1, pp95-125.

Draho, Jason. (2004). The IPO Decision: Why and How Companies go Public,

Edward Elgar Publishing.

Fan, Q. (2007). Earnings Management and Ownership Retention for Initial Public Offering

Firms: Theory and Evidence: The Accounting Review, Vol 82, Issue 1, pp27-64.

Greg, N.G. (2006). Initial Public Offerings: An International Perspective,

Butterworth-Heinemann.

Valemus Limited Prospectus

IPO Summary

Valemus Limited

Shares On Offer

555,000,000

Issue Price

$2.20-$2.50 per share

Capital To Be Raised

$1.221 billion — 1.388 billion

16 June 2010

2 July 2010

The initial public offering for engineering and construction company Valemus is now under way. This is the largest float so far this year and may in fact turn out to be the largest float for the entire year if the current share market volatility continues.

According to the prospectus:

Valemus is one of the largest multi-service contractors across the construction, and specialist infrastructure asset management and engineering services, industries in Australia

The company owns and operates the Abigroup and Baulderstone businesses in the construction industry and Conneq in the services industry. If you read through the prospectus, Valemus certainly has impressive diversification by market, sector, and customer and by geographical region.

Unlike many new listings on the Australian Stock Exchange, Valemus Limited is making money. They are forecasting earnings per share of 20.9 cents and dividends per share of 4.5 cents for the 2010 calendar year. However, before you get too excited, make sure you check out the risk factors outlined starting on page 130 of the prospectus. They make for sobering reading.

Valemus is hoping to raise somewhere around 1.2 to 1.4 billion dollars depending on the final pricing of the offer. The proceeds will be used to fund the acquisition of the operating businesses from Bilfinger Berger and to further capitalize the company.

Retail investors can expect to pay between $2.20 and $2.50. The minimum subscription is $2,000.