Ensuring success in a backdoor listing

THIS successful group of insurance companies is offering investors a model case study on how struggling resource companies can realise a win-win in the increasingly ubiquitous world of backdoor listings. By Justin Niessner – RESOURCESTOCKS*
Ensuring success in a backdoor listing Ensuring success in a backdoor listing Ensuring success in a backdoor listing Ensuring success in a backdoor listing Ensuring success in a backdoor listing

Ensurance’s Adam Davey, Brett Graves and Stefan Hicks.

MiningNews.Net

In July last year, Australia-listed gold hopeful Parker Resources moved to acquire online insurance provider Ensurance Capital in a transaction that included the issue of 30 million shares and payment of $500,000. The deal effectively transmuted Parker into Ensurance Limited in May and represented a growing trend among junior resource plays keen to maximise their value in a suffocating market.

Ensurance’s motive was to access ASX capital in order to speed up its pipeline of sales as it rolls out a ground-breaking service of real-time online digital distribution channels for general insurance with multiple insurers. Parker’s motive was to find a fair return for its investors despite the reduced development opportunities in the current resource space.

Ensurance chairman Adam Davey was on the Parker board before the reverse takeover and was therefore in a unique position to help orchestrate the transaction from both sides. In recounting the Parker-Ensurance story, he advised RESOURCESTOCKS on the best approach to a reverse takeover listing, acknowledging that many resource industry directors with earth science backgrounds may find it challenging to buy assets outside their current area of expertise.

“It’s pretty tough out there in the junior mining space. It’s hard to raise money. It’s hard to get liquidity in your stock. It’s hard to attract investor interest in your stock. The brief for junior miners is to make money for shareholders, so where do they go from here,” Davey said.

“The only reason public resources companies are looking at other opportunities is they’re just not getting any recognition in the capital market or from investors. If we were getting traction and interest in the resource market, then everyone would be more inclined to stay in the resources market.

“The advantage of the Parker transaction was that neither side needed to do the deal. It was done the right way for the right reasons for the right price.”

Parker hit the ASX boards in September 2011 as a Northern Territory uranium developer when the nuclear fuel was trading in a healthy range north of $US50 per pound. The explorer eventually refocused on the Cue gold project in Western Australia’s Murchison goldfield.

Cue lies 10km from the historic Big Bell mine, which has produced about 2.6 million ounces of gold.

“There were no problems with the asset, it was just problems with the overall capital market,” Davey said.

“You could do a transaction on the resource end, but there is a real risk that the market wouldn’t recognise it and it wouldn’t give you a capital appreciation for shareholders. So you have to ask yourself as a board, why would we do a transaction if we know that the market is going to use that as an exercise to sell down stock? When we don’t get a positive rerating in the share price even though the board believes that the asset purchase itself was positive, or the acquisition was positive, it’s just due to the macroeconomic environment.”

Davey said any resource company considering a backdoor deal had to make sure it set the criteria of what type of asset and management background it would look at before looking for an acquisition. In the case of Parker, it had to be a business that had potential to take its share price three to five times its standing price at the time. It also had to be a company that attracted capital with the transaction and had a board that could have a good knowledge about the industry.

Along with the ability to increase the share price and bring cash to the table, Parker demanded the company have a concrete asset and a board that understood capital markets.

“That gave us a criteria that allowed to start the process for looking at transactions,” Davey said.

“If it met those criteria, we would agree that it warranted further due diligence. Otherwise you’re just looking at anything and everything. Another board might have completely different criteria, but once they’ve agreed on the criteria, they can then determine what is the best way to seek out those types of acquisitions.”

Parker was looking for a meaningful acquisition, something that would create a business larger than itself. In such cases, there will be a transition from the old board to the new board. Davey identifies this shakeup as a potential sticking point for many companies, which must be addressed in the early days.

The board has to understand and agree that they will be moving on and will lose directors fees. For some board members, this is not a problem because they may be putting more hours into the company than they’re being awarded for financially. For others, the loss of fees could be a material issue.

“The boards do need to make sure that everyone sitting around the table is on the same page and understand that there’s going to be a change,” Davey emphasised.

Parker had to be sure when Ensurance came in that there were board members who understood being in the public ASX environment since many board members from private companies moving into a public company may not be familiar with the transition or the legal and corporate responsibilities that are now required at a public company level versus a private company level. A private company board can find that transition confronting, so Davey recommends ensuring directors seek board members who have the skill and experience needed to offer the necessary advice and help manage the transition process.

Any junior resource company’s shareholder base is looking for higher returns than what they would get in the blue chip end of the market, so that does give some flexibility to a board in considering other opportunities in front of them.

