Costa Group Holdings Limited Business - Assignment Example

Small Business Question 1: Provide a brief description of the activities of each of the businesses (100 words) Adairs is a retailer of different types of home ware in Australia. According to Adairs Limited (2015), the company has over 100 stores in the country and sells different products under the following categories: bedroom, bathroom, general furniture and kids’ ware. Apart from the distribution stores, the products of the company are also made available for purchase online. The products include covers, sheets, towels, cushions, general furniture and different gifts and furniture that are used by children. On the other hand, Costa Group Holdings Limited grows, packages and markets fresh fruits and vegetables. The fruits and vegetables that are grown, packaged and marketed by the company include berries, mushrooms, tomatoes, citrus, avocados, bananas and grapes (Costa Holdings Limited, 2015, p. 31). Question 2: Listing firms must be public companies to have their shares traded on the ASX. What was the legal ownership structure of each of your firms before the prospectus was issued? Provide some explanations as to why the original owners of the business consider that a public company is now a more appropriate structure (200 words). According to the Adairs Limited (2015) prospectus, the ownership of the company prior to the initial public offer was shared by five parties. The management owned 8.4% of the shares while Catalyst and BBRC owned 69.5% and 19.9% of the shares of the company respectively. 2.2% of the shares were owned by other shareholders. There were significant changes to this structure following the listing. There was the introduction of two groups of shareholders: non-executive directors who obtained 0.5% of the shares and the other new shareholders who obtained 54% of the shares of the company. The shareholdings of the four major groups, existing management, Catalyst, BBRC and other shareholders were reduced significantly to accommodate the entry of the new shareholders. According to the Adairs Limited (2015) prospectus, the Costa family owned 45.8% of the company prior to the initial public. This was reduced to 10.5% after the process. Paine and Partners shareholders controlled 54.2% of the shares of the company. This stake was reduced to 12.4% after the initial public offering process. Therefore, following the initial public offer, a considerable stake of the company was owned by the general public. This was accomplished by a reduction in the percentages of stakes held by the two previous investors of the company.  Question 3: Are the two issues underwritten? Using the specific characteristics of each IPO firm, explain why the issuers were likely to make this choice (150 words) The two issues of Costa Holdings Limited and Adairs Limited were underwritten. In general, the underwriter is responsible for managing all the activities that are carried out in the course of an initial public offering (Ghosh, 2006, p. 81). These include issues to do with the pricing of the shares of the companies that are being offered for trading and ensuring that the trading of the offered shares takes place smoothly immediately after the initial public offering. In this case, the two companies were new in the market. They were relying on the initial public offering to raise the required capital for their expansion. Because of this, there was a need to raise the level of their reputation in the market. This made it necessary for the companies to use underwriters who, among other services, help companies that are listing on the stock exchange to have higher levels of certification and reputation.  Question 4: Identify any signalling mechanisms the issuers have used in the prospectus. Explain why issuers might use these signals. What other signals could the issuers have provided? (250 words) In the case of Adairs, the company has used the release of its sales growth figures in the recent past and the prospective sales figures in the near future as a form of signalling mechanism. The company has indicated in the prospectus that the sales growth from its continuing operations in the previous financial year was 16.7% (Adairs Limited, 2015, p. 7). It forecasts a strong growth in sales for the financial year of 2014/2015. From the forecasts of strong growth, it is expected that the revenue and profitability of the company will considerably increase in the near future. By providing this information, the company seeks to indicate to the prospective investors that it is profitable and that it is expecting to experience fast growth after the initial public offering. For the case of Costa, the company provided information about growth prospects in its different business segments. The company has three business segments: produce, international and farms and logistics. From the information that is provided, revenue from the three segments has been rising over the recent past and is expected to rise in the near future (Costa Holdings Company Limited, 2015, p. 75). This information was used as a signalling mechanism by the company. This is because its inclusion in the prospectus was done as a way of showing the potential investors that the company had good business prospects at the time of the initial public offering. The companies would have used information about potential new products or the extent to which dividends had been paid out as other ways of signalling. Question 5: Do your issuers meet the definition of small business prior to listing? Explicitly state your chosen definition of small business (300 words) A small business is defined by the amount of annual revenue generated, the number of employees and the amount of assets that are under its control. In Australia, for a business to be considered under this category, it has to have posted total revenue of less than $25 million, must have less than 50 employees and its assets should not exceed $12.5 million (Australian Securities & Investments Commission, 2015). The two issuers, Costa Holdings Limited and Adairs Limited, did not meet these conditions. The revenue for Costa Holdings Limited prior to its initial public offer was $662.3 million (Costa Holdings Limited, 2015, p. 10). The annual revenue for Adairs Limited for the financial year preceding its initial public offer was $167.2 million (Adairs Limited, 2015, p. 6). The amount of revenue posted by both companies prior to their initial public offers exceeded the set limits for small businesses by far. Also, judging from the scale of their operations, neither of the companies had a workforce that did not exceed 50 employees. Adairs had 100 stores distributed nationally. On the other hand, all the three business segments of Costa were running prior to the initial public offering. Therefore, the companies had employees who exceeded the limit of 50 workers that is necessary for a company to be considered small. Also, the total assets of Adairs prior to the initial public offer were worth $197.3 million (Adairs Limited, 2015, p. 46). Similarly, the assets for Costa were worth $496 million (Costa Holdings Limited, 2015, p. 77). In both cases, the total amount of assets held by the companies prior to their initial public offerings exceeded the set threshold of $12.5 million. Therefore, neither of the companies met the criteria of a small business prior to the initial public offering. References Adairs Limited (2015). Prospectus: Initial public offering of ordinary shares. Retrieved from http://www.asx.com.au/asxpdf/20150617/pdf/42z7dxcb3f69w4.pdf Australian Securities & Investments Commission. (2015). Small business – what is small business? Retrieved from http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/ Costa Group Holdings Limited. (2015). Prospectus: Initial public offering of ordinary shares. Retrieved from http://www.asx.com.au/asxpdf/20150723/pdf/42zzpkpcflwnkx.pdf Ghosh, A. (2006). Pricing and performance of initial public offerings in the United States. New York: Transaction Publishers.  Read More