A capital idea

Written by Allan Britnell

“Poised to go nuclear” is one way to describe the state of affairs at NBC Team Ltd. in early 2003. Not only because the two-year-old Stoney Creek, Ont. company was doing $10 million in annual sales and facing massive growth potential, but because it manufactures containment and suppression systems for nuclear, biological and chemical weapons. (The system is essentially a tent placed over a device and filled with a specialized foam that contains the blast and neutralizes any biochemical agents.) In order to build upon their successful R&D, expand their market and put a little money in their private bank accounts, the founders decided to take the 25-employee company public.

But instead of following the traditional initial public offering route, NBC Team, on the recommendation of a financial adviser, decided to take advantage of the Capital Pool Companies (CPC) program offered by the TSX Venture Exchange. It’s a relatively cheap and easy way for operating companies to go public that comes with up to $2 million in capital and an experienced management team poised to raise even more cash. NBC Team took the CPC plunge, and came away with a cool $5.2 million to finance future expansion.

Modeled after the Junior Capital Pool program of the now-defunct Alberta Stock Exchange, CPCs are a uniquely Canadian alternative to common methods of going public, namely IPOs and reverse takeovers.

The first step is for a management group to form a shell company under the CPC program. The CPC then issues shares valued at 15ÀšÃ‚¢ to 75ÀšÃ‚¢ in an effort to raise a minimum of $200,000 and a maximum of $2 million in seed capital. After meeting certain requirements, such as having at least 200 arm’s-length shareholders and no single investor holding more than 2% of the offering, the CPC is listed on the TSX Venture Exchange. The shell then has 18 months to merge with or, in CPC-speak, “vend in” an existing operating company (e.g., your cash-hungry firm) as its “qualifying transaction.” Next thing you know, you’re a publicly traded entity with all the privileges — and pains — of being public.

“A lot of SMEs can’t afford to do an IPO,” says Harry Jaako, chairman and co-CEO of Vancouver-based Discovery Capital and a director of the TSX. “The fees and paperwork might cost $200,000 or $300,000 [alone].” Since the CPC has already raised that money and is listed on the Venture Exchange, the CPC program is essentially a streamlined way for SMEs to go public. And unlike a reverse takeover, the operating company isn’t faced with the uphill battle of cleaning up any messes left behind by the previous listed organization.

Once the merger is complete, you can begin using the CPC’s seed bank to fund your expansion or acquisition goals. As a public company, you have liquid stock with which you can fund acquisitions. And the CPC’s founders can use their experience and connections to boost the results of subsequent share offerings.

Cheap, easy … but still not for everyone. First, few companies are built to get much bang from going public. “If you’re a niche company that’s dominant in your market and there’s no room for growth or any promising acquisitions, then you’re better off staying private and reaping the benefits of your market position,” says Peter Kozicz, a partner in Canadian Public Venture Capital Group, the CPC that merged with NBC Team.

Second, you must be willing to surrender part of your ownership stake. “By the time you amalgamate your firm with the CPC, depending on the upfront negotiations, you’ll have given up anywhere from 5% to 30% of your firm to the shareholders of the CPC,” says Jaako.

So, how do you get noticed by a CPC? Through the grapevine. If you’re interested in a merger, then put the word out through your bankers, lawyers and accountants. There is also a developing field of investment dealers that specialize in CPCs, so ask around. Or you can contact the TSX Venture Exchange directly to inquire about CPCs that are in the market for a qualifying transaction. As of February there were 41 CPCs listed, sitting on approximately $22 million in seed capital.

CPCs are interested in a broad range of industries, but they do have a tendency to follow market trends. A few years ago high tech was hot. Today, it’s mining.

For NBC Team, the math was easy. “It was a cost-effective and attractive way to go public,” says David Luxton, president and CEO. (Post-merger, NBC Team was renamed Vanguard Response Systems Inc. However, most CPCs retain the SME’s corporate title.) The merger was approved on Nov. 17, 2003, and, a week later, in a rare fast-track move, the new entity was listed on the senior TSX. In February 2004, with its stock trading at $3.05 a share, Luxton says his company “is looking at an aggressive strategy of developing the market and really exploiting our new opportunities.” Translation: we’ve dipped our toe in the capital pool and intend to buy our way into the big leagues. To that end, in February Vanguard acquired two Ottawa-based blast-containment specialists, Bosik Technologies Ltd. and EOD Performance Inc., in deals valued at $28 million. Poised to go nuclear, indeed.

© 2004 Allan Britnell

Originally appeared on PROFITguide.com