Events conspire against some players

Three high-profile transactions launched during 2005 ran into unexpected difficulties, providing telling reminders that even the best-laid plans can run off course.

iiNet’s acquisition of OzEmail, the float of Automotive Holdings Group and the planned merger of Home Building Society and StateWest Credit Society all could have been contenders for the top deals of 2005.

Fundamentally they are all good transactions that made a lot of sense for the companies involved.

But in each case there were significant flaws, sometimes in unexpected ways.

Internet services provider iiNet is a Western Australian success story, having expanded interstate and overseas through a series of increasingly large acquisitions.

Its $104 million purchase of OzEmail last February made iiNet the third largest ISP in Australia and gave it the scale to start rolling out its own DSL infrastructure and pushing into the telecommunications market.

The deal was welcomed by the market, which pushed iiNet’s share price as high as $3.85 and keenly supported an $85 million capital raising.

But late last year the share price slumped to about $1.75, which the company attributes in large part to the impact of what it calls Telstra’s “more aggressive stance towards its competitors”, particularly through wholesale cost increases.

iiNet has also acknowledged that the integration of the OzEmail business had a “significant short-term impact on customer service”.

In a business update released late last year, iiNet said its underlying profit (EBITDA) in the half-year to December would be 14 per cent below budget.

It said sales had been adversely affected by the performance of its contact centre, and that it planned to hire an extra 40 staff to help lift sales and service levels.

The slide in iiNet’s performance is highlighted by its annual profit; after lifting net profit (before goodwill amortisation) by 55 per cent to $16.9 million in the 2005 financial year, it expects net profit will fall this year to $13.6 million.

AHG’s $45 million initial public offering was one of the biggest WA floats of last year.

The float was strongly supported by investors and the shares, issued at $1, have since traded at about $1.15.

The problem was that completion of the float was delayed by two months because of defective accounting advice.

The company was forced to issue a supplementary prospectus in September – around the time the float was scheduled to close – to clarify the accounting treatment of a complex restructure that occurred in March.

Specifically, AHG said its auditor, Horwath, had “determined that some of the external advice received by the company in relation to the accounting treatment of the restructure was incorrect and needs to be restated”.

This can be interpreted in two ways – that the original advice was shoddy or that accounting standards are highly complex and subject to different interpretations.

Either way, investors had to put up with the delay and AHG’s business planning was put back by two months.

The planned merger of Home and StateWest is another transaction that has been strongly supported by the market.

The ‘in market’ merger will allow the combined entity to achieve big cost savings and make it a more serious competitor to the big banks.

Home’s share price has gone from about $8 to more than $12 since the deal was announced and StateWest members voted overwhelmingly in favour when they met last year.

However, the merger team, advised by lawyers Phillips Fox, corporate finance firm Azure Capital and public relations firm Porter Novelli, failed to take full account of a small group of opponents, led by former StateWest chairman Pat Kirwan, who launched a public and legal challenge after getting financial backing from United Credit Union.

The opponents successfully argued in the Federal Court last month that StateWest failed to keep its members properly informed, specifically over the salary package offered to its chief executive Greg Wall.

Home chairman Tony Howarth, who plans to chair the merged business, pointed out that StateWest members would have been told about the salary package before the deal was finalised, but that wasn’t good enough for the court.

Its decision means StateWest will have to conduct a new postal ballot of its members, which will add to costs and delay completion of the merger, assuming it is still supported by members.