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Jun 06, 2010

Beware the stampede: companies rethink US listings

New round of de-listings from US exchanges by European companies

After years in which an NYSE listing was considered the gold standard for major international companies, this year has seen a sudden rush of de-listings, particularly by German companies.

Rather than being the result of a burst of economic nationalism, however, all the indications are that the movement is a product of globalization: electronic trading platforms with screens in every trading room around the world and investors who have generally abandoned their old parochial inhibitions, particularly Americans. With the European shift to IFRS and the NYSE’s acceptance of the new accounting rule – indeed, with the possibility of IFRS fully replacing US GAAP under consideration – there has already been convergence.

De-listing was once the ignominious fate of companies whose stock price had plummeted below a dollar and showed no signs of recovery, but Deutsche Telekom and Daimler opted to do so when the NYSE’s turnover of their global stock fell below 5 percent.

It’s not just the Germans who are weighing up their options in New York, either: Greece’s Hellenic Telephone Corporation joined the exodus from the NYSE, following French insurance giant AXA, which announced its plans in January 2010, and UK-based broadcaster BSkyB. For Daimler this was coming full circle given that it was the first German firm to seek a listing, 17 years ago.

Hard to leave
Prior to the amendment to the ‘Hotel California’ situation in 2007, European issuers who wished to downgrade their US listings found it very difficult to do so. The SEC’s rules dictated that you had to have fewer than 300 US shareholders to stop following SEC rules, which was very hard for companies to prove, leading to the Hotel California moniker – because you could check out any time you liked, but you could never leave.

That system has now been replaced with one that allows companies to leave if less than 5 percent of their trading volume derives from the US over the course of a year. For many issuers, trading volumes in the US had been low for some time and this was the green light they had been waiting for. The move led to a flurry of activity as issuers like Imperial Chemical Industries (subsequently acquired by AkzoNobel) and BG Group deregistered and terminated their reporting requirements.

‘The rule change allowed a number of companies whose depositary receipt (DR) programs may not have been fulfilling their strategic requirements to take advantage of the situation,’ comments Michael Cole-Fontayn, chief executive of the Bank of New York Mellon’s DR division.

Since then, every time a clutch of companies decides to check out of the US, it leads to a bout of soul-searching about the benefits of a listing on the other side of the pond. Deutsche Telekom’s North American IRO Nils Paellmann is at pains to explain that his firm’s de-listing was not an expression of anti-American or even anti-NYSE sentiment, not least since, with its acquisition of T-Mobile, Deutsche Telekom has a very large presence in the US markets.  

Paellmann explains that the price of maintaining the NYSE listing was ‘in double-digit millions of euros’, yet it brought few if any benefits. ‘Trading is global, and if you want Deutsche Telekom stock you can just call up your broker,’ he points out.

The spread of electronic trading has removed the attractions of multi-listings. Screens have no passports. The US is still home to Deutsche Telekom’s most important group of investors, with the highest percentage of its institutional holders based there. ‘But we have not done any capital raising for some time,’ Paellmann adds. ‘Back in 2000, we used American DRs (ADRs) for T-Mobile but we have nothing on the cards now. In fact, we have explicitly announced that any coming acquisitions will be in cash, not shares.

‘Most US investors now prefer the liquidity of the company’s home market. About 13 percent of them hold ADRs, while 87 percent hold ordinary shares listed in Frankfurt.’  

A decade or so ago, American investors were often chary of investing directly overseas, but they seem to have become more cosmopolitan. Typically the ADR holders – foundations, pension funds and endowments, such as Brandeis University, Deutsche Telekom’s largest holder – were restricted by charter to dollar-denominated securities and so held ADRs. As a duly diligent IRO, Paellmann spoke to the larger ADR holders before the move and most of them were comfortable both with the position and to continue holding the stock on the over-the-counter (OTC) market.

Sticking with it
International issuers, however, do not want to turn their back on US investors and capital markets. In addition to making acquisitions in the US, there are many benefits to maintaining dollar-quoted shares, such as handing out employee awards. As a result, many firms are retaining a presence through a level one ADR listing in the OTC market. This trend is most pronounced in Germany, where 50 percent of the DAX 30 Index of Germany’s biggest stocks now trade OTC in the US, notes Stanislas Beneteau, head of western Europe ADR client management at Deutsche Bank.

‘The trend is a combination of two factors,’ he explains. ‘Some companies are establishing brand-new sponsored level one ADRs or upgrading existing unsponsored ADRs, such as those of Linde, Deutsche Post and K+S. The other group comprises companies de-listing from US exchanges and deregistering with the SEC but keeping a sponsored level one ADR, such as Allianz, Infineon and Deutsche Telekom.’

In response to the demand, Pink OTC Markets now offers the OTCQX platform to provide the liquidity without the paperwork, and Deutsche Telekom is considering using that or the forthcoming NYSE ArcaEdge platform, which, says Paellmann, ‘could help raise the visibility of the stock.’ So far, there has been no move out of the stock, although others moving to the OTC market have reported a 20 percent fall-off in ADRs. Some of that might be accounted for by a move to ordinary shares, however, which can easily be traded electronically in Frankfurt from screens in the US.

