Automated ticketing company ERG will shortly hold meetings of note holders and shareholders to seek approval for a major restructuring. Mark Beyer takes a closer look.
Automated ticketing company ERG will shortly hold meetings of note holders and shareholders to seek approval for a major restructuring. Mark Beyer takes a closer look.
ERG issued a 220-page information memorandum earlier this month to explain the balance sheet restructuring that could lead to control of the company changing hands.
The memorandum provides many fascinating insights into ERG’s woes, but one aspect is fascinating by omission.
There is no reference to the future of Sandy Murdoch, who has been chairman since 1994, and there is only one brief reference to chief executive Peter Fogarty, who has run ERG since 1985.
Tucked away on page 42 of Ernst & Young Corporate Finance’s independent expert’s report is the statement that: “Mr Fogarty has undertaken to continue as chief executive officer if the board so desires”.
While heads have rolled in boardrooms across Australia, Mr Murdoch and Mr Fogarty have survived – despite raising $350 million from investors over the past three years and then proceeding to lose it all.
The fall in the share price – from the dizzy heights of $4.27 in the tech boom to recent lows below 10 cents – has highlighted the company’s sliding for-tunes.
Mr Fogarty’s decision to sell some of his shares, switch into the convertible notes and invest a reported $7 million in the Lakes Folly winery in NSW’s Hunter Valley, has done nothing to endear him to shareholders.
Now the company is proposing a major balance sheet restructuring, which will hand majority ownership to holders of convertible notes.
A meeting of note holders on March 28 is expected to approve the proposed restructuring.
Paterson Ord Minnett analyst Robert Gee – the only broking analyst who actively follows the company – believes the major risk to the restructure is opposition from ordinary shareholders, who are due to meet in late April.
If shareholders approve the restructure, which includes a debt-for-equity conversion and a rights issue, their stake will be substantially diluted.
But if they reject the restructure, the company’s future will remain under a dark cloud.
ERG’s directors and its auditors have already acknowledged there is significant uncertainty regarding the ability of the group to continue as a going concern.
And the company has stated that failure to fully implement the balance sheet restructuring would “more than likely prevent the group from continuing to bid for large projects”.
The company’s woes have been all too apparent to shareholders.
It lost $243.9 million in the 2002 financial year and a further $124.9 million in the half-year to December 2002.
The latest loss included a $52.4 million write-down in the value of its Belgian subsidiary Proton World, which ERG is now negotiating to sell.
ERG’s flirtation with smart card developer Proton World was extra-ordinary, for both the brevity of its ownership and the scale of its loss.
It paid $150 million for Proton World in March 2002 and now, less than one year later, is selling the business and writing off one third of its investment. (ERG will be able to claw back some of this loss via an earn-out contract.)
Despite its big losses, the company is painting a potentially positive picture for the future – assuming the balance sheet restructuring proceeds.
“The company continues to have excellent commercial prospects for its technology,” Mr Murdoch said.
ERG has highlighted recently awarded contracts in Sydney, Seattle and Washington DC to support this contention.
Mr Gee likes the revenue outlook.
“Contracts secured plus ongoing revenue from managed projects such as Melbourne and Rome will give ERG revenues of $300 million per annum over the next few years,” he said.
Generating revenue and clinching contracts, which is seen as Mr Fogarty’s strength, has clearly not been the group’s main problem. Converting the revenue into profits is.
“Everyone would agree they needed more financial discipline in the past,” said David Ferris, investment manager at Australian Ethical, which is a major note holder and potential underwriter of the planned rights issue.
The big losses over the past two years have coincided with a revolving door at the all-important chief financial officer’s (CFO) office. Long serving CFO Ian Allen retired in mid 2001 and was replaced briefly by Michael Slater and then Richard Howson.
Current CFO Yew Seng Kwa was recruited from Burswood last year.
Mr Ferris said the involvement of global investment bank Babcock and Brown (see article below) has been a positive factor.
“We have been given a good story in terms of better project financing in future and better internal financial discipline,” Mr Ferris said.
Assuming ERG completes its balance sheet restructuring, it will be better placed to withstand continued fierce competition from its arch rival, US-based Cubic Transportation Systems.
ERG has claimed that spoiling tactics, including legal action, by Cubic delayed the start-up of major ticketing projects and reduced revenue over the past two years by about $100 million.
Despite suffering a crushing loss in a NSW court case last year, Cubic shows no sign of backing off.
It has appealed aspects of that judgement and circulated US broker reports that describe it as “the global leader in automated fare collection systems”.
Industry watchers who thought Cubic may retreat after losing the NSW court case were obviously not aware of its second line of business – provision of combat training systems to the US military.
