Benefits of Chow property deal in reverse takeover of RIS outweigh negatives, independent adviser says

Tuesday 9th February 2016

An independent adviser’s report gives the thumbs up to a proposed backdoor listing of a company owned by Wellington property developers and brothel owners John and Michael Chow despite existing shareholders of the shell company RIS Group being heavily diluted and debt increasing substantially.

NZAX-listed RIS Group has agreed to accept a conditional offer from trusts associated with the Chows which would see it buy the shares in the brother’s 16 Park Avenue company, a South Auckland provider of long and short-stay accommodation, for about $7.5 million. The purchase price will be met through RIS issuing new shares at 39 cents per share to the vendors who will own more than 90 per cent of the company after the reverse takeover.

The company today released a disclosure document and independent adviser’s report on the deal prior to a shareholders vote on Feb. 24 in Auckland.

The independent adviser’s report from Campbell MacPherson said the proposed transaction had benefits to RIS shareholders because the shell company had limited alternative courses of action and its directors don’t consider its current operating and financial position to be sustainable. It has minimal net tangible assets, no material revenue, and its shares are traded infrequently.

Under the deal RIS will enter into a five-year contract for services with Chow Group Management Ltd worth $150,000 per annum or 1 percent of the value of the property portfolio, which Campbell MacPherson said was on attractive terms.

RIS shares were valued by the independent adviser pre-acquisition in a range of 39 cents to 49 cents, including $300,000 ascribed to the worth of its NZAX listing. Its directors said the existing value was unlikely to be sustained for long in the absence of any other deal.

The independent adviser said negatives of the deal include existing RIS shareholders being diluted by a factor of about 19.5 times, meaning a 10 percent shareholder would shrink to just 0.51 percent after the deal. RIS will substantially increase core debt from $21,000 to at least $7.3 million, half the value of the two Otahuhu buildings it will own.

After the deal the Chow brothers along with Clint Webber and Brent King will be appointed to the board.

The disclosure document says RIS will be reliant on the Chow brothers' property and business experience with commercial property and the company intends buying further properties to refurbish and property-based businesses. An eventual NZX listing is likely to be sought in 2018 though the company will need to grow substantially to meet current listing requirements.

Financial projections include the property company posting a loss of $172,000 in the 2016 financial year, rising to a $1.29 million profit the following year. The projections are reliant on the 135-room Otahuhu accommodation business achieving an 87 percent occupancy rate and an average room rate of $45 per night, though the disclosure document says it is yet to achieve that since beginning operations in July last year.

The company, 16 Park Avenue, wasn’t profitable in the 2015 March financial year but hadn't started trading at that stage while refurbishment of the former IRD building and a neighbouring property was still underway.

RIS chairman Roger Bennett said the directors are recommending shareholders vote in favour of the transaction as it will move RIS from being a shell to immediately becoming an active trading company.

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