ERG eager to pursue bold Belgian deal

THE 26,000 shareholders in local technology chip ERG received their prospectuses this week for the $104 million renounceable rights issue to help pay for the acquisition of Brussels-based Proton World International (PWI).

In ordinary circumstances, this deal might be seen as a company maker. ERG will be stepping up from the low cost mass transit smart card market to the high security integrated financial services card arena. But these are not ordinary circumstances.

ERG has gone from a prince of the stock market to a punching bag in less than a year. The lowest blow came when Price Waterhouse-Coopers was asked to recognise $31.2 million ERG earned from software licence fees in Germany as bookable for the financial year ended last June. The auditors would not even own to a nodding acquaintance with the figure. So profits came in at only $6.1 million instead of $37.2 million. The company insists that the missing revenue is not disallowed, but merely deferred, until the accountants are happy. However, the shares continue to be hammered and have fallen to 59 cents. That is getting close to the 50 cents pitching price of the three-for-10 rights issue, underwritten by Salomon Smith Barney. The brokers say they think the Belgian transaction is a good one, “given PWI’s market position, synergies with ERG products and longer term earnings outlook”.

Whether it is a good deal or not, it is certainly a bold one. Chief executive Peter Fogarty and his team are acutely aware that the market is losing patience with waiting for ERG to deliver, and is not ecstatic about another diluting acquisition. They must think it is really worth going for.

PWI is best known for its “electronic purse” application Proton, which is software that goes into 35 million multi-use smart cards globally, and is used by more than 500 banks. The company was set up three years ago as a joint venture between American Express, Visa, Banksys and ERG, which is now buying out the other partners.

The enterprise is yet to make any money. The expectation is that Amex will be the prime mover in the use of the products delivering some $200 million in revenue over five years.

Many of the more than a thousand ERG staff around the world are puzzled over the negative sentiment weighing down the group. They are proud of their technology and the goals recently kicked.

Just when we thought it was a mirage, ERG was named preferred proponent for the Sydney transport smart ticket contract. Then the company clinched exclusive contractor status to supply the automated fare system for Seattle, deepening the footprint in the US.

The current lowly share price amounts to option money on an ERG success story that could take several years to tell.

Note of caution as oil prices continue to slide

WE can thank that nice Mr Mikhail Kasyanov for putting some extra spending money in our pockets this Christmas. The new best friend of George Bush turned down the OPEC call for Russia to limit its oil production, and that pushed the already groggy world price below $US18 a barrel.

Petrol prices rarely fall as far or as fast as the price of oil, but even at the current 80 cents a litre they are at an 18-month low. Commodities analyst David Thurtell at CBA is looking for the price at the pump to slide to 74 cents within a month. That is based on $15 a barrel and an extra fillip from the Australian dollar hopping over 52 cents. This is good news for inflation, because cheaper fuel flows right through the economy.

We should not get too carried away. There is still a war going on and the position of Saudi Arabia is looking increasingly slippery. The US is busily topping up its strategic reserves to guard against disruption of supplies.

The recent pounding of Australian oil and gas shares looks to have been overdone. Santos has been driven below $6, where the fully franked yield is over 5 per cent and the earnings multiple a mere 6.3 times. Woodside has fallen more than a dollar below the $14.20 blocked takeover bid from Shell last year – too cheap for one of the premier operators of energy assets in the world.

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