Another Nice One From Maxis

On Star Business: Should Maxis’ current shareholders bear IPO costs?

• Saturday March 6, 2010
  Should Maxis’ current shareholders bear IPO costs?
  By ANITA GABRIEL
  
  PETALING JAYA: Should existing shareholders of Maxis Bhd bear the cost of its initial public offering when the proceeds went to its selling shareholders and not into the company’s coffers?
  
  That was the question that was being asked by several market observers following Maxis’ recently released fourth quarter results. For the period, the company made a one-time charge of RM120mil largely related to IPO expenses – RM53mil for discount of shares issued to retail investors in relation to the IPO and RM24mil listing expenses (the remaining RM43mil involves higher finance costs which is not IPO related) – in the company’s income statement. (Note: in the third quarter, it had made a charge of RM26 mil for IPO expenses.)
  
  As a result, the company’s earnings was dragged down; profit for the fourth quarter was 18% lower at RM503mil compared to RM615mil in the preceding quarter. Consequently, profit for the year was lower at RM2.23bil compared to RM2.40bil in the previous year.
  
  Here’s the rub. “They (vendors who are shareholders of Binariang GSM Sdn Bhd) owned the shares and they sold it. But now, they are charging the new shareholders of the company the cost of doing that?” asked a peeved observer.
  
  “Why should existing shareholders of Maxis subsidise the IPO cost for the selling shareholders or promoters of the company?” asked another irate observer.
  
  (Maxis was listed on Nov 18 last year. Maxis Communications Bhd, which is wholly owned by Binariang, offered for sale 30% of Maxis’ issued and paid-up capital. Retail investors got their shares at a discount at RM4.75 each compared to RM5 per share for institutional and cornerstone investors. The exercise raised some RM11.2bil which went to Binariang’s controlling shareholder T. Ananda Krishan as well as 25% owner Saudi Telecom Company. The company did not get any proceeds as it did not involve issuance of new shares)
  
  When contacted, Maxis chief financial officer Rossana Annizah Ahmad Rashid pointed out that these potential charges had in fact been disclosed in Maxis Bhd’s IPO prospectus.
  
  She highlighted sections 4.7 and 4.8 of the prospectus that state (i) expenses relating directly to the sale of shares, i.e. brokerage, underwriting, selling commission, were absorbed by the selling shareholder Maxis Communications, the recipient of the IPO proceeds, and (ii) professional (e.g. legal, accounting) and miscellaneous expenses (e.g. printing, advertising and travelling) incurred in relation to the IPO are recognised by Maxis Bhd, the listed entity.
  
  In addition, the prospectus also stated that “the expenses of the IPO to be borne by Maxis are estimated to be RM50mil.”
  
  But industry observers lament that the main issue is not about adequate disclosure but about doing the “morally right thing.” Truth is, the company has no choice as it has all to do with accounting standards which require the company to charge the IPO expenses as well as discount (retail against institutional investors) to the company’s income statement.
  
  “It’s an accounting quirk,” said a source close to the company. “An IPO is done by the company, so although it is also done by the secondary party (selling shareholder), the company needs to bear certain cost,” he explained.
  
  The quirk also extends to the issue of charging the company for the discount of shares to retail investors.
  
  “There’s no cash involved in this. No one paid any cash to anybody and no one lost any real money. It was an opportunity loss, not a cash loss. That opportunity loss, based on accounting standards is to be borne by the company.”
  
  Rossana elaborated: “The retail discount, which is a non-cash cost, was recognised by Maxis Bhd, as required by accounting standards. This item has no impact on total shareholders’ funds as there is a corresponding increase in other reserves. This is consistent with FRS (financial reporting standards) 2.”

Well how?

Do you still think that Maxis is a stock to die for?