– Everything must be ready for the first acquisitions – E24

The collapse of the prices of a large number of shares on the Euronext Growth stock exchange attracts investors who are looking for a good deal.

On Tuesday, the Norwegian Venture Capital Association (NVCA) is organizing the breakfast seminar “From Public to Private – Takeovers of Companies Listed in Euronext Growth”, in association with the law firm Selmer.

“Today, there are 120 companies listed on Euronext Growth Oslo. Many companies have capital requirements, and many have fallen significantly in price since listing. So everything should be ready for the first acquisitions of Euronext Growth,” the invitation said.

NVCA organizes private equity (PE) and venture capital players in Norway, known as buyout funds, and organizes regular professional seminars under the name «PE at Breakfast».

– And now the buyout fund is going to eat the rickety growth stock for breakfast?

– He, I wouldn’t say it like that. However, we note that many of these depreciating companies need capital, and one possible solution to this is to be acquired by a private equity firm, says partner Selmer Are Herrem to E24.

Risks of getting paid less

Buyout funds, as the name suggests, live by acquiring and improving companies, so that they can be resold after a few years of gains.

Herrem is a private equity specialist and one of the speakers during the seminar, along with his colleague and partner Andreas Jarbø, for whom Stock and Securities Law is one of his areas.

– What we’ll be reviewing is how this acquisition is technically implemented, which is different from the main-listed companies on the Oslo Stock Exchange, says Hierem.

– The key word here is perhaps less protection for minority owners?

– Yes, you can probably say that. Herim says they are not as protected as in the Oslo Stock Exchange.

Euronext Growth is a less regulated market than the Oslo Stock Exchange and Oslo Axis, with lower documentation requirements and a faster acceptance process.

Among other things, the mandatory bidding rules do not apply to Euronext Growth. It obligates an investor who exceeds the ownership limit of 33, 40 or 50 percent to bid on the entire company at the same price.

– Let’s say you buy up to 50 percent more in a company. After that, you usually pay a premium on these shares, as it guarantees control. Without a bid commitment, Yarbrough says, you don’t have to offer the same price to the rest of the contributors, but you can try with a lower bid.

He points out that the main justification for the obligation to make an offer is to ensure that the “control premium” is shared equally among all owners.

– Worrying about his reputation

Another important reason to stick to the offer is that it can have a negative impact on a stock’s liquidity and valuation if you get a large, dominant owner, says Garp.

So small shareholders in Euronext Growth companies risk being left with the cat in the bag?

The risk is greater, of course, without an offer commitment, but I also think private equity firms trying to take over would be interested in maintaining a good reputation in the market, Garbo says.

He points out that recent acquisitions of companies that were not subject to the bid obligation, such as Torghatten and Oslo Børs VPS Holding, have nonetheless been made in a manner very similar to voluntary bidding.

Small shareholders will also be protected by stock legislation when it comes to abuse of power by the majority, so the extent of the cynicism can be limited, Garbo notes.

All shareholders of a Norwegian limited company are entitled to forcible redemption if one owner exceeds 90 percent.

However, the Oslo Stock Exchange may allow a company to be delisted in cases where the principal owner owns less than 90 percent, despite the fact that this makes it difficult for small shareholders to sell their shares afterwards.

In such cases, however, Oslo Bors was concerned that small shareholders would have had a reasonable opportunity to exit earlier, and my gut feeling is that they would adopt this practice with Euronext Growth as well, Garbo says.

We were the seller – now they are the buyer

The influx of new companies into Euronext Growth over the past year and a half has been driven by strong stock markets, risk-hungry investors and higher prices.

Many buyout funds have used euphoria to sell themselves into portfolio companies through market listing, after discovering that this gave a much higher price than auctioning in the private market.

After several months of strong price development, prices turned wildly at the beginning of 2021. Everything from high interest rates to lack of business progress and over-optimistic forecasts were used as an explanation.

finansavisin It recently calculated that an all-equity investment in Euronext Growth a year ago would have yielded a return of less than 16 percent, which is 35 percentage points weaker than the benchmark in the same period.

So far, Euronext Growth has been used primarily as an exit opportunity for private equity funds. Now, lower prices at many of these companies mean we’re headed in a new direction where funds are more interested in buying, Herrem says.

Even when Euronext’s growth spurt was in its infancy, many indicated that new companies would need massive capital to pursue their growth ambitions. Many of them have significant deficits and have not yet developed commercial products.

Robert Ness, chief investment officer at Nordea, identified needs of up to NOK 200 billion in November 2020. Since then, dozens of new companies have rang the stock market bell.

The combination of a ruined share price and a greater need for capital necessitates significant dilution for those owners who cannot or have the opportunity to participate in the issues.

Do the many small shareholders who invested in these companies have to admit that the money is lost forever?

One should probably expect that all of these companies will be required to raise the capital they need, says Herim.