What makes de-listing easier is the OTC market, where companies come by default afterward, says Tim Ryan, Pink OTC Markets’ managing director for sales and marketing of the OTCQX. But the Pink Sheets are not very investor-friendly, hence the OTCQX platform that offers both investors and companies the benefits of liquidity and transparency without the heavy costs and regulation of the NYSE.

Pink OTC Markets says ‘OTCQX separates out the credible companies from the large number of economically distressed and questionable companies that trade OTC’, but when you get companies like Air France, Allianz, Bayer, BSkyB or Imperial Tobacco de-listing, it would be a very naïve investor indeed who was unable to distinguish between them and the penny stocks pumped and dumped on the Pink Sheets. Major multinationals no longer need the exposure the NYSE listing gave them; investors know where the information is to be found and no one is going to mistake SAP, Daimler or similar companies for penny stocks.

‘OTCQX offers a listing process with quality control, a facility to see quotes in real time and a facility for blue sky brokerage. And we let them put their home country compliance information on the OTC market,’ Ryan says. In reference to dealing with the foreign companies, he adds that ‘it’s not that they don’t care about US investors, and OTCQX allows them to show that they do care’, but how they show that varies. ‘Some have decided they don’t want anything to do with the US anymore,’ Ryan continues. ‘Some go straight from the NYSE to OTCQX, some go into the Pink Sheets and then upgrade, and some decide they do not want anything to do with the US and end up on the Pink Sheets.’

Costs and compliance
The NYSE professes itself calm about the moves, pointing to the convergence of European and US markets, listing standards and regulation. After all, with Euronext it has hedged against change and, coming soon, the NYSE is rising to the occasion with ArcaEdge, its competitor to OTCQX, offering OTC cost-effectiveness with NYSE branding.

NYSE staff members continue to point out their comparative advantages in attracting emerging market business with a large pool of liquidity and better regulation, certainly compared with – for example – Russian or Chinese markets, and they proudly point to IPO and secondary listing business.

But even though ArcaEdge will reduce costs for Europeans listing in New York, the combination of SOX, the SEC and other listing expenses could still hit $10 mn or more, without compensating advantages.

In addition, since admitting it would be almost self-incriminating, the departed companies will not state publicly (although they will admit privately) that the fear of litigation in the US also preys on their minds, and a de-listing helps ease that. Siemens settled with the SEC and Department of Justice for $800 mn and Daimler for $185 mn in penalties, the sort of sums that are difficult to shut out of boardroom minds completely. What’s more, as cost is a driving force, it’s worth noting that an OTC listing can come out of petty cash; it is in the thousands rather than the millions.

Like so many things, the picture is not entirely black and white, however. ‘We’ve heard companies saying, We don’t mind incurring this cost, because when we do business in the US, we can go to a US counterparty and say we are SOX-compliant. It gives the counterparty a level of comfort,’ notes Ayden Dagg, director and EMEA head of DRs at Citi. ‘We’ve also heard from a number of different companies that say if they de-list from the US, they won’t make any saving on the SOX costs because a lot of the big blue-chip companies already have a risk and compliance structure in place that almost matches what SOX imposes on corporates.’

Joseph Dooley, Americas regional head of JPMorgan’s DR division, agrees that size and business model are further important considerations. ‘The more complex a company is, the more complex it can be in terms of legal audits and reconciliation of the accounting,’ he points out. ‘This and the actual size of companies’ DR programs are often considerations when evaluating the costs and benefits of having a fully listed program.

‘We have seen the quality of companies that use level one ADR programs increase and become more transparent with real-time pricing, which has been well received by US investors.’

It is also worth stressing that the traffic is not entirely one way. Colgate-Palmolive is de-listing from European exchanges for similar reasons to the Germans pulling out of New York. Its last day of trading in Amsterdam was June 18 and it left the Paris Euronext in April. A company spokesperson explains to IR magazine that ‘over time, the trading volume on the European exchanges has dropped dramatically and now represents no more than approximately 0.1 percent of Colgate’s annual trading volume. Because investors around the world now have easy access to trading on the NYSE, we recently began the process of de-listing Colgate’s stock from the European stock exchanges on which it is listed.’

Back in the USA
The four remaining German companies listed on the NYSE – Deutsche Bank, Fresenius Medical Care, SAP and Siemens – are the exceptions that prove the rule. They have all denied any plans to follow their compatriot corporations, and their reasons illustrate input into the de-listing decision: they all work in regulated industries with large markets in the US and all still have a reasonable turnover of stock. These companies might even be considering stock-financed acquisitions.

Established companies from developed economies that do not envisage acquisitions using shares as currency really do not need to go far from their home exchanges to tap the pools of international finance, but for these companies, the advantages of maintaining an NYSE listing outweigh the costs. In these straitened times, companies across the world will be running similar calculations.