False start

Wednesday 1st August 2001

The New Capital Market was supposed to nurture new public companies. So why is the nursery bare?

Cabletalk chairman Ross Keenan has an oft-told yarn about the New Capital Market. A few months ago he was phoned by a shareholder of the NCM-listed company who was happy the stock he bought at $0.70 had doubled in value. "You guys are doing a great job," the shareholder said. Almost as an aside he asked, "What is it you do, again?" Cabletalk Group was then just a cash-box. It hadn't made, in the NCM parlance, its key transaction. Which means it didn't actually do anything, yet.

When Keenan valiantly tried to explain the market's intricacies, the eager investor replied, "Just carry on as you have been. Don't do anything". In late June, shareholders approved the key transaction, buying telecommunications network service company Cabletalk Astute Network Services. That shareholder stayed on the register.

Keenan's yarn proves a point - the Stock Exchange's New Capital Market, set up last March with great hoopla, is not well understood. What's more, those who know it love the idea, but it just isn't working the way it should.

So, last month the stock exchange suggested a cure: changing from a two-step process to one-step, to reduce costs. The way it works now, an NCM company lists as a shell, raising up to $1 million from directors and from an initial public float. It then has 18 months to complete a key transaction - that is, to buy or set up a company. The aim is to bring the listing and key transaction together.

At least one broker likes the idea. "The NCM is sold not bought. Having one step means we can market it better," says John Reuhman, whose own broking company is NCM-listed as nzij.co.nz. But many question whether the change will be enough to stimulate the NCM.

A host of problems assail the fledgling market. So far, 11 companies have listed on the market and nearly all complain the process is too bureaucratic and too costly (see table). The biggest expense is legal and accountancy bills. Many brokers aren't actively pushing it because it's not worth their while.

Some NCM companies complain it would have been cheaper and less hassle to have gone straight to a main board listing or raise the money through the increasingly active unlisted market.

Rocom Wireless managing director Steve Borich says that while early companies like his own blazed a trail that made things easier for later companies, he and many others think the protection for investors is still too stringent for the relatively small amount of money being raised.

Neil Craig of ABNAmroCraigs says more NCM companies need to list on the main board before there will be any real upsurge. So far, only two have done so. Cabletalk recently jumped to a full exchange listing when its key transaction lifted its capitalisation over the $10 million limit for NCM companies. Selector Group has had a torrid time since graduating to the main board, trading at an abysmal $0.04 compared to last year's $0.50 issue price.

The upshot of these problems is in the figures: no NCM companies have listed this year. Mind you, there haven't been any main board IPOs since November either.

The original NCM concept, borrowed from Canada, was about capital looking for opportunity. Here, the reverse has occurred. Of the 11 companies that listed on the NCM last year, all knew their key transaction before they listed. Several companies trade below their issue price, although Mooring Systems - one of two to still complete its key transaction - has rocketed to around $2.

Will moving to a one-step process improve things? It should make it quicker and cheaper, although most of the costs are in the key transaction. The stock exchange could be flexible and allow two processes: one that would suit those who identify their key transaction from the word go, the other for those with capital, seeking new opportunities.

But the main beef about too much red tape remains. There are also calls for NCM companies to be allowed to borrow and for the public to be able to invest higher amounts. Perhaps the biggest unaddressed issue is the need to better promote the NCM to the public. More brokers need to get involved rather than rely on the stock exchange to educate investors, says Forsyth Barr director Andrew McDouall. But as Keenan found out, there are limits to what investors want to hear.

Fiona Rotherham
fiona@unlimited.net.nz

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