Shares in Melco
International Development, operator of the Jumbo floating restaurants,
were up 285% today on the back of a proposed acquisition of respected
e-commerce developer iMerchants. Only problem is, we don't think the deal
will ever happen.... |
Melco's Floating Merchants
7th December 1999
Shares in Melco International Development Ltd (Melco)
took off today when the company announced a Heads of Agreement entered into on
24-Nov-99 in relation to the proposed acquisition of a 48.75% interest in
Exploration Enterprises Ltd, a BVI company which will own all the business of
respected e-commerce developer iMerchants
Group. Melco is better known as the owner-operator of the Jumbo floating restaurants
in Aberdeen, Hong Kong.
The shares closed up a whopping 285% at $3.85. The only problem
is, in our view the deal will probably never happen. The Listing Division of the
Stock Exchange has stated that the acquisition is what is known as a "Very
Substantial Acquisition" or VSA and would be treaded as a new
listing application by Melco. The company is appealing this decision to the
listing committee, but history is not on their side, as the listing committee
very rarely sides against the executive staff of the listing division on matters
such as this. The deal is conditional on a favourable ruling, so If the ruling
is upheld then the deal will not proceed.
The reason for this condition is that, if the deal were treated
as a new listing then it would probably not pass the track record requirements.
Like most internet businesses, iMerchants is young, having been founded only in
1996. Therefore it would likely lack the necessary 3-year audited track record,
as the third set of accounts are probably not yet available. Secondly, the
announcement admits that "the businesses which will be injected...have
not previously operated as an integrated group of companies." It
continues "Exploration Enterprises therefore has no historic financial
statements". No doubt the individual component businesses of iMerchants
have some sort of accounts, but it would take a lot of time to compile and audit
them into group accounts.
Finally, even if the 3-year track record is available, the
combined group almost certainly won't show the necessary profit requirements for
the main board. That's a profit of $20m in the most recent year and $30m in the
last two years. Melco itself made a loss of $11.8m in 1998 so that makes
iMerchants hurdle even higher. For the last two years, Melco made a total loss
of $1.4m so that doesn't help either.
Backdoor Listing Rules at Stake
The SEHK faces a crucial test here. If they allow the deal
through, then they are opening the door to other back door listings for
companies which more rightfully belong on the new Growth Enterprise Market
(GEM). We happen to think that iMerchants is one of Hong Kong's leading
independent e-commerce companies, but if it wants to go public then they should
go through the proper channels and seek a GEM listing. Opening the back door
would undermine the development of GEM and reduce the transparency of the
flotation process.
Perhaps the only way out of this would be for Melco to apply for
a listing down on GEM. But in that case, surely iMerchants would rather go it
alone than tie up with a floating restaurant business?
Interestingly, 3 weeks ago on 10-Nov-99 Melco announced that it
was "considering two proposals regarding a possible disposal of assets
which are surplus to its operational needs and an acquisition of assets by the
Company in relation to its core business."
It is not clear whether one of these transactions was the
iMerchants deal, and whether the other was a disposal of part or all of the
restaurant business, or perhaps some of its property interests. Melco owns a
residential building called Art Court at 5 Tung Shan Terrace, Stubbs Road, and
509 car park spaces at the Jumbo Court Public Carpark, 3 Welfare Road, Aberdeen.
© Webb-site.com, 1999
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