What is a “Reverse Takeover”?
Reverse Takeover (RTO) is an acquisition by a publicly listed company of a private company, the size of which is larger than the listed company. The transaction will result in a fundamental change in the listed company’s business, the board, and voting control of the listed company. A reverse takeover is also a quicker way to bring a private company to the public markets without going through a costly and lengthy process of IPO.
The publicly listed company is often a cash shell or a special purpose acquisition company (“SPAC”), which are vehicles listed on the stock exchange with no assets other than cash. They are purpose-built to acquire an appropriate business in a specified sector.
Cash shells are frequently used to make acquisitions of companies that will grow rapidly. Following an RTO, the cash shell becomes an operating company and operates in the business of the acquired company.
In an RTO transaction, the public and the private companies conduct due diligence on each other, exchange information, negotiate terms, and finally sign a share exchange or share purchase agreement. The public company issues substantial new shares and board control to the private company’s shareholders. The private company shareholders receive the share payment from the public company and, as an exchange, give the shares in the private company to the shell company that they now control. The private company’s shareholders effectively become the majority shareholder of the public company, which completes the RTO. After completing an RTO, the private company’s shareholders become shareholders of the listed company, and the private company normally becomes a 100% subsidiary of the listed company. Thus, the private company becomes publicly held through the RTO.
Reverse Take Over Process
Post RTO Group Structure
Key Learning Points
- A private company can become publicly listed through a reverse takeover (RTO) without going through an IPO
- While an RTO can be cheaper and quicker than an IPO, the transaction is still subject to the regulator’s approval. In some countries, the due diligence and disclosure requirement for an RTO can be similar to an IPO
- After an RTO, the previously privately owned company shareholders benefit from the greater liquidity of their stocks. The private company gains greater access to capital markets since both retail and institutional investors can invest, which can drive up its valuation
- RTOs are a powerful tool for private companies to become public, but investors should study all prospective investments carefully and assess whether the “new” company is worth the price, whether the listed company has conducted sufficient due diligence on the private company, and if the management team has the necessary expertise to take the public company forward for years to come
Reverse Take Over Example
Phytopharm PLC is a listed cash shell mandated to acquire UK-based healthcare businesses with significant growth potential. On 23 September 2013, Phytopharm PLC announced acquisition terms for IXICO, a privately held medical technology company. Given the size of IXICO in relation to Phytopham, the acquisition was classified as an RTO.
Highlights of the RTO transaction
Acquisition consideration: an aggregate consideration of £5.6m was satisfied by Phytopharm PLC issuing 8,479,753 new ordinary shares at 66p per share.
Share swap: IXICO shareholders received 15.67 new shares for each IXICO ordinary share held.
Shareholders’ position in the enlarged issued share capital: Phytopharm PLC shareholders owned 45%, and IXICO shareholders owned 55%.
IXICO effectively became a publicly listed company through the RTO, and its shareholders became the majority shareholders of the enlarged issued share capital.
Reasons for the RTO and synergies between the two companies:
Phytopharm PLC considered IXICO to be a good target. Since its inception in 2004, IXICO had established itself as a leading provider of medical imaging analysis services in the clinical trials market. The company has shown consistent revenue growth over the previous three years, was increasingly recognized as a center of excellence, and specialized know-how in brain health and dementia. The company had valuable, innovative, and commercialized services, geared towards the clinical trials and experimental medicines market. IXICO had the potential to expand its business from the clinical trials market into the diagnostic market.
The two companies’ directors had the shared vision to expand the business internationally and develop more product offerings for those involved in researching and treating severe brain diseases, enabling them to help patients quicker. The management teams of both companies saw strong synergies between both companies. The directors could build on IXICO’s proven track record to grow shareholder value in the medium and longer-term following the RTO.
Reverse takeover/merger transactions have become increasingly popular in the global stock markets. In the US, an RTO is used by private companies to raise funds on the public market without the lengthy and expensive process of an initial public offering (IPO). However, in the UK, the transaction will require the publication of a prospectus, and the enlarged company will be treated as a new applicant for admission. As a result, an RTO is not considered a shortcut to going public in the UK. It is more usual for the target to be active in the same sector as the buyer. Nonetheless, reverse takeovers continue to be an option for companies seeking to strengthen their position and attract investment.
Download the accompanying excel files to test your understanding of RTOs.