Reverse mergers are takeovers where the target is larger than the buyer, or the target is listed but the buyer is not. In this case, the DX Group, which is already listed on the Alternative Investment Market (AIM), is buying the larger John Menzies Distribution, and so the deal is classed as a reverse takeover under the AIM rules. Why consider reverse mergers? Reverse mergers are carried out for a variety of reasons. In the US, especially, they are used by private companies as a way of raising funds on the public market. By acquiring a public company with only nominal operations and assets – a shell company – a private company can access capital markets without the lengthy and expensive process of an initial public offering (IPO). In the UK, it is more usual for the target to be active in the same sector as the buyer. Eddie Stobart Logistics achieved public listing in 2007 in a reverse merger with the Westbury Property Fund, a logistics and property business. A reverse merger may allow a company to relocate its headquarters. In 2015, US pharmaceutical giant Pfizer planned to move its head office to Ireland – and cut its corporation tax bill – in a reverse merger with Dublin-based Allergan. The deal collapsed in 2016 after a clampdown on tax avoidance moves by the Treasury. In January, Formenta, a British company, was absorbed by its Italian subsidiary Newco Immobiliare in a reverse cross-border merger – an EU mechanism which is likely to see further use as the UK moves towards Brexit. A reverse merger can also assist a business with reputational difficulties. Merging with AirTran Airlines enabled US airline ValuJet to rebrand itself as AirTran after a fatal accident. Pros and cons of reverse mergers A study by City University has highlighted the benefits of reverse mergers. They may bring higher value and greater liquidity to the buying company’s shares. The unlisted private company meanwhile will then find it easier to use share-based incentive plans and carry out further acquisitions using listed shares. In comparison with an IPO, there may be less share dilution for the original shareholders, and it can be easier to satisfy the conditions for listing. Investors may be more willing to support a reverse merger than an IPO, especially in a falling market, and an already-listed company will generally receive more coverage from analysts. On the other hand, there are some disadvantages. The possibility of liabilities attaching to the listed company brings a higher level of risk than an IPO and highlights the importance of due diligence. Another consideration is the possible need for a lock-up agreement with significant shareholders in the listed company, who might be seeking an exit, to prevent them from selling their shares for a period after completion. While appearing to be a quicker and easier route to the public markets than an IPO, a reverse merger still presents regulatory obstacles. It is likely that trading in the listed company’s shares will be suspended, as is currently the case with DX. Further, on AIM the transaction will require approval by the listed company’s shareholders and publication of an admission document (similar to a prospectus), as the enlarged company will be treated as a new applicant for AIM admission. Shareholder approval will also be required for a waiver of the mandatory bid provisions of the takeover code if the private company’s shareholders will acquire shares carrying 30 per cent or more of the voting rights of the listed company. The enlarged company will then need to ensure continuing compliance with the requirements for a listed company post-completion. Outlook With recent news that John Menzies is considering its position after DX’s announcement of a police investigation into its operations, the outlook for the DX deal is uncertain. Nonetheless, reverse mergers continue to be an option for companies seeking to strengthen their position and attract investment. Andrew Betteridge is a partner and head of corporate and commercial at Ashfords
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