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Market upheaval no obstacle to First Active's flotation Back  
Bobby O'Brien of ABN AMRO Corporate Finance, financial advisers to First Active during preparations for its conversion and flotation, explains why the Society decided to pursue its conversion plans in one of the most volatile markets in recent years
Shares in First Active commenced trading on the Dublin and London Stock Exchanges on 6th October 1998 at a price of ?2.86 (IR225p) following 18 months of intense preparations undertaken by First Active management and advisers. This gave the company a market capitalisation of IR?340.16 million, making it the largest equity offering on the Irish market during 1998.

At the time of setting the flotation price at the beginning of October 1998, global stock market conditions had been badly deteriorating since Russia’s default in July and a global sell off was being fuelled by the rumoured impending bankruptcy of a major US securities house. Between 15th July 1998 and 2nd October 1998 the ISEQ index had fallen by 27.4 per cent while between 17th July, 1998 and 2nd October, 1998, the FT-SE Financial Index had fallen by 31.6 per cent. In the week prior to First Active’s flotation the FT-SE Financial Index had fallen sharply by 9.8 per cent. However, for reasons discussed below, First Active and its advisers decided to proceed with the flotation despite the turbulent market conditions. Since flotation, the First Active share price has peaked at ?5.00 (IR394p) and currently (as at 16th February) stands at ?4.30, representing a 50 per cent gain.

Why convert?
In the light of the changing dynamics of the financial services market in Ireland, with markets becoming more competitive, First Active studied various alternatives for its future strategic direction. These included remaining a building society and growing through selected acquisitions, merging with a competing Irish building society and converting to a plc. There were 4 main factors which the board of First Active took into consideration.

1) Access to capital
Traditionally, the principal source of capital available to First Active was retained earnings which in recent years had been augmented by the issue of Permanent Interest Bearing Shares (‘PIBS’). PIBS is the only form of finance similar to equity capital that a building society can raise in the Irish market and First Active had reached the point where it had become increasingly difficult to issue further PIBS as a result of illiquidity in the sector. First Active concluded that conversion would provide access to capital enabling it to improve competitiveness, grow organically and respond quickly to acquisition opportunities.

2) Flexibility to pursue acquisitions
In an increasingly competitive market place with rationalisation likely (as evidenced by the recent merger of Irish Life and Irish Permanent) First Active considered its corporate structure as a building society to be a competitive weakness compared to its publicly quoted peers. It was thus concluded that as a plc, the company would be in a better position to structure acquisitions on a basis other than cash by having the option of using its equity.

3) Release of value to stakeholders
As a building society, First Active’s members, as owners, had no direct way of measuring and realising the value of their holdings - conversion and flotation unlocked this value and enabled it to be released. First Active concluded that it was in the interests of the members to convert and receive shares in place of their membership rights and this enabled members to choose whether to retain their shares in First Active and receive dividends, or alternatively, sell them for cash.

4) Legislative framework
Irish building societies are subject to the terms of The Building Societies Act, 1989 which First Active felt weakened its competitive position. In particular, it was felt that the obligation to maintain a 50:50 ratio between shares and deposits was particularly detrimental to the society’s future development. By conversion, First Active would be released from the restriction of the Act.

As with any building society conversion, the preparation for demutualisation of First Active was lengthy and complex. The Board of First Active made the decision to convert in the autumn of 1996, following the completion of a strategic review of the Society’s options, although work did not get underway until January 1997. At an AGM on 18th May 1998 the members approved the resolution to shed its mutual status and become a public limited company. Following this approval, the flotation process took over 4 months to complete with the Listing Particulars issued on 8th September 1998 and admission of the shares to listing on 6th October 1998.

The conversion and flotation process demanded significant time dedication from the management of First Active. Early in the process the Board established a sub-committee, the Strategy & Policy Committee (‘S&P’). This comprised both non-executive and executive directors, and had overall responsibility for reviewing progress and considering issues relevant to the conversion/flotation process prior to their review by the full Board. This committee met frequently throughout the process, increasing meetings to two to three times weekly prior to the flotation. The Society’s general manager for IT, Paul O’Neill was appointed to manage the process and logistics, and this became a full time role. Significant managerial input was also required from First Active’s finance function in terms of the preparation of the Long Form Report (in conjunction with the Reporting Accountants) and the Listing Particulars.

Professional advice
First Active appointed ABN AMRO Corporate Finance Limited to advise on all aspects of the conversion and flotation process. In addition to the usual aspects of a financial advisory role, ABN AMRO was also required to become heavily involved in structuring and drafting the fine detail of the conversion and flotation process. In addition, we were responsible for co-ordinating the activities of the other advisers and of First Active itself both to ensure that all issues were tackled and the timetable met. First Active appointed two stockbroking companies - Davy Stockbrokers in Ireland and Hoare Govett in the UK. Their primary responsibilities were:

1) To assist in raising new money from institutional investors for First Active on flotation as the Society was keen to boost its capital reserves;

2) To become designated ‘market makers’ in the shares post-flotation; and

3) To advise on Stock Exchange requirements for a public listed company in Ireland and the UK.

