Last Thursday, early in the morning, a group consisting of investment bankers, lawyers, accountants, and other players in the capital market, Israelis and British, gathered in the garden of the residence of UK ambassador to Israel Tom Phillips. Sipping their coffees, they exchanged business cards, enjoyed the early morning sun, and were almost reluctant to make their way indoors, despite being urged to do so by Richard Salt, director of Trade and Investment at the British Embassy.
The conference, whose theme was "London Listings - What's Next?", was arranged by Graham Dallas, head of international business development at the London Stock Exchange (LSE). It aimed, among other things, to review the UK's stock exchange's activity on the Israeli scene over the last three years, and assess how this is likely to develop in the future. London’s Alternative Investment Market (AIM) began operating 12 years ago, but Israeli companies only began flocking to it in the second half of 2004. The first company to list that year was Nipson Digital Printing Systems Ltd. (AIM: NDP), and the only ones to precede it were Pilat Media Global Ltd. (AIM: PGB; TASE: PLMG), which floated in 2002, Pilat Technologies International Ltd. (LSE: PIA; TASE: PILT), which floated in December 1996, Emblaze Ltd. (LSE: BLZ), which listed in October that year, Mondial English Holdings Ltd. (AIM: MEH), which floated in July, BATM Advanced Communications Ltd. (LSE: BVC), which floated in June, and Dmatek Ltd. (LSE: DTK), which floated in December 1995.
Once ambassador Phillips had said a few words and left ("I have another commitment"), and Dallas had given an overview of the stock exchange's activity, past, present, and future (not before he said jokingly, "Now we can wreck Tom's house for him"), it was the turn of the main speaker at the event, Joel Plasco, CEO of UK investment bank Collins Stewart Plc (LSE: CLST). Collins Stewart is considered the leading investment bank for small to medium-size companies in the UK, and last year it was the bank that raised the most from IPOs on AIM (₤1.7 billion, in 28 IPOs). Collins Stewart has floated three Israeli companies on AIM so far. The first was Ki-Bi Mobile Technologies Ltd. in April 2005, (recently merged with Zone IP (AIM:ZIP) -formerly Emblaze-VCON), followed by Playtech Cyprus Ltd. (AIM:PTEC) in March 2006, and Polymer Logistics Ltd. (AIM: POLL) in December the same year. The bank currently has a market cap of $910 million and is listed on the FTSE mid 250 Index.
Plasco chose to focus, in his lecture, on the correction of a number of "misconceptions," as he described them, about AIM. The first of these relates to the role of the nominated adviser (NOMAD), the investment bank which serves as an appointed consultant to the company and acts as a form of regulator, in the absence of a regulatory authority governing AIM. "If something goes wrong, it's the NOMAD's reputation that is at stake, so my message to you is don't think AIM is an easy option," said the Collins Stewart CEO. He immediately followed this with a comment on AIM's liquidity level. "The liquidity level on AIM has been rising consistently, and is currently at a high. True, there are small companies whose liquidity is typically low, but these do not represent the market overall. Liquidity is a function of company size, and the proportions of floating capital, not the type of market it is traded on."
Plasco ended his lecture with a comment on the image Israeli companies have on the UK capital market. "It's true that some Israeli companies listed on AIM too soon, but on the other hand, there are others that have proved themselves, such as Bateman Litwin, for example. We need to impress on UK investors that not every Israeli company is necessarily a pig in a poke."
Globes: Joel Plasco, you sounded quite defensive in your lecture.
Plasco: "I don't agree with you. The aim of conferences like these is to educate the people that attend them. I think that there are number of misconceptions about AIM, and what I did was say 'there are misconceptions and they're wrong because….' That's not being defensive. Period. Frequently, in order to highlight the opportunities in what you're proposing, you first have to put right the misconceptions that exist about it."
But how do you explain the large number of companies that floated on AIM and let their investors down shortly after?
"I can only talk about standards at Collins Stewart, not those at other investment banks. That said, it's quite clear, to me at least, that the standards of all the others are not on a par with ours, and that some of companies that listed on AIM should not have been floated there. In most cases, these are small companies which issued a low proportion of their equity, and did not take the time to develop investor relations once the offering was complete. There were quite a few companies whose managers returned to Israel, or China, or Vietnam the day after the listing, and didn't bother coming back to London, maintaining regular contact with their NOMAD and issuing proper announcements as they were required to do.
"So companies like these should not be surprised if their stock collapses. Every company needs to realize that a listing is not a quick fix solution. Issuing a company just so that it can be publicly traded is pointless, since ultimately it will boomerang on the company itself. At present, nine of the ten companies slated for a listing on AIM are unsuited to such a move, but when they consult our competitors, who are interested in the fees they can charge them, they'll get a positive reply.
"Despite all this, rather than being defensive - as you put it - and looking at what goes right and what goes wrong, we have found good companies that have been floated on AIM. In other words, if the company is suitable for a listing, then AIM 's the right place to float it. If it isn't, it doesn't really matter where it is traded."
