Going Public

For a com-pany in the water treatment business, like any other business, access to capital is integral to meeting growth targets. Traditionally, businesses have used debt instruments to fund growth, but this can be difficult even at the best of times.

When a business owner approaches a lender (often a bank) and explains that he or she wants a loan to grow the business, the lender often will decline, unless the business owner is willing to completely collateralize the loan by assigning personal assets. Currently, this already difficult situation is being compounded by currency and interest rate fluctuations. As a result, lenders and investors have become increasingly reluctant to take risks.

CPC Program

Although raising “equity” as an alternative to debt has always been a challenge for growing businesses, this has become particularly true in recent years. In Canada, however, there is an instrument that has been gaining popularity in the mainstream that has not caught much attention in the U.S. as of yet. It is called the Capital Pool Company (CPC) program. New regulations have paved the way to make this vehicle attractive to companies, yet U.S. companies, who are able to access this funding, have not begun to capitalize on it.

The CPC program is a “blind pool” listed on a Canadian Exchange that has capital and seasoned management but no operating business. Its primary objective is to identify and acquire an early-stage business, resulting in a public company. Revisions to the CPC program have been approved in order to increase the amount of capital that can be invested (up to $2 million) and to facilitate the shareholder approval process.

The CPC program is available to emerging companies at a time when a traditional Initial Public Offering (IPO) would be unsuitable. The IPO route can cost upwards of $1 million just in fees and administrative costs. Unless a company is raising $5 to 10 million, this fixed cost burden precludes many companies from even considering this as an option. The CPC route has capped commissions and legal and accounting fees so they are not overwhelming; thus, this route can be a viable solution.

For example, there are many meat and food processing-related companies that could make great use of $500,000 to $2 million in growth capital. In which case, these companies would be ideal “targets.”

Each target company must meet minimum listing requirements for the Canadian Exchange. These requirements vary depending on the industry and the seniority of the listing. The prerequisites for the most senior industrial issuer include adequate working capital for 12 months, $50,000 of pre-tax earnings in the last year (or in two of the last three years) and $500,000 of net tangible assets.

Multi-Step Process

The CPC program is a multi-step process. The mechanics work according to these principles:

  • Founders set up a new company and invest a minimum of $100,000 to establish a pool.
  • An investment firm is engaged to find at least 300 investors who subscribe to the pool.
  • The pool is then between $250,000 and $2 million and ready to acquire an operating business.
  • The founders identify a target company that is then acquired by the pool, which results in public status. The operating business now has the capital to grow, and has reporting requirements with the TSX Venture Exchange.

Benefits & Drawbacks

There are numerous benefits to being a public company. It offers entrepreneurs capital, visibility, an exit strategy, and a means of employee and management participation. It also is well suited for following investments or using the public shares as a “currency” for subsequent acquisitions. Additionally, it gives the outside world (including people in the sector) the opportunity to own and share in the future.

On the other hand, there are always drawbacks to being a public company. These include the costs of maintaining the public listing, watching the share price fluctuations, and the fact that the financial information of the company is open to the outside world.

Another issue is the fundamental shift that is required for business owners who have traditionally run a private enterprise to now run a public company. In a private company, decisions can be made by business owners who can essentially “do what they like,” but a public company cannot be run in this way. With a public company, there are shareholders to consider, and management, while they may be shareholders as well, still has ultimate responsibility for realizing the long-term benefits for all shareholders.

Case Study: Water Capital

“Many argue that water, in many ways, will become the oil of the 21st century,” John Coburn said. Coburn should know, as he has spent most of his career in the water industry. He was in senior management at ZENON Environmental as well as a director of the company. Prior to that, he worked with Environment Canada for 10 years and was recognized by receiving the Government of Canada Merit Award.

Coburn now is managing director of XPV Capital and has also been a director of Biorem, which is a biofilter company that went public through the CPC process in 2005. According to Coburn, “Today, the water industry is divided into many sub-sectors: pumps, valves, water testing, filtration treatment, infrastructure, automation and consulting/engineering services. As well, it is a $365-billion global market that is dominated by a small number of large companies, and that number is expected to shrink.”

Large utility companies like General Electric and Siemens are driving consolidation in this sector. Since GE formed its water company through a series of acquisitions three years ago, it has grown its water business to $2.1 billion in revenue. The company, GE Infrastructure Water & Process Technologies, says it has experienced double-digit organic growth in its business group. Goldman Sachs, a global investment banking and securities firm, said these water acquisitions have multiples that range from 0.8 to 3.6 times the sales of the company.

Water Capital, Inc. began trading on the TSX Venture Exchange under the symbol WCP.P on May 2, 2006. Water Capital raised the maximum amount allowed under the CPC program of $2 million in three stages. Five founding directors invested $500,000. Then, a group of value-added angel investors, advisors and capital markets participants invested $1 million. Finally, an IPO, completed through Raymond James, Ltd. and Canaccord Capital Corp., of 2.5 million Common Shares at $0.20 per share for total gross proceeds of $500,000 completed the process.

The founding directors of Water Capital hold a strong belief that the world’s water problems will increasingly become a daily reality that will have to be addressed. This will encompass drinking water, wastewater, and water shortages in the agricultural and oil industries.

The CPC program is a two-part process. The first part is the IPO and subsequent listing on the Venture Exchange. The second part is completion of a Qualifying Transaction, which involves the identification and acquisition of a suitable business or assets. A CPC is a company that has filed and received a receipt for its prospectus but has not yet received final approval from the Venture Exchange for the Qualifying Transaction. To complete this, Water Capital is looking for a target company, a profitable company with a minimum of $5 million in revenue and a track record of at least three years. Ideally, the bigger the company, the better, and the longer the track record, the more attractive it will be.

In conclusion, while weighing the benefits and the drawbacks, the CPC program is an option that growing companies should consider as they conduct their long-term strategic planning. If the CPC makes sense, with Water Capital already established, businesses in the water industry would be wise to give this serious consideration.

James Sbrolla is president of Environmental Business Consultants. He can be reached at 416.234.5120, or by e-mail at jamessbrolla@ebccanada.com.

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