IPO pricing is a highly controversial issue, particularly for early stage companies that still operate at a loss.

How should we value these companies?

How much value should be allocated to the pre-IPO shareholders?

This issue is particularly relevant as far as Moa Group is concerned, the craft beer company that released its prospectus this week.

Moa Brewing was incorporated on July 4, 2004 and was originally 100 per cent owned by Blenheim-based Allan Scott and his son Josh. The Scott family owns Allan Scott Wines.

In September 2010, Pioneer Capital and The Business Bakery joined the share registry. The latter is predominantly owned by Geoff Ross and Grant Baker.

Moa Group acquired 100 per cent of Moa Brewing last week and the former is raising $15 million from the public and will list on the NZX next month.

Moa’s pre-IPO shareholders are: Pioneer Capital 41.8 per cent; Business Bakery 40.5 per cent; Allan Scott Wines 13.2 per cent and staff 4.5 per cent.

The big question is how much value should be given to existing shares through the IPO process.

In other words, how big a paper profit should the pre-IPO shareholders be entitled to?

The accompanying table ranks six IPOs – Diligent Board Member Services, 42 Below, Xero, Ecoya, Energy Mad and Moa – in terms of the value attributed to the original shareholders through the IPO process.

These six companies have been chosen because their revenues at the time of listing were relatively low and they all operated at a loss.

Diligent is in the top spot because it issued 24 million new shares at $1 each which valued the existing 80 million shares at $80 million, even though the company had annual sales of only $1.4 million.

42 Below, which was also a brainchild of Geoff Ross and Grant Baker, issued 31 million new shares to the public at 50c each.

This valued the existing 90 million shares at $45 million compared with the cost of pre-IPO investment in the company of $1.98 million.

This column was highly critical of the 42 Below IPO because of the $43 million paper profit given to existing shareholders through the IPO process.

42 Below was acquired by Bacardi at 77c a share.

Ecoya, another Ross and Baker IPO, issued 10.1 million new shares to the public at $1 each.

This valued the existing 33 million shares at $33 million compared with the cost of pre-IPO investment of $6.3 million.

Thus, the original shareholders were assigned a paper profit of $26.7 million through the IPO process.

The original shareholders in Xero invested $2.8 million in the company and were given a $37 million value for these shares through the IPO.

Existing Energy Mad shareholders paid $11.3 million for their shares which were given a value of $32.7 million at the $1 a share IPO offering.

Moa’s IPO price was established through a process whereby fund managers made bids through a book-building process on the basis that the existing shares would be worth between $18 million and $24 million.

The process, which was complicated and highly criticised, produced an existing share value of $22 million compared with an estimated $6.5 million cost of pre-IPO investment in the company.

The latter figure is difficult to confirm because of incomplete reporting as Moa Group acquired Moa Brewing earlier this month.

Based on these figures existing Moa shareholders will make a paper profit of $15.5 million through the IPO process compared with IPO paper profits of $26.7 million attributed to existing Ecoya shareholders and $43 million for 42 Below shareholders.

The paper profits assigned to Moa’s existing shareholders are also much lower than for Diligent, Xero and Energy Mad.

These paper profits are the rewards available to original shareholders for their sweat equity, brand developments and entrepreneurship.

A number of parties, including investment industry participants, are highly critical of the Moa float with one implying that investors who purchase Moa shares are little better than lemmings.

These parties fail to understand the primary aim of a sharemarket is to facilitate the raising of new equity. This gives companies the opportunity to grow, create jobs, generate export earnings and build wealth.

The stock exchange’s trading facility encourages organisations and individuals to contribute new capital because they then have the facility to trade these securities on a secondary market.

Most major stock exchanges have a large number of start-up IPOs each year but the NZX has very few, partly because investment industry participants are risk averse and very critical of high risk IPOs.

Moa is an extremely high risk investment but new shareholders through the IPO will receive a better deal, relative to existing shareholders, than in either 42 Below or Ecoya. This is because advisers and investors have convinced Ross and Baker to accept a lower paper profit through the IPO process than they did with 42 Below and Ecoya.

There are a number of other features of the Moa IPO worth noting:

* All the money raised will go to the company as it did for the other five companies included in this comparison. None of the money raised goes to existing shareholders. By comparison $56 million of the $66 million raised through the Rakon IPO went to the Robinson family and $204 million of the $254 million raised through the Feltex IPO went to existing shareholders. Investors should always have a strong bias towards IPOs where the money goes to the company rather than existing shareholders.

* The existing shares held by Pioneer Capital, The Business Bakery and Allan Scott Wines cannot be sold until May 2014 when Moa’s results for the March 2014 year are released. These share sale restrictions are greater than those that applied for the 42 Below and Ecoya offerings. The important point about these restrictions is that existing shareholders will not be able to realise any of their paper IPO profits for at least 18 months and their ability to sell any shares will be extremely limited if the company has not achieved investor expectations.

Thus Moa’s capital structure will be as follows:

* 17.6 million existing shares that cannot be sold until May 2014.

* 11.68 million new shares to be issued to the public through the IPO at $1.25 each.

* 1.12 million new shares to be issued to existing shareholders through the IPO at $1.25 each.

It is important to reiterate that Moa is an extremely high risk company and it is almost impossible to assess whether it will be successful or not.

Potential investors should read the investment statement before contemplating investment.

However, there are obvious benefits from taking small positions in high risk IPOs through well diversified portfolios.

For example a $10,000 investment in each of Diligent, 42 Below, Xero, Ecoya and Energy Mad, costing $50,000, would now be worth $123,000.

The latter figure does not include the benefits of free warrants issued to 42 Below and Ecoya shareholders.

If Rakon and Feltex are included, then a $70,000 investment in these seven companies would be worth $126,000, a return of 80 per cent.

This is well in excess of the returns achieved by the overall sharemarket, or most other investments, over the last few years.

IPOs- How much value should go to existing shareholders?


Value of existing shares

Money raised

Post IPO value*












42 Below















Energy   Mad










*At the IPO price

Brian Gaynor

Portfolio Manager

Disclosure of Interest – Milford Asset Management has been allocated new Moa shares – to be held on behalf of clients – through the IPO book build process at $1.25 a share.