Investors may go into a particular stock to get exposure to a particular mineral project, but ultimately, they’re still looking for a certain risk-to-reward equation.

Davey said that although many of the technology and service sector companies attracting mining industry reverse takeovers offered a similar risk-to-reward profile, Ensurance – true to its business model – offered a bit of insurance.

“We could still have the upside of three to five times but limit our downside because the Ensurance business had actually been an operating business for over 24 years,” he said.

“It’s not like in some mining or technology transactions where you can go from a certain value to zero because you did the drilling and it didn’t work or the technology failed. Parker might go drill the Cue deposit, for example, and if there’s nothing there, the fall-back position would be to go find another asset to drill. With this deal, we don’t need to find another asset to explore, we just continue to build.

“Not all backdoors will be able to acquire assets that will have that benefit of an operating asset underlying it. So in the case of the Parker asset, we were always comfortable because of Ensurance’s underlying business. It had already done over 60,000 transactions online.”

In a broader strategy of expanding the services of its IT solutions division, Ensurance has developed a new platform for taking advantage of its knowledge and experience as well as the availability of improved technology. The plan will enable the company to “white label” customers in addition to its normal brokerage.

White labelling is the branding of products by another company, positioning organisations to take advantage of opportunities by leveraging the strengths of other businesses without the need to develop these capabilities internally.

An industry first, Ensurance has effectively automated insurance brokering online, complete with advice, allowing anyone to sell insurance directly to their members or client base without the considerable investment in infrastructure. Ensurance thereafter takes control of the management of the client’s insurance requirements while continuing to pay the white labeller renewal revenues, resulting in the compounding of renewal income. Examples of white labellers would be mortgage brokers, credit unions, banks, real estate or consumer websites.

“It allows them to build brand loyalty with a client,” Davey explained.

“It allows them to offer their clients products badged under their label while effectively Ensurance conducts the back-office platform and the vast component of the transaction. It is all done online and allows the client to purchase and research insurance. The client can actually research insurance online, get multiple quotes, choose and then bind online in less than 10 minutes.

“Due to the platform, Ensurance is able to scale its business dramatically with a minimal increase in expenses.”

It also allows Ensurance to scale up and transport its IT capabilities on a global level into overseas markets much larger than the Australian market.

In May, Ensurance signed on with WA real estate and financial services group Ausnet to beta test the online insurance platform. Ausnet manages more than 25,000 clients and $1 billion in mortgages. Its arrangement with Ensurance is expected to lead to one of Ensurance’s first white labelled partnerships.

Being a functioning business meant that Ensurance, as the vendor, was not in any rush to get to the capital market. It wanted access the ASX to help roll out its newest IT ambitions, but because it had an operating cashflow, there wasn’t any particular sense of urgency.

This resulted in a longer-than-usual transaction process with Parker, but also a certain sense of security between both parties.

“From Parker’s point of view we had a vendor who was not under any pressure, so it was a definite advantage for us. Ensurance did not have to stand still while trying to do an IPO,” Davey said.

“We did not have a vendor who was panicked. They wanted to do a transaction for the right reasons, not for just any reason – and that made a big difference to the process. The fact that they had cashflows in their operating business and that they weren’t reliant just solely on the public company for funding meant that we could do our due diligence properly. It meant we knew we were buying a good asset, because there was no desperation.

“Parker even lent some funds across to Ensurance as part of the process in the public environment, which helped Ensurance advance its commercial connections with the insurers. That helped both the vendor and the Parker side.”

Davey also stressed the importance of getting the right advice, communicating with investors and knowing that just because an announcement goes up on the ASX, that doesn’t mean everyone’s going to read it. And this process should not be left until the end.

“They’ve got to make sure they appoint the right professional advisors to assist in the transaction. That’s not just in legal and accounting but also capital markets because there is a re-education that occurs in the shareholder base,” he said.

“When you’re doing a backdoor, it’s actually quite a big job. Sometimes when a backdoor has occurred, the stock can come under pressure because that education process didn’t occur correctly. We made sure we communicated with the shareholders, the centres of influence in the shareholder base and the core brokers.

“If you do not communicate with the shareholders properly, as part of the process, they tend to sell things because they’re uniformed. You don’t want them to sell because they don’t know what the deal is. The business is kicking goals, going from strength to strength but the share price is going down because the shareholders weren’t informed. That creates a negative momentum which then makes it difficult for the stock to rise.

“It has a real compounding effect, and you see it time and time again.”

*A version of this report, first published in the July-August 2015 edition of RESOURCESTOCKS magazine, was commissioned by Ensurance.