Stock market delistings have been in the news a lot recently. But what exactly is a delisting, and what does it mean for investors?
If you're a DIY investor or a keen follower of our weekly share tips, these might be questions you are keen to have answered.
Each stock exchange has its own set of rules and regulations that companies have to meet to be a member. For example, there are size, liquidity and reporting requirements. Once a company has been admitted to an exchange, investors can buy and sell shares in the company whenever the market is open.
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Being listed on an exchange is beneficial to a company insofar as it makes it easier to get investment and grow the business. However, it also makes the share price more volatile, as it becomes subject to market movements and investor sentiment.
As well as being added to an exchange, companies can also be removed. This process is called delisting. Sometimes companies delist voluntarily. Other times, they are forced to delist. There are several reasons why a company might delist – from going private to failing to meet listing regulations, or even going bankrupt.
Delisting can sometimes be a good thing for investors, pushing up the share price. For example, when a private investor snaps up a company, they often buy investors’ shares off them at a premium. Other times, delisting can be a bad thing, resulting in reduced transparency and liquidity.
We answer some frequently asked questions, before delving into some recent case studies.
Reasons for delisting from a stock exchange
Delisting isn’t always an involuntary process. Sometimes, a company will choose to delist because its management team wants to gain greater freedom and reduce the regulatory and reporting burden than comes with being a member of an exchange.
Furthermore, a company might decide to go private because its management team wants to make bold decisions that would be difficult (and slow) to get past investors, or that would prove too disruptive to the share price. We’ll delve into a recent case study shortly, involving Superdry.
Private equity buyouts can be another common reason companies delist. If a buyer thinks a company is undervalued, they might try to snap it up at a bargain price. They will often buy existing investors’ shares off them at a premium, and this can be difficult for investors to turn down.
Sometimes takeovers are ‘friendly’, carried out with the approval of the target company’s management team. Other times they are hostile, with the buyer targeting shareholders without management’s agreement.
While buyouts can push the value of your investment up, there are less positive delisting stories too. A company could also be removed from an exchange for failing to meet exchange regulations or going bankrupt.
What does delisting mean for investors?
Delisting can be both a good and a bad thing for investors – it all depends on the circumstances.
If a private or overseas buyer moves in to snap the company up at a bargain price after its share price has fallen, it can give investors the opportunity to sell their shares at a premium. The private buyer will often offer an attractive price as an incentive for shareholders to sell.
However, if the company delists for a different reason and investors don’t get the opportunity to sell their shares on favourable terms, it can create challenges. You could find yourself hanging on to unlisted shares that are tricky to manage and slow to sell.
Unlisted companies operate in murkier waters without the same reporting requirements, which can make it difficult to get an accurate picture of their operations and performance. Management teams also have more freedom – which means they sometimes get away with putting their own interests before those of shareholders.
What’s more, if you want to exit your holding, selling shares in a private company can take a lot longer because there are fewer buyers, resulting in reduced liquidity. This also means the bid-offer spreads (the difference between what a buyer is willing to pay and a seller is willing to accept) are wider.
Recent delisting stories from the London Stock Exchange
To help bring the delisting process to life, we highlight some recent case studies.
Superdry’s delisting proposal
UK fashion retailer Superdry recently announced plans to delist. The proposal will go to shareholder vote at the company’s general meeting in June.
The brand has suffered from “soggy sales”, according to Susannah Streeter, head of money and markets at Hargreaves Lansdown, and hopes that delisting will allow it to “find the lifeboats needed to stay afloat”.
The company wants to carry out a dramatic restructuring plan and has said that it would be “best to implement these changes away from the heightened exposure of public markets”.
TUI simplifies its structure by delisting in London
Travel agency firm TUI is also in the process of delisting from the London Stock Exchange – this time for an entirely different reason. TUI’s stock is also listed in Germany, and investors felt the decision to delist in the UK would result in a simplified structure and better liquidity.
Shareholders voted decisively in favour of the proposal in February.
A string of takeover attempts in 2024
Despite the FTSE 100 reaching a record high last month, UK equities remain chronically undervalued compared to their global and US counterparts.
While domestic investors have been shying away from including UK companies in their portfolios, private and overseas investors have been swooping in to snap them up at a bargain price. The news has been full of takeover headlines so far this year.
A recent example from April this year is the FTSE 250 company Tyman, a supplier of door and window parts. The firm received a takeover bid from Texas-based rival Quanex, which plans to list the combined company on the New York Stock Exchange instead.
The takeover deal will offer Tyman shareholders 240 pence and 0.05715 of a new Quanex share in exchange for each of their Tyman shares. This is a premium of just over 35%, based on Tyman’s closing share price on 19 April.
While a premium of 35% is not to be sniffed at, other deals so far this year have offered even bigger mark-ups.
Dan Coatsworth, investment analyst at AJ Bell, points to Energy Fuels’ recent takeover bid for Base Resources, a company listed on the London Stock Exchange’s Alternative Investments Market. This deal offered investors a 188% premium.
Coatsworth says: “Sometimes a company spots an opportunity and doesn’t want to dance around, teasing low-ball offers to see if they stick. Instead, they’re going in with a best offer to get the job done.”
These case studies highlight the fact that delisting isn’t always a bad thing. On the contrary, buyout opportunities often create the opportunity for investors to cash in.
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