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
7 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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