Finding Value in ADR Shares of Foreign-Based Companies (Part 2)

Finding Value in ADRs

We find that if you exclude momentum-driven exchanges, many foreign companies are valued at lower multiples or in lower quartiles than US-based companies that might be considered peers or comparables.  And since most ADRs are initiated by the companies without doing a US offering or even a US roadshow, many ADRs languish on US exchanges, with very low levels of trading that can scare off investors.

The trick to capturing value in an ADR is to realize that the ADR is a security that you can create when you need it and then convert back to its original form on demand.  So if you buy the shares of a foreign company on, say, a European exchange, you can convert them to ADRs on demand if there is an ADR program with one of the depositary banks. 

 Once the foreign shares are converted to ADRs they can be handled as US securities, reported on statements in US dollars, and, depending on individual broker-dealer rules, may be marginable.  If the trading liquidity of the ADR in the US is not satisfactory, the ADR can be converted back to the original form as an “ordinary” share, and sold on the home exchange. 

 So while it is convenient if there is a liquid trading market in the ADR, it is not essential if there is a liquid market in the home exchange. 

OTCQX International

The OTCQX International is aUSelectronic trading market that is primarily for cross-border companies represented by ADRs.  Founded in 2007, the OTCQX has become a haven for large and small non-US companies who might, in former times, have been listed on Nasdaq or on the NYSE in order to make their securities available to US investors. 

With the high cost of duplicative filing rules, D&O insurance and compliance with US laws & regulations such as Sarbanes-Oxley, many cross-border companies have elected to move their listings to OTCQX International, where costs are considerably lower than they are maintaining a full NYSE listing, but respectability is assured.  Large-cap international companies like Deutsche Telekom, easyjet, BNP Paribas, Gazprom, Roche, and AXA trade on the OTCQX, alongside small-cap and mid-cap companies.

 Each company trading on the OTCQX has a Principal American Liaison (PAL) or a Designated Advisor for Disclosure (DAD) as a guide to the regulatory environment, and, in some cases, as a helper in navigating US markets.  These PALs and DADs are investment banks, broker-dealers, law firms, accountancies – companies that bring helpful expertise to the task.

 Unlike London’s AIM (Alternative Investment Market), to which many compare it, the companies listed on the OTCQX International do not use their listings to raise financings, but simply to facilitate trading of the ADRs.  The “Level 1” ADRs listed on the OTCQX International are not empowered to do US financings without complying with more of the full panoply of US laws & regulations. 

Two other ADR examples include:

Poland-based Grupa ADV (www.grupa-adv.pl) is a group of companies in three developing areas: integrated market communication, innovative technologies and e-commerce. The companies offer a variety of interactive media and e-marketing services including online campaigning, email marketing, viral marketing and advertising production. It trades as ADV on theWarsaw exchange and GPVSY on the OTC in theU.S.

Mauritius-based Essar Energy (www.essarenergy.com, a subsidiary of the Essar Group, is a low-cost, integrated energy company focused onIndia. It has interests in both the power generation and petroleum industries. It trades on the London Stock Exchange as ESSR and is a constituent of the FTSE 100 Index. Its ADRs trade on OTC as ERERY.

For further information

For more information on ADRs, please contact us at info@allencaron.com.  We are NOT financial advisors and do NOT trade or sell securities or make markets.  We are an investor relations agency with strong experience in cross-border securities.

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