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How Chemist Warehouse’s backdoor deal passes ASX pub test
How do you backdoor list a big company that is majority owned by two founders and their families and still have enough free float? Now, we have an answer.
Roll out the red carpet – Chemist Warehouse is finally coming to the ASX boards. And when it does, all eyes in capital markets will be looking for one thing; its free float.
How do you backdoor list such a big company that is majority-owned by two founders and their families, raise only a skerrick of new capital, lock up important shareholders, attract a big valuation, and still pass the free float test?
Chemist Warehouse’s deal to list via Sigma Healthcare is due to be signed in coming days. David Rowe
Per the ASX listing rules, at least 20 per cent of a company’s shares must be free float – that is, shares that can be publicly traded and are not subject to restrictions such as voluntary escrows or insider lock-ups – to ensure an orderly secondary market for the shares. It’s the ASX equivalent of the pub test, trying to ensure there is enough stock traded to create a proper market.
Chemist Warehouse, suitor Sigma Healthcare, the ASX and all of their lawyers have been talking about this issue for months. It is hugely relevant, given Chemist Warehouse’s size (roughly 85 per cent of the combined group based on our estimates) and the number of insiders on its share register that will be locked up as part of the transaction.
Sources said the ASX hasn’t issued any waivers – it is a coup to get Chemist Warehouse on the bourse, but not at the expense of the sort of foundations that support a $2.5 trillion-odd market. So, how will it work?
Sigma’s existing investors will own about 15 per cent of the combined group, which we will call SigmaHouse for now, and nearly all of that can be classified as free float.
Sigma will also raise about $350 million worth of shares, which will add another few per cent to SigmaHouse’s free float.
And the rest of the free float will be small Chemist Warehouse shareholders, who will be free to buy/sell stock as they see fit as part of the agreement.
Chemist Warehouse has more than 200 shareholders. By far the majority of the stock is in the hands of the Gance and Verrocchi families, and their stock will be placed under escrow given their importance to the group, their standing and their impact on how Sigma shares trade in the secondary market.
But there are a bunch of smaller parcel shareholders that are not insiders and whose stock will contribute to the free float. These shareholders include franchisees, who are a big part of the Chemist Warehouse story, but not the head office/management types that need to be escrowed for informed secondary market trading.
So between the Sigma shareholders (old and new ones that tip into the raising) and the small Chemist Warehouse investors, we should get to more than 20 per cent of the combined SigmaHouse.
All is expected to be revealed on Monday, when Sigma and Chemist Warehouse’s owners announce their transaction.
It is the sort of deal that will pique bankers and lawyers’ interest because of the size and structure. Backdoor listings are rare at the bigger end of the market – the only other one worth $500 million or more in recent years was Regal Partners’ deal into VGI Partners.
SigmaHouse’s free float and how its share register appears post-deal is also highly relevant to investors. The new-look company should be big enough to crack the ASX100 index and find a home in Australia’s large caps sector, given its near $10 billion valuation. However, S&P also considers free float as part of its index inclusions.
Assuming the deal values the combined group at about $10 billion, and the listed company passes the 20 per cent free float test, the bulked-up SigmaHouse should have a $2 billion-plus free float.
That likely makes it big enough for the S&P/ASX200, but there may have to be more loose stock before it can join the big kids’ table in the ASX100.
As for the dealmakers, those escrows will see SigmaHouse added to block trade watch lists, as bankers get ready to chip away at stakes held by the Gances, Verrocchis and other insiders. Lawyers will also be watching to see how far the merger parties have gone down the regulatory approvals path.
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