Most listings on AIM have the same investment bank serving as both NOMAD and broker, two roles that could create a conflict of interest. Shouldn't these be separated?
"I don't think there's a conflict of interest between the two. First, most of the offerings on AIM are by small to mid-size companies, not giants, which can engage a number of investment banks and give each one a role of its own. So the consolidation of roles both reduces costs for the company and also allows it to get on with managing its activity instead of managing contacts with dozens of banks.
"Second, the conflict you refer to no longer exists. If in the past, a broker felt it was important to sell the shares to his institutional clients at the cheapest price, while a NOMAD aimed for as high a price as possible, in order to increase the return on investment for the shareholders and/or the company, it no longer works like this now. Today, every company knows the value it is aiming for, and the investment bank filling the two roles mentioned is supposed to help it reach the target, while taking into consideration market conditions. So at the end of the day, the only conflict is the one between the cost of hiring one investment bank or two."
And what about quarterly reporting? Isn't time that AIM-listed companies published quarterly financials?
"No, not in my view. Quarterly reporting would merely add to the company's work and it would not give investors any more information than they already have."
Too little, too late
A month ago, the earth shook beneath the feet of investment banks serving as NOMADs, such as Collins Stewart. For the first time in its history, the LSE fined a UK investment bank called Nabarro Wells & Co., which had served as a NOMAD, publicly condemning its shoddy activity. In an announcement that amounted to an indictment, the LSE said, "the bank's systems and controls failed did not satisfy the eligibility criteria; it failed to act with due skill and care; it failed to undertake the necessary due diligence to assess the appropriateness of certain companies for admission to AIM, and it failed to make due and careful inquiry into whether certain AIM companies' admission documents complied with the AIM rules." The LSE fined Nabarro Wells ₤250,000.
"I think this was too little, too late," says Plasco when asked to comment on the issue. "I'm very glad it did happen, not for Nabarro Wells - because it's unfortunate for them - and not because I want the competition I'm up against to decrease, but because a move like this on the part of the LSE should have happened long ago.
"If we could go back for a moment to the misconceptions about AIM, and your view on the manner of my lecture, those perceptions resulted, among other things, from the fact that the LSE has not bothered to enforce its rules until now."
If so, what has changed?
"Six years ago, the LSE itself became a public company (it was floated in July 2001, T.T.). In other words, it ceased being a government body, and the regulatory power it exercised decreased. So it wanted to create a situation where if it criticized and fined another entity, it would be secure enough with the facts it had, otherwise it could end up being sued itself."
In your estimate, will the action taken against Nabarro Wells have an effect from now onwards on the way other NOMADs operate?
"I very much hope so. I hope it will make them realize that they have a commitment to the stock exchange and investors that they cannot ignore."
"Teddy thinks Playtech is worth much more"
Playtech, which develops online gaming software, was mentioned quite a few times during the conference and with good reason. The company, which has now been traded on AIM for the past 20 months, is one the most successful Israeli offerings on that market. It was issued at ₤2.57 a share, crashed to ₤1.42 following the closure of the US market to online gambling, and then rose like a phoenix to its current price of ₤3.63, reflecting a return of 41% on its IPO, a 50% return since the beginning of the year, and a market cap of $1.6 billion.
Plasco, naturally, is proud of Playtech's success and is unstinting in his praise. "The stock's good results prove, among other things, that there are investors who are still capable of disregarding the shoddy image that Israeli companies have acquired on the UK capital market, and can spot a good company when they see one and add it to their portfolios," he says.
How does the fact that Collins Stewart is both Playtech's NOMAD and its broker work in practice?
"Collins Stewart's bankers and analysts are in regular contact with the Playtech management, and have discussions with them almost every week. The discussions address the company's activity, the way investors see the company, and regulatory developments in the online gaming sector, and how we can help the company explain to investors how regulation will affect its business."
Judging by the stock's performance, it appears to be working.
"True. Demand for the company's shares has been consistently high, as has the stock's liquidity level. What's more, the feedback we've been receiving most from investors is that there is not enough floating capital, and so they would like to see some of the company's founders selling a further part of their holdings to increase the amount of floating capital and liquidity."
When Plasco says 'company founders' he mainly means controlling shareholder Teddy Sagi, who holds 46% of Playtech. Sagi sold shares for $291 million in the IPO and his current holding is worth $736 million. The company's other parties at interest are Blackrock Investment Management Ltd. which owns 5.2%, and Interexpo Trading Ltd. which owns 4.1%.
And what does Teddy Sagi think about this?
"Teddy told he's not willing to sell more shares right now. He believes Playtech is worth a lot more than it is at present."
How much more?
(Laughs) "In his words, a fortune. Several billion dollars. To be honest, all Playtech's managers and founders and its shareholders are proud of the company's achievements. They believe it's on its way up, so they'd rather hold on to their shares and not sell them for the time being."
Published by Globes [online], Israel business news - www.globes.co.il - on November 19, 2007
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