Burger Fuel

Looks like the latest kid on the NZAX block is not very liquid – the first trade drove the price down by 20%! I’m picking that the 35,000 sitting at the original listing price on the market will keep that stock from giving a return for some time.

The Dominion Post has a good article on the debacle:

The initial public offer (IPO) of Burger Fuel shares was a failure. The company raised only a third of what it wanted, and listed only because the promoters were prepared to write cheques to make up the difference between the amount raised from the public and the minimum amount needed to list, being half of the amount wanted.

The company listed at the end of last week with almost 90 per cent of the shares in the hands of the promoters, rather than the two- thirds they had been hoping for.

There have been a number of examples over the years of companies that have “failed” in the IPO but have still listed. For those with longer memories, CBD New Zealand springs to mind.

The problem for the investors in Burger Fuel is that the company tried to raise money without really using the broker network. Media reports indicate the company is now aware that raising money directly from the public is harder than it looks, even with a snappy tag line, “Would you like shares with that?”

Brokers also blanched at the idea that people could buy shares using their credit cards. It’s anathema to use debt to buy equity unless the risks can be properly measured and the outcomes known; contracts for difference are all about using debt wisely to manage an equity position.

Some might argue that buying shares with a credit card is okay because the shares may double in value and the 18 per cent or 20 per cent interest rate on the card won’t be a problem.

Sure, the shares could double in value. But they could also lose 90 per cent, and the cost of interest would be crippling. Who knows where Burger Fuel is going to go as a listed company.

And this is where Burger Fuel failed. The food is pretty good as far as burgers go, the franchise model works fine and is common in the fast-food industry. The problem was that the IPO was taken over by the marketing department; the belief was that smart marketing, which works for selling burgers, would work the same for selling shares.

Simply put, Burger Fuel and its adviser, Grant Samuel, didn’t understand investors and, in return, investors couldn’t understand the company. As a result, investors stayed away in droves and the promoters had to dig into their own pockets to get the company listed.

It always pays to examine the “usual way” closely if you’re going to try something different. Chances are good that there’s a reason for things being done the way they are done.

The Motley Fool has some advice, as always. Worth a read.