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Stock market delisting

The announcement by DP World today of its delisting from NASDAQ Dubai (https://www.ft.com/content/bf96d684-5161-11ea-8841-482eed0038b1 or https://www.bloomberg.com/news/articles/2020-02-17/dp-world-to-return-to-private-ownership-after-delisting-in-dubai) may not be surprising. Indeed, there are many firms across the world that delist from the stock markets, resulting in what is referred to as the listing gap. In a research paper, my co-author and I found that a good number of companies delist from the junior London Stock Exchange market, mainly because the costs of listing are higher than the benefits. We document that these delisted firms have not raised equity capital during their listing life and they tend to underperform significantly before the delisting. Our results are consistent with some firms that delisted from the London Stock Exchange main market, such as Vedanta Resources in Oct 2018. The case of DP World appears to follow this trend: Its stock price has declined by about 50% over the last two years. The fact that the firm has only about 19.5% free float facilitate the delisting; in the UK AIM market, companies can be taken private when insiders own 75% stake in their firm. Its low free float is likely to have exacerbated its underperformance. The argument that it is delisting will mitigate its “beholden to public markets’ short-term view on capital and shareholder returns” is debatable as it is not clear that with such low free float, public shareholders have enough power to monitor the company and to push it to make it subject to short-termism.

However, what is surprising is the fact that the firm is increasing its already very high leverage to pay for the acquisition of its shares from the market. It is offering 29% premium, and it is paying $2,72bn. At the same time, its borrowing is increasing by $8.1bn, worsening its already high leverage. PFZW would pay $5.15bn to its parent Dubai World to help repay debt to bank lenders, but it is not clear how these funds are going to be treated. If the new funding is in the form of debt, the transaction becomes cosmetic as it is replacing one debt with another.

In normal circumstances, underperforming firms should not engage in cash depleting strategies, such as, as in the case of DP World, buying back shares or engaging in takeovers, which according to recent research destroy value. DP world could have adopted some cash generating strategies, such as, asset sales and/or raising equity capital, after undertaking all the required operating strategies. Thus, staying in the stock market and taking good strategies to lift up its price and raise additional equity capital in the form of seasoned equity offering to pay back debt and implement its strategy without any restrictions from its creditors, is likely to help the firm in its long-term prospects.

Overall, the decision of DP World to delist from the stock market is ambiguous and the reasons provided for such a strategic decision are not likely to be compelling.

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