Second Eco World listing goes from Spac to IPO

By Khairie Hisyam

What would have been Malaysia’s first property blank-cheque listing is now going to do a normal IPO en route to Bursa Malaysia. But does property man Liew Kee Sin need to list his new venture at all when the Eco World brand already has one listed company?

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Eight months after making headlines with a new venture, property man Liew Kee Sin has changed his mind. Instead of listing his Eco World International (EWI) as a special purpose acquisition company (Spac), he has now opted to go for a normal initial public offering (IPO) route.

The decision was announced June 17, 2015. EWI had earlier submitted an application to the Securities Commission (SC) in October 2014 to list as a Spac, eyeing at least RM1.9 billion in gross proceeds.

In a regulatory filing, Eco World Development Group Bhd (EWDG) said that EWI was advised to list the IPO route as the projects intended for injection into it, once listed, are well on their way to launches before end-2015, not to mention strong sales seen for one project already.

This means the listing timeline will likely have been pushed back to next year as the Spac listing was initially targeted for the third quarter of 2015.

However, this latest development also implies a potential hurdle down the Spac route that might have played a part in this shift of strategy.

To recap, in October 2014, EWDG announced its intention to subscribe to the proposed Spac listing by way of a 30% stake for RM562.5 million. This effectively valued the listing at RM1.9 billion, which if happened, it would have single-handedly matched the collective proceeds of all four previous Spac listings in Malaysia.

But it had raised concerns, specifically over a potential conflict between EWDG and EWI as both are property developers. As EWI is intended to focus on international markets, this would mean EWDG is confined to the Malaysian market.

In a recent interview, Liew himself admitted to much conflict in his various roles, though he was adamant that he had made proper declarations. For this issue Liew did not respond to KINIBIZ’ messages requesting comment.

KINIBIZ previously examined this conflict and the wider tangle of conflicts centred around Liew in a five-part issue here.

Hurdle down Spac route

While a regulatory filing by EWDG said EWI will be withdrawing its application to list as a Spac, the application may not have been approved by SC anyway.

A Spac is essentially a company with no real business activity, raising funds from the market on the strength of its promoters’ track record to buy an asset to become its core business. The problem with EWI is that it already has assets lined up for acquisition even before listing.

Several months after the market was informed of EWDG’s intention to subscribe to 30% stake in EWI’s potential Spac listing, Reuters reported that Liew has inked a joint venture (JV) with Irish developer Ballymore Group worth nearly RM12 billion in gross development value (GDV).

The JV was through Liew’s private vehicle Eco World Investment, co-owned with his former long-time lieutenant at SP Setia Voon Tin Yow. The deal saw Eco World Investment acquire 75% interest in three London residential projects by Ballymore for GBP428.7 million.

By now these three projects are worth approximately RM13.2 billion in GDV, according to EWDG on June 17.

According to reports, Liew intended to offer his proposed Spac the first right of refusal to his interest in the JV. This raised the question of whether a proposed Spac listing can happen if the management already has prospective deals in hand.

International standards differ. The US expressly prohibits pre-identification of qualifying assets, while Europe is more accommodating, even allowing advanced negotiations before listing. And the Malaysian regulators’ stand is unclear.

To be fair, it is unlikely any Spac director would moot a blank-cheque listing without some idea of what is on the market, given his or her extensive experience. Nor does SC’s Equity Guidelines expressly prohibit pre-identifying qualifying acquisition deals prior to a Spac listing.

However, awareness of potential deals is starkly different from actively negotiating for and even having deals lined up prior to listing. The latter is frowned upon for Spacs, according to sources with knowledge of how Spacs work.

In other words, had EWI persisted in trying to list as a Spac, there is a strong possibility that the SC might have shot down its application anyway. That scenario would put EWI back to square one, which is what it is proactively doing by opting for an IPO now.

Merits of IPO route

That Liew has been persistent in trying to list EWI is understandable. The proposed Spac route would have raised RM1.9 billion in proceeds and he is eyeing RM2 billion from the IPO listing if it happens.

And going down the IPO route does has advantages over the Spac option. A major plus is that EWI would have an easier time roping in institutional investors to take a position in the exercise.

