Entropy slams IPO candidate Zap's corporate governance

Zehavit Cohen  photo: Rami Zarnegar

The Israeli investment institutions consultancy company is not enthusiastic about how the online ad group, which plans a TASE IPO, is managed.

While Apax Partners is conducting other discussions with investment institutions in order to rescue the offering by Internet company Zap from complete failure, Entropy, which provides consultation for investment institutions, is shining a spotlight on another aspect of the company making the offering - poor corporate governance.

A commentary on the subject published by Entropy ahead of the planned offering by Zap described the company's corporate governance as poor and states that up until now, a number of elements that are an inherent part of corporate governance have yet to be implemented and will therefore be given weight in an assessment of the company."

The Zap group is active in advertising and providing of management tools for small and medium-sized businesses. According to figures from the company, 400,00 businesses are registered on the group's websites and it has 23,000 paying customers and 16 million hits a month. Zap currently has 23 websites. Among the most prominent are Zap Price Comparison, the Rest restaurants website, Mitchatnim (a matchmaking website), the Zap Doctors medical website, Zap Deliveries, and other content areas, including law, design, hobbies, and so forth.

No remuneration and dividend policy

Among the weaknesses in Zap's corporate governance cited by Entropy is the composition of the company's three-member board of directors, "all three of whom are simultaneously serving as directors in companies related to the controlling shareholder in the company. One of them, Zehavit Cohen, is CEO of Apax Israel and a partner in global company Apax Partners."

"The director who signed the financial statements attached to the draft prospectus has no academic financial training and no academic training in the company's field of business. He also provides the group's company with consultation services through a private company under his control," Entropy writes. These services are provided for NIS 20,000 a month, plus individual consultancy for up to NIS 10,000 a month.

The director in question is Itay Shiloni, who has a BA in theater and a PhD in psychology. In addition to providing consultancy services, he is a lecturer at the Arison School of Business Administration at the Herzliya Interdisciplinary Center and a director in other Apax companies, such as Schulz Catering. Shiloni received NIS 370,000 from the company in 2017.

Other points mentioned by Entropy involving corporate governance at Zap are that the company has not adopted a dividend distribution policy or a remuneration policy and has not yet appointed an internal auditor.

Entropy accordingly gives Zap's corporate governance a negative and below average mark, leading to the conclusion that "The materialization of failures and negative events resulting from faulty management mechanisms, failures in auditing arrangements, and poor organizational culture" is highly likely. This rating does not indicate the company's value or the feasibility of its offering; it refers to the way the company is managed and the possibility of a failure in corporate governance.

Zap said, "The Zap group's corporate governance is appropriate for a private company. When the Zap group becomes a company whose shares are listed on the TASE, the composition of the group's board of directors and the relevant rules will change in accordance with the requirements for a public company."

Investment institutions want a lower company value

Apax Partners, the controlling shareholder in Zap, and the underwriters for the offering, headed by Leumi Partners, have been holding intensive talks in recent days with a number of prominent investment institutions in the market in an attempt to reach understandings about the price at which the offering could take place.

As reported this week by "Globes," the investment institutions want to lower the company value for Zap in its IPO by 40% to NIS 400 million, which Apax finds it hard to accept. Apax, led by Zehavit Cohen, plans to hold the IPO at a company value of NIS 650-700 million, four times the value at which it acquired ownership of Zap from a series of investment institutions in 2015, and yesterday filed for an IPO for the second time.

Little transparency, processes just beginning

Despite the focus on Zap, it is not the only company in this position. Following the wave of IPOs on the TASE, with nearly 30 new companies since the beginning of 2017, Entropy recently began rating corporate governance in the companies that are candidates for joining the trading arena. The resulting data shows that these companies feature a low level of corporate governance.

In the framework of its activity relating to corporate governance, Entropy reviewed all of the recent companies whose IPOs were imminent, completed, or failed. Among the companies already listed on the TASE are Globrands, Delek Royalties, and Clal Beverages. Companies whose IPOs failed include Fresh Market and Ace. Candidates for a future IPO included in Entropy's survey include Reit Azorim - Living.

Entropy explains that because these companies are just now becoming public companies, their level of corporate governance is usually fairly low, among other things due to the low level of transparency and processes in the initial stages, which are likely to improve later and contribute to achieving the necessary level.

Entropy corporate governance CEO Adv. Matti Aharon says, "New companies holding an IPO are usually terra incognita to investments and their level of corporate governance helps quantify the risk. A risk in the level of corporate governance can affect the company's business risk. In the past two years, we have seen quite a few offerings with a level of risk that materialized. We are therefore expressing opinions on this point."

Aharon adds, "As a trend, no company comes to the TASE with a reasonable level of corporate governance. They all have a low level of corporate governance and investors have to realize this and take it into account in their negotiations over the value in the offering in order to reduce the risk.

"There are many significant aspects concerning a company's corporate governance and not all of them can be adopted from the first day. If a company is more prepared in this matter, however, it can help attract the type of investors willing to take part in the IPO. It will be more comfortable for investment institutions in the pension and insurance sectors to invest.

"It is best for private companies considering an IPO to improve their corporate governance milestones, or at least to devise a plan that will show investors how they plan to improve the company's corporate governance.

"Such improvement achieved ahead of the IPO will enable the company to reduce the large corporate governance risk in becoming a public company. On the one hand, it will provide better access to investors whose investment considerations also taken the company's level of risk into account. In other words, raising the level of corporate governance in companies holding IPOs will serve a company seeking to reduce its risk, while at the same time making the IPO more attractive in terms of risk.

"As a trend, it takes new companies about one quarter in order to appoint external directors. It takes them a few months to establish an internal auditing plan. They do not address the subject of remuneration in the first years following the IPO."

Published by Globes [online], Israel business news - www.globes-online.com - on August 9, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Zehavit Cohen  photo: Rami Zarnegar
Zehavit Cohen photo: Rami Zarnegar
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