ERG has to accept umpire’s decision

THE 26,000 shareholders in ERG suffered nasty bruises in the collision between the company and Pricewaterhouse-Coopers.

The already groggy ERG share price sagged to 65 cents on news that its auditors had refused to identify more than $31 million from the sale of software licence fees by its German smart cards joint venture as bookable profits. So earnings for the year to June 30 have been chalked up at $6.1 million instead of $37.5 million, amidst a general gnashing of teeth.

The accountants were unwilling to accept that shares received by the company in return for selling the technology could be sufficiently measured for value, or that there was “sufficient probability that economic benefit would flow.”

ERG chief executive Peter Fogarty has made it plain that he did not agree with the umpire’s decision, but he has been obliged to accept it.

The shock result raises a few questions. When did it become clear that an impasse was developing with the auditors? Why did the tussle drag on until late at night on the day before the results were announced?

Who and what was behind the bear raid on ERG shares earlier this month? And what is the relationship now between the company and its former cuddly partner Motorola of the US?

Selling of ERG reached a crescendo on Friday August 10 when the shares were the heaviest traded counter in Australia, and tumbled to a (then) low of 82 cents. Fogarty claims ERG has been the subject of short selling and rumour mongering, Both were going on that day.

There was talk that ERG had lost out on the tendering process for a $100 million smart ticket contract in Sydney, chatter that top executives were on the move, and a story that Motorola was about to convert a holding of $30 million worth of ERG notes and dump the shares on the market. Nobody seemed to have heard about the potential problem with the auditors. If there had been a leak of that development it might have explained the ferocity of the selling.

Then came the announcement that ERG had won the role as preferred proponent for the Sydney contract. But market sentiment remained tepid.

ERG shares, former darling of the market, fell from more than $4 last year to $1.85 in late February when Motorola made an abrupt exit from the share register by selling its 82.6 million ordinary shares. ERG stumped up $46 million to buy Motorola’s interest in a Rome project.

The company has not yet been able to ascertain Motorola’s intentions in respect to the convertible notes. This seems odd, given that ERG and Motorola are consortium partners in the Sydney contract.

Fogarty has been manfully defending the dismal results on a roadshow in the eastern states. He was accompanied by the soon-to-retire chief financial officer Ian Allen and his replacement Michael Slater – who started his career as a Coopers & Lybrand man in the UK, before working in a dozen European countries for leading companies, including AXA and Mayne Nickless.

ERG is not an insignificant concern. It is a component in the S&P ASX100 share index – although the market capitalisation has now shrunk to just $400 million.

The group employs 1,100 people in 12 cities around the world. Its systems are already being used in Brisbane, Hong Kong, Singapore, Toronto and San Francisco.

There is no doubt that its products are top class and have significant future potential.

The important German sale was further evidence of that, and a Sydney win would generate more business. But shareholders are fed up with waiting for jam tomorrow.

Turning technology-licensing revenue into folding cash seems to be a tough trot. Orbital Engine Corp, which has just reported a loss of $26.8 million, is another case in point.

Ironically, Orbital shares jumped 26 cents to 73 cents following news of a technical transfer licence agreement for its fuel injection system with Delphi Automotive of the US. ERG has now suffered the indignity of seeing its shares trading lower than those of Orbital – you could have got very long odds against that six months ago.