Over the past decade, private equity investors have invested huge amounts in buyouts. But these operators ultimately need to exit those investments to get liquidity for their portfolios, typically via an IPO. Unfortunately, the public offering market has remained lackluster (with Facebook (NASDAQ:FB) cooling what little ardor there may have been). So to help things along, Wall Street is looking at financial engineering.
Today we saw an example of this: Burger King (NYSE:BKW). Back in 2010, the company went private in a $3.3 billion transaction. As of today, it’s back on the NYSE. But it pulled this off by using a convoluted process. Burger King merged with Justice Holdings, which was traded on the London Stock Exchange. For this, Burger King’s private ownership group, 3G Capital, received $1.4 billion from Justice, and the name of entity changed to Burger King Worldwide. The company then met the listing requirements for the NYSE (see “Burger King Is Back — WITHOUT an IPO” from InvestorPlace Editor Jeff Reeves).
Interestingly, as complex as it sounds, this was easier than a traditional IPO, which requires an extensive regulatory review and grueling roadshow presentations. In today’s volatile market, it can be extremely important to speed up the process.
Such backdoor IPOs — or “reverse mergers” — have been a common type of transaction. But for the most part, they’ve been used for small companies, with the listings on non-exchanges like the over-the-counter markets. The problem is that these deals have been vulnerable to fraud. In response, the Securities & Exchange Commission has been tightening up its standards for reverse mergers.
Yet the reverse-merger deal structure could become much more common for larger companies. After all, KKR (NYSE:KKR) used it for its own listing, and it has worked out fine.
If anything, the new JOBS Act may be a key as well. The goal was to help small companies raise money — with the ultimate hope of increasing hiring. But ironically, the JOBS Act may be ideal for backdoor IPOs of mature companies, which often focus on job cutting!
The legislation has a classification called an “emerging growth company.” It actually has little to do with growth. Instead, this is a company that has less than $1 billion in revenues. For such an operator, the regulations for audits and financial reporting are much less rigorous.
In other words, it makes a reverse merger more attractive — especially for decent-size companies that are in the portfolios of private equity funds. According to a recent piece in The Wall Street Journal, over a dozen such transactions are already in the pipeline.
Yes, the JOBS Act looks like another example of the how Wall Street can find valuable loopholes. In the end, reverse mergers could represent a boon for industry players looking for a way to unload their positions.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.