Back to the roots. Kernel leaves the Warsaw Stock Exchange. How should shareholders respond?
What does the delisting initiated by the company mean?
Kernel Holding, one of the pioneers of IPOs among Ukrainian companies, plans to leave the Warsaw Stock Exchange. This is stated in a stock exchange message posted on the WSE website and addressed to minority shareholders. The letter was sent on behalf of Namsen Limited, owned by Andriy Verevsky, Chairman of the Board of Directors of Kernel, and which holds 41.29% of the holding.
"Namsen informs the Board of the company (Kernel) of its intention to delist the company and submit a tender offer... to invite the remaining shareholders to sell their shares in the company with a view to a possible delisting," the statement said. A similar proposal has been sent to the holding's board of directors to consider.
Kernel Holding SA (Luxembourg) has been listed on the Warsaw Stock Exchange since November 2007. Today, its capitalisation is about $388 million. At its peak in 2015, the company's capitalisation briefly exceeded $1 billion.
Among the reasons that prompted Kernel to initiate the delisting was the inconsistency between the organisational and financial costs of maintaining publicity and the benefits generated by this status. "We have come to the conclusion that the disadvantages, from a strategic, commercial and cost perspective, resulting from the listing of the Company's shares on Warsaw Stock Exchange outweigh the relative advantages of being a public traded company," the letter says. It also specifies that over the past 11 years, the company has never been able to raise financial capital to invest in development, and Polish investors are no longer among Kernel's major shareholders. Private ownership will reduce vulnerability to potential unfavourable conditions on the stock market, the majority shareholder believes.
Namsen's goal is to concentrate 100% of Kernel shares.
Mind explored what is behind the delisting procedure and how minority shareholders should act to exercise all their rights in relation to shares that are no longer traded on the stock exchange.
What does the delisting procedure mean? Delisting means removing a company's shares from trading on a stock exchange.
Delisting can be:
- Involuntary, i.e. initiated by the exchange in response to the issuer's violations, for example, in terms of publishing reports;
- initiated by the issuer itself, when the management decides to terminate the trading of shares on the stock exchange and launches the relevant procedure.
Why might a company decide to delist? In Western practice, the most common reasons for voluntary delisting are as follows:
- consolidation of the main shareholding in the hands of one or more key shareholders, which has already occurred or is being prepared;
- mergers/acquisitions that result in the creation of a new company;
- unwillingness to disclose financial and other information to protect against unfriendly actions of competitors or to avoid increased interest of tax authorities;
- unjustified costs of going public compared to the effect obtained (Kernel states this as the main reason);
- the desire to avoid management restrictions imposed by the presence of external shareholders and/or disagreements over the company's future development strategy. This reason may be non-public, but it is also relevant in the case of Andriy Verevsky's holding;
- deterioration of the company's performance during an economic downturn or crisis and a decline in the value of its shares.
Delisting avoids massive share buying at the lowest price. Kernel's performance has deteriorated, but not critically, given the extremely stressful conditions for business in Ukraine. For example, in the first half of FY2023 (July–December 2022), Kernel reduced its net profit by 12.6% to $370.31 million, while revenue fell by 41.3% to $1.9 billion.
In the case of Kernel, is the officially stated reason for delisting the main and only one? It is certainly true that in recent years, and especially after the start of the full-scale invasion, the profit from being listed did not justify the investment in maintaining public status. Shareholders, however, may have found the protocolar and administrative resources required by a listing more burdensome than the financial ones.
The public company status places a number of restrictions on management, in particular on strategic decision-making that requires stakeholder approval. At the same time, in the current environment in Ukraine, efficiency in management has become critical.
It is not known how united the shareholders are in their vision of the company's development. In April 2022, Kernel's board of directors decided to divest some of its crop farms out of 134,000 hectares of land bank. These lands were bought by Verevsky's companies for $210 million.
This is not the first time that Andriy Verevsky has been stripped of such burdensome regalia. In 2013, he was stripped of his MP status. According to the official version, it was due to the combination of political and business activities, and according to the unofficial version, because the status of Politician provided for additional checks and procedures in foreign markets where his financial business operated.
Have there been any precedents for delisting Ukrainian companies on foreign platforms? None as large as Kernel.
Dragon Ukrainian Properties and Development Plc (DUPD), a foundation managed by Dragon capital and specialising in real estate transactions, initiated a similar procedure in 2017.
What are the risks of delisting for the company that initiated it? The main negative consequence of delisting is that a clear digital benchmark of the company's value disappears, making it more difficult to sell. This is especially true for large businesses such as Kernel, which are usually only taken over by external players who work according to clear formulas. In such formulas, the share price is one of the main parameters.
The same problem arises for individual shareholders; for them it becomes difficult to sell their stakes. Even if they manage to succeed, the transaction usually takes longer.
What should small investors do if a share delisting is announced? Indeed, in the event of a management-initiated delisting, minority shareholders are faced with the fact that their asset, the shares, is significantly changing its characteristics. Therefore, the interests of minority shareholders are protected by law and sometimes by the exchange itself.
For example, in the event of an issuer-initiated delisting, they must be sent an offer under which those who wish to sell their shares can do so.
To avoid the risk of the major shareholder artificially lowering the share price, the buyout price must not be lower than the average price for the six months prior to the delisting announcement.
After the announcement of the delisting, Kernel's shares fell by 6.8% to PLN 18.9.
It is worth noting that more than 10 years ago, Kernel had troubles with minority shareholders of one of the companies it was acquiring, a large Ukrainian oilseeds market operator, Allseeds Group.
What options do minority shareholders have?
- The most favourable option is to sell the stake before the delisting announcement, but this requires insider information. The sooner the sale takes place, the higher the potential price of the stake, as the news of the delisting will inevitably drive down the price.
- Take advantage of the offer and sell the stake at the weighted average price.
- Keep the stake for dividends.
What are the signs that a company is preparing for delisting? The free-float indicator – if the largest shareholder systematically withdraws shares from circulation and gradually buys them back, this may indicate an intention to take the company private.
How long does the delisting procedure take? If all regulatory approvals have already been obtained, the issuer submits an application to the delisting department of the stock exchange. It takes a month for the application to be considered. If a positive decision is made, the relevant conclusion is published and an offer is sent.
Is it possible to re-enter the stock exchange? Yes, after a certain period of time, as the market conditions change or other considerations arise, the company may return to listing on the same or another exchange platform.
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