The involvement of the stockbrokers became greater closer to the time of the flotation and both were involved in building a book of institutional demand for the float and pricing the shares based on this demand.

In addition to the financial advisers, there were three sets of lawyers, as well as reporting accountants. The primary task of the reporting accountants was to prepare a Long Form Report which gave an in-depth review of the Society’s activities and history over the preceding three years, updated as and when new information was acquired.

Mechanics of conversion
The conversion process required significant liaison with and the approval of its regulator, the Central Bank of Ireland. The Central Bank specifically had to approve:

(1) The relevant alterations to First Active’s ‘Rules’ or ‘Articles’;
(2) First Active’s Conversion Scheme and Conversion Statement;
(3) The resolution presented to members to convert; and
(4) All communications with the Society’s membership.

The Conversion Scheme needed the approval of members in a general meeting, and was summarised in a Conversion Statement sent to every voting member of the Society prior to the AGM. Entitlements and eligibility to Free Shares were determined by the Society within the discretion allowed by the statutory requirements and the Society’s Rules. The objective of the Board of First Active was to adopt a progressive policy to include as many members as possible in the allocation of Free Shares. Although the Building Societies Act does not make provision for Free Shares to be allotted to Borrowing Members, a resolution was passed to change the Society’s rules to permit such a distribution. Once eligibility criteria had been set, it was essential that the Society’s IT systems identify all members entitled to vote and eligible to receive Free Shares and that this could be continuously updated to reflect account movements. In effect, the Society’s de-duplication exercise which ensured that all the various account relationships pertaining to one member could be established and that no member could receive duplicate entitlements, was the most important logistical component of the entire process.

Educating members about the process was a key priority for First Active and its advisers and to that end a Helpline was set up which at its peak had up to forty operators handling over 7,000 calls a day.

The AGM was held on the 18th May 1998 and the Resolutions were passed by a majority of 97 per cent of those who voted.

The Conversion of the Society was confirmed by the Central Bank following a period to allow for appeals and petitions. No petitions were received.

Once conversion was approved in May, preparation for an autumn flotation was stepped up. The main tasks prior to flotation were to:

(1) Complete the Long Form Report;
(2) Prepare and verify the Listing Particulars;
(3) Decide on the deal structure and amount of new capital to be raised;
(4) Draft all relevant members forms;
(5) Establish employee/management participation; and
(6) Manage the printing and despatch of Free Share sale/claim forms and New Share application logistics.

In the few months prior to flotation, First Active decided to raise IR?104 million of new money by way of an offer of New Shares. Of this, IR?48.4 million was made available to qualifying members, IR?48 million under the terms of an institutional offer to major portfolio investors in Ireland, the UK and Continental Europe and the balance to qualifying employees and agents.
Members who were entitled to Free Shares were offered a sale facility which enabled them to sell their shares prior to flotation. Just under 14,000 members (6.4 per cent of the total) took advantage of this facility and achieved a price of IR225p per share, equal to IR?1,012.50 per person. This was the lowest percentage recorded in any demutualisation in the UK or Ireland and compares with over 30 per cent in the case of the Northern Rock flotation in 1997.

Demand and Pricing
As discussed, stock markets were in deep turmoil in the run up to the flotation date at the beginning of October. In the Listing Particulars, a wide range of IR265p to IR380p was stated to reflect the volatile nature of the stock markets and to serve as a pricing guide for the bookbuilding exercise. Despite these market conditions, demand from members was exceptionally strong and the total value of applications for new shares exceeded IR?225 million - the offer was thus some 4.5 times oversubscribed. However, institutions who were pricing the issue through the bookbuilding exercise were much more cautious and, although the Offer was comfortably over-subscribed (around 2.3 times), the clearing price was set at IR225p per share.

As market conditions were so weak, active consideration was given by First Active and its advisers as to whether to proceed with the float or abandon it until conditions improved but it was decided that it was in the best interests of the members and the company to proceed for the following reasons:

(1) Since such a low percentage of members (6 per cent) had elected to sell their entitlements, the interests of the vast majority based on demand for the New Shares was sufficiently strong to suggest that retail demand would underpin the share price. To a lesser extent this was the case with institutional investors; and

(2) Due to the vast printing and communication logistics associated with the offering, the ability to ‘switch on’ and ‘switch off’ the process was not a ready option. It was estimated that there were at best only two opportunities for flotation during the rest of 1998 because of these logistical issues and there was no guarantee that market conditions would get any better before the end of 1998. Beyond the year end, new financial results would have been required to reflect the listing requirements of the Stock Exchanges which would in effect have pushed the float out until March 1999.

Therefore, the decision to proceed with the original timetable was taken albeit with much anxiety. Since flotation, the share price has appreciated by some 50 per cent and a member who received 450 Free Shares on 6th October 1998 worth IR?1,012.50 now has a holding worth IR?1,523.61 (e1,935).

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