In May 2008, the shares of New World Resources NV (NWR), a
Dutch-incorporated company (formerly a wholly-owned subsidiary
of RPG Industries SE) with mining operations in the Czech
Republic, were admitted to trading on the London, Prague and
Warsaw stock exchanges. The offering, after exercise of the
greenshoe option, was approximately £1.3 billion
(approximately $2.5 billion) resulting in a market
capitalisation of about £3.5 billion, the largest
European IPO to date in 2008. Post-IPO, RPG Industries holds
approximately 63.8% of the shares in NWR.
RPG Industries is a Cypriot-incorporated company with
diversified investments including real estate, transportation,
and mine and landfill gas extraction. Its majority shareholders
are two leading private equity players in Europe, Crossroads
Capital Investments Inc and Zdenek Bakala (a Czech financier).
Its minority shareholders are American Metals & Coal, Inc
and First Reserve Corporation, both major international private
equity investors. The IPO represents a significant partial exit
for all these investors. This article examines the corporate
restructure leading up to the IPO, including the use of
tracking stock, a tool sometimes used in company
restructurings, which tracks a division of a company's
PE firms bring
The company undertook a major restructuring and
recapitalisation before the IPO. OKD a.s. (NWR's key operating
subsidiary) was previously listed on the Prague Stock Exchange.
Its then majority investor acquired the Czech National Property
Fund's significant minority stake, following which RPG
Industries acquired that majority investor (in 2004) and took
OKD private (in 2005), after a squeeze-out of minority
interests. It was one of the largest leveraged finance
transactions in Central Europe at that time.
The restructuring that followed shows the focus that private
equity houses can bring to a business. This included: the
consolidation of the mining businesses within one entity, OKD,
rather than the five entities within which the assets had been
partially held, and the demerger or sale of the company's
non-mining businesses: initially demerging OKD's non-mining
property portfolio and placing it under the direct ownership of
RPG Industries; separating real estate used by the company in
its mining activities from the company's mining operations
(thus creating two separate divisions and the tracking stock
concept); extracting the company's railway assets into a
separate legal entity and placing them under direct ownership
of RPG Industries; and transferring NWR's mine and landfill gas
extraction business into a separate company wholly owned by RPG
Industries, known as Green Gas International BV. The
recapitalisation included a e1.1 billion senior facility and
e300 million high yield bond.
Tracking stock is a security issued by a company to track
the performance of a division of its business or a subsidiary.
It is used in corporate restructurings to track separate
businesses of a company which are not, or cannot be, separated.
As part of its policy of managing its real estate business
independently from its mining business, RPG Industries wanted
to transfer NWR's property portfolio to a separate legal
entity, which it achieved with respect to the non-mining real
However, mining regulations in the Czech Republic would not
permit land used in mining to be removed before the cessation
of mining activities. The mining assets and NWR's real estate
portfolio were partitioned into separate divisions the
Mining Division and the Real Estate Division and
operated separately for accounting and reporting purposes. To
reflect this division, the company's share capital was
re-organised into two separate classes of shares, or tracking
stock: the A Shares track the performance of the Mining
Division; the B Shares track the performance of the Real Estate
Division, and have no financial rights or entitlements over the
Mining Division or its assets. The IPO was only with respect to
the A Shares. RPG Industries has retained the B Shares.
To allay potential concerns about the relationship between
the two classes of shares and the operation of the separate
businesses, the company adopted divisional policy statements to
ensure that the Mining Division has unrestricted access to the
Real Estate Division's property, and that the Mining Division
and Real Estate Division are managed in the best interests of
NWR as a whole.
All dealings between the two divisions are to occur on arms'
length terms as if they are separate companies. To ensure
proper corporate governance procedures are in place, a real
estate committee comprised of NWR's independent directors has
been established. The committee: oversees the assets and
liabilities of the Real Estate Division; manages the
interaction between the divisions in connection with the Real
Estate Division assets; and reports to, and advises, the Board
regarding the Real Estate Division.
Good for investors
The tracking stock strategy has benefits and disadvantages.
The benefits include: investors can track the performance of a
specific part of a company's business; different investor
groups can participate in separate lines of the company's
business; and shared overheads.
The disadvantages include: no legal separation between the
divisions so that each can suffer from unrelated liabilities in
the other; potential corporate governance conflicts; and
potential competition between shareholder groups.
The concept of tracking stock is useful for diversified
companies, or large corporations such as NWR which have
significant non-core assets. It is an effective means by which
private equity and other investors can optimise exits from
Dechert represented NWR in its recent IPO.
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