Delisting: Will it become a widespread phenomenon for Ukrainian agricultural sector?

Last week, the news about Kernel’s intentions to delist from the Warsaw Stock Exchange and buy back shares from shareholders have stirred the market. Among the reasons why Kernel initiated delisting was an inconsistency between the organizational and financial costs of maintaining a public profile and relative advantages of being a public traded company.

AgroPortal.ua asked market experts whether we should expect a trend of mass exit of Ukrainian agricultural holdings from the public equity market and what impact it may have on the sector.

Bohdan Kostetskyi, co-owner and operating partner of Barva Invest

Ukrainian companies have lost more than $US1 billion in capitalization, and we can see it, in particular, with Kernel, which announced delisting of its shares. This is very painful for investors, as many of them bought shares at much higher prices, while Kernel offers to buy back shares at the price prevailing today. This creates a deadlock for a large number of investors. However, this is convenient for the owner, the company’s key majority shareholder, as it will allow Kernel to be more flexible and its management to make decisions faster and more efficiently, without the need to go through bureaucratic procedures.

Kernel Holding SA (Luxembourg) has been listed on the Warsaw Stock Exchange since November 2007. Today, its capitalization is about $US388 million. At its peak in 2015, the company’s capitalization briefly exceeded a $US1 billion mark.

As Iaroslav Serputko, Audit Director and Head of Food Processing and Agriculture Group at Deloitte Ukraine explains, after the start of the full-scale war in Ukraine, agricultural companies have faced a number of challenges such as occupation of territories, mined fields, physical destruction of assets, unprecedented logistics disruptions, huge difference between the domestic and international grain prices, disparity between the official and market exchange rates, mobilization of employees, record-high energy prices, etc.

Iaroslav Serputko, Audit Director, Head of Food Processing and Agriculture Industry Group at Deloitte Ukraine

Whereas initially market players were focused on rapidly adapting business processes to the new realities, companies and their owners are now returning to the issue of updating their business strategy. This is a complex issue, which, in particular, involves divestment of certain assets or, conversely, their acquisition. Some are trying to diversify geographically, while others are addressing specific logistical issues. Large business owners are considering buying or setting up businesses abroad. This year has also shown that companies or business groups that are additionally involved in livestock or processing are more viable than those engaged in pure crop production.

Iaroslav Serputko explains the reasons behind the intention to buy back shares and delist public companies as follows: the market capitalization of Ukrainian public agricultural holdings is currently extremely low. If we look at the price to book ratio, the companies are valued much lower than their capital and even lower than the annual EBITDA of these companies in previous periods. At the same time, similar European companies are traded at a 5-7 EBITDA multiple.

A very low capitalization leads majority shareholders to believe that buying shares from the market may be the most successful financial investment at the moment. However, that is under the premise that there are liquid funds to make the buyout. On the other hand, given the small number of transactions on the market, the majority shareholder remains almost the only player that can create real demand for shares and enable minority shareholders to divest their investments. Given the lack of alternatives, the majority shareholder has an additional leverage in negotiations.

Iaroslav Serputko outlines several reasons for delisting.

• First, public status requires companies to communicate with their stakeholders on a regular and timely basis. This involves costly administration in terms of preparation and disclosure of financial and non-financial information, including ongoing communication. The companies also need to comply with certain reporting standards, undergo audits, have an investor relations department, and incur additional legal costs – all of which creates a substantial burden on businesses, especially in times of crisis.

• Second, despite the efforts (marketing, publication of reports, regular conferences and investor days), there is no improvement in the investment attractiveness of Ukrainian issuers, which gives no hope for additional fundraising. Moreover, the loss of the opportunity to obtain an objective assessment of the company’s value as a result of delisting is hardly considered a disadvantage: the gap between the quotations and the intrinsic value of companies is too large.

• Third, to meet the stock exchange requirements, public companies must comply with certain corporate governance standards. Given a highly dynamic operating environment, this model may not be sufficiently effective in terms of decision-making speed.

«Could the decision to buy back shares by majority shareholders become popular among Ukrainian public companies? Given the low value of shares on the market, this is quite possible. We have already seen that holdings have been actively buying back their eurobonds,» says Iaroslav Serputko.

However, he added that in the event of delisting, companies should consider the reaction of key stakeholders, including creditors (bondholders, banks). After all, it was the public status that allowed companies to attract credit funds on better terms (lower interest rates or longer terms).

«In any case, even though a voluntary delisting is a blow to reputation, it is not a significant one. Moreover, the history of Ukrainian public agricultural companies remembers far more high-profile cases,» summarized Iaroslav Serputko.

Source: AgroPortal.ua