According to Kenanga Research, institutional funds generally have one issue with Spac listings: they are not mandated to invest in something like Spacs which do not have a core business activity, any real asset, nor any income stream at the point of listing.

Instead, institutional funds can only come in once the qualifying acquisition is approved and completed. In other words, EWI would have had a hard time getting institutional investors to come in until after it has been injected with one asset or another.

Even then, institutional investors may not want to by that time. EWI shares at that point would reasonably have appreciated, meaning potential upside would have been more limited and less attractive.

Hence by going down the IPO route, EWI can effectively tap into a larger pool of strong institutional investors, while at the same time avoiding a potentially awkward hurdle in terms of regulatory approval for a Spac listing examined above.

However, EWI still needs to meet the market capitalisation test before its IPO can happen. This test is one of two possible routes for an IPO listing and is outlined under paragraph 5.02 of SC’s Equity Guidelines.

That said however the strong responses to the Eco World-Ballymore projects indicate, meeting the test may not be an issue.

There are downsides to an IPO listing, however, as far as EWI is concerned. One is a delayed listing given EWI has to be operating for at least one full financial year prior to applying for listing, as outlined in the market capitalisation test.

In any case, the requirements of the market capitalisation test may explain why Liew chose the Spac route at first – a Spac listing is faster.

Essentially, through a Spac listing, Liew would have been able to raise the funds first before injecting assets into the company. In fact, his Ballymore JV showed that the assets intended for EWI had already started operating well before listing, a further hint at his desire for speed in getting his new venture up and running as a listed entity.

Therefore, the shift to an IPO listing may be a hint that he is resigned to a slower progress in the face of the potential regulatory hurdle down the Spac route examined earlier in this article. The choice of market capitalisation test, which requires only one full financial year compared to three through the profit test, adds weight to this.

As they say, better late than never.

Inject into existing Eco World?

Yet Eco World, the property brand, already has a listed entity on Bursa Malaysia doing exactly what EWI is set-up to do: property development. This raises the question of whether Liew should look to inject the assets intended for EWI into EWDG instead.

The main merits for listing EWI seems to be the funds raised, as well as the capacity to further raise funds from the capital market by virtue of being listed. By going down the IPO route, Liew can attract institutional funds more easily.

But this can also be done with EWDG. As a listed company, EWDG can tap into the capital market any time it requires a fresh injection of money into its coffers to continue doing business. It is already doing property development anyway.

An argument may arise in that EWI will be seeking to raise funds from fresh investors, particularly institutional investors with keen appetite and deep pockets. This relieves some stress from EWDG’s existing shareholders, who would not have to fork out more money through new rights issues and the like in order to absorb new assets.

But on closer examination, the argument falls.

What Liew can do is inject the Eco World Investment assets into EWDG. Taking the RM2 billion target as reference, issuing shares alone as payment would make Liew a majority shareholder of EWDG, whose market capitalisation as at June 18 was at RM3.67 billion.

This implies EWDG may want to absorb the assets by combination of shares and cash to Liew. It can raise the cash by either undertaking a rights issue to its shareholders or by doing shares placement to private investors, even institutional funds.

To be fair, EWDG had just completed a slew of corporate exercises underpinned by its RM3.8 billion land bank acquisition from major shareholder Eco World Sdn Bhd earlier this year. These exercises included a placement of 20% new shares, or 394 million new shares at RM1.62 each, as well as issuing new shares and rights shares that took its paid-up capital up to RM2.4 billion.

In other words, its shareholders may need some time to recuperate and regroup before forking out more nine-digit sums to support the company’s fast expansion.

But that does not mean an injection is impossible, just slower and more carefully thought out. EWDG may even forgo raising funds from shareholders, just borrow to pay for Liew’s assets and still come out ahead – borrowing money is a norm in such a cash-intensive business like property development and the ability to do it smartly is a strategic advantage.

The point is this: EWDG will have ways and means to make an assets absorption work. And this in turn means that EWI need not list after all.

So the question then is whether the Eco World property brand really needs two vehicles doing the same core business listed on the same bourse. That road leads to more conflicts atop Liew’s already complicated tangle of conflicts.

Tomorrow: From Spac to IPO, conflict still looms