This article originally appeared in the NZ Herald.

The takeover offer for Opus International Consultants shows once again that the NZX is struggling to hold on to its listed companies. This is a global phenomenon as new stock exchange listings are declining and listed companies are increasingly subject to takeover offers from trade buyers, private equity or other investment groups.

The table shows that the number of listed companies continues to contract in most developed countries. There are several reasons for this, including: increased regulation that has pushed up the cost of IPOs; selling to private equity is an alternative to listing; and there are a limited number of exchange traded funds (ETF’s), or passive funds, that invest in small companies.

Consequently, small companies have little incentive to list and those that do can be relatively undervalued because they don’t attract passive fund investors.

The NZX is one of only three exchanges in the table to achieve an increase in domestic listed companies over the past decade – though it should be noted that it had 273 listed companies at the end of 1986 compared with 168 at present. The other two exchanges to achieve an increase in listed companies are the ASX and Euronext.

Meanwhile, the average value of listed companies has increased over the 10-year period, with the notable exceptions of the ASX, Oslo, Euronext and Spain in the table (the Oslo and Dublin exchanges are included because they are in countries with a similar population to New Zealand).

The average company value has fallen in Australia and Oslo because these exchanges are overweight in oil and gas, and resource companies, and the other two have been hit by Europe’s economic problems.

Opus International Consultants has its origins in the Ministry of Works and Development, which was established in 1885 to build the country’s road and rail networks.

In 1988, the Ministry became a state-owned enterprise, with Works Consultancy Services as its consultancy division. Eight years later the consultancy division was sold to Kinta Kellas of Malaysia and was rebranded Opus.

Works Consultancy Services had established a small presence in the United Kingdom in 1989 but under Malaysian ownership it moved into Australia in 2000 and Canada in 2003. It expanded its British operations between 2004 and 2006 through the acquisition of several UK consultancy companies.

In September 2007, when Opus issued its IPO prospectus, the company had 2145 full-time employees, with 71 offices and 11 laboratories in Australia, Canada, the UK and New Zealand. At the time, New Zealand generated 81 per cent of group revenue of $253 million, with the UK accounting for 12 per cent of revenue, Australia 4 per cent and Canada 3 per cent.

The IPO was structured to allow the Malaysian shareholder to realise part of its investment and to raise new funds for Opus to pursue investment opportunities. According to the prospectus, “the public listing of Opus will also provide the company with better access to the New Zealand capital markets, giving it an enhanced profile and further financial capability to pursue growth opportunities”.

The IPO raised $47.7m at $1.65 a share, with $36.2m going to the Malaysian shareholder and $11.5m to the company. Following the IPO, the Malaysian interests owned 66 per cent, employees and directors 15 per cent and the public 19 per cent.

The company, which listed on the NZX on October 30, 2007, had a sharemarket value of $224m at the $1.65 a share IPO price.

Unfortunately, Opus hasn’t been a successful listing, even though its share price traded at an all-time high of $2.40 in May 2011 and its net profit after tax increased from $13.3m in the December 2006 year to a high of $26.2m in 2014.

Since then, it has been steadily downhill for the company as net earnings for the December 2015 year declined to $16.7m compared with a reported $26.2m the previous year.

Chief executive David Prentice explained that “the group result [in 2015] was impacted by market and economic conditions in Canada and Australia, primarily as a result of the collapse of oil prices and the downturn in the resource sector in general”.

Although the December 2015 year dividend was increased to 11c a share, investors were unimpressed as the company’s share price was only $1.29 shortly after this announcement.

The December 2016 year was a disaster, with Opus reporting a net loss after tax of $29.9m. Chairman Kerry McDonald wrote that the result mainly reflected “the dramatic contraction in oil and gas industry work in Canada and the impact of reduced resource prices in Australia”.

He added that the Canadian “Opus Steward Weir business, acquired in 2013 and substantially oriented to oil and gas work, had reduced activity levels and results”.

The poor 2016 result included a $4.4m impairment of Australian assets and a $33.2m reduction in the value of Canadian assets. The annual dividend was cut from 11c to 4c and the company’s share price slumped to an all-time low of 74c.

The poor share price performance was disappointing considering that Opus’ New Zealand revenue grew from $204m to $280m in the decade since listing, UK revenue rose from $37m to $62m, Australian from $11m to $48m and Canadian from $7m to $79m.

Meanwhile, group operating ebitda (earnings before interest, tax, depreciation and amortisation) increased from $22.4m to $28.3m in the 10 years after listing, yet the company’s share price had slumped from its IPO price of $1.65 to 99c before Monday’s takeover announcement.

Just after the market opened on Monday, Opus announced that it had received a takeover notice from WSP Global at $1.78 a share. This represented a massive 80 per cent premium on Friday’s closing price, when normal takeover premiums are in the 20 to 40 per cent range. In addition, the offer terms allow Opus to pay a dividend of 7c a share prior to the closing of the offer, without any adjustment to the $1.78 offer price.

The announcement revealed that WSP Global had reached an agreement with the Malaysian shareholder whereby it had agreed to sell its entire 61.2 per cent to the bidder.

WSP is a Montreal-based business providing management and consultancy services to the infrastructure and construction sectors. It has a sharemarket value of C$5.2 billion ($5.6b) compared with Opus’ takeover value of just $263m.

Opus’ value in the 10 years since listing has risen by just 17 per cent, from $224m to $263m – with the latter figure containing a premium for control, whereas the former figure did not. The Opus stock exchange listing demonstrates the problem facing the NZX in attracting small companies and keeping them. Small companies receive little media and broker attention and they are largely neglected by their IPO lead managers because these organisations are transactional, rather than relationship, oriented.

Small and medium-sized NZX companies are also extremely poor at promoting themselves to the investing public. In addition, the NZX has clear conflicts because its Smartshares division promotes ETFs or passive funds, which invest mainly in global companies or large listed NZX entities.

Smartshares’ NZX Mid Cap Fund (MDZ) doesn’t invest in Opus, which is one of the reasons why the company was undervalued before this week’s takeover announcement.

The NZX will continue to struggle as far as listings are concerned until it, along with the stockbroking sector, has a much more strategic and co-operative approach to attracting small and medium-sized companies to the NZX. They also need a clear programme to support these companies after they list.