A few times this summer we have been asked to comment on valuation and capital structure issues arising from a proposed Canadian Capital Pool Company (CPC) transaction with a reverse take over target.
Our answer when it comes to dilution of the target company shareholders is usually the same if the target company has any substance at all. That is, the dilution from the qualifying transaction (QT) itself is generally de minimis. In other words, it can cost very very little to go public.
The real dilution arises from the financing the amalgamated company usually requires simultaneous with the going public transaction. But, then again, the target company likely required this financing anyway, and the going public transaction only helps the valuation and prospects of financing.
The QT negotiation should never fall apart over price. The valuations of the CPC and target are relative. What really matters is the value of the financed amalgamated company, whether there is secondary support for the stock post QT and plans to move past the TSX-V.
HERE is an example of a recently completed QT between W 7 (the CPC) and ViXS (the target). The going public transaction only diluted the ViXS shareholders by 0.94% (they still owned 99.06% of the business and had gone public). The financing diluted them to 66.91%. But they raised a lot of equity, presumably at fair market value.
With respect to the W7 shareholders, by my rough calculation, they are up at today’s prices, but not much. Maybe there was room for them to have gotten a little better deal.
Posted by Scott Sinclair, Range Advisors
(with a thanks to Kurt for reviewing the transaction and crunching some numbers)
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