Who let the cat out of RMG's bag?

Friday 10th May 2002

The most amazing thing about Jim Boult, the executive chairman of receivables management group RMG, is that he still imagines his predictions for the company have a shred of credibility.

Announcing last week that the company would lose money this June year before one-offs, Boult predicted 2003 earnings before interest, tax, depreciation and amortisation would be $A4-8 million ($4.8-9.6 million).

RMG's medium-term outlook, he said in a May 1 "position clarification" statement to the New Zealand and Australian stock exchanges, was positive. "There is clear evidence that the effort put into restructuring RMG over the past year is now beginning to show benefit."

The timing of Boult's statement is interesting and will be particularly fascinating for the investors who took up a 30 million share allotment four weeks earlier, paying 18Ac (22c).

On that day, April 3, the share price closed at 24c. It remained there, or at 23c, until April 22. Over the next five trading sessions it fell steadily to 18c, a loss of 22%.

Boult's statement, made in response to "weakness in the share price in recent days," was the first the markets had heard from the company about its recent state of affairs.

Chief financial officer Paul Wilkinson resigned the next day and chief executive Adrian Mitri followed him the next day after only five months in the job.

It's a moot point whether these two were invited to fall on their swords, because of the lamentable state the company had just revealed, or jumped ship while their reputations still had some tread on them.

In either case it's hard to reconcile their departure with Boult's insistence their hard work was about to bear fruit.

By the time Mitri went the share price had fallen to 11c. Those who took the April 3 allotment saw the value of their investment halved in just four weeks. They won't be too happy.

Nor will the buyers of the 10 million shares issued at 22.5Ac and 15Ac in November, the 29 million issued at 18Ac in October, the 31 million issued at 26Ac in September 2000 or the 97 million issued at 25Ac in June 2000.

In fact, since December 2000, RMG has issued 128 million shares, or nearly a quarter of the equity on issue at that time.

That's a massive dilution of the existing holders. These include the vendors of the 22-odd credit services businesses RMG has been trying to weld together. Also notably included is Eric Watson's Cullen Investments.

Cullen's 17.6% - watered down from 20% by all the allotments - is now worth a mere $15m. But that's still a pretty good "finder's fee" for providing the former listed shell Frontier Petroleum into which to back the RMG companies.

And Watson got his shares at 8.5c, so even at 11c he's still in the money.

Still, the share price has fallen so low and the RMG welding job has fallen so far behind schedule that Watson has now seen fit to send a couple of boys on to the board to help Boult and chief operating officer Paul Cooney to sort things out.

The move is understandable. The smokescreen of obscurity and bluster regarding the true state of affairs at RMG can probably be penetrated only by those with a seat at the boardroom table.

But it seems to Shoeshine that the risks attached to trying to integrate so many companies, with different cultures, capabilities, client bases and systems, in two countries, was massively underestimated from the start.

The company listed in its own right in June 1999 at 32c following a $A25 million share placement to institutions (these guys won't be happy either) at the same price.

At the time the organising sharebroker, DF Mainland - whose chairman, Stuart Cairns, was also the chairman of RMG - forecasted a bottom-line profit of $A8.1 million for 2001 (actual result, $A9.1 million loss), $A11.4 million for this year (latest company forecast, an ebitda-level loss of $A4.35-4.85 million) and a $A14 million 2003 profit.

The broker said rolling up so many companies at once seemed, at first glance, a recipe for disaster. But it predicted RMG would be a success because, among other things, 65% of revenue would come from the top three companies. It should have stuck with first impressions.

RMG, true to form, hasn't gone into much detail about the latest crop of problems. Boult's May 1 statement simply noted "a number of operational and management issues" remained from the "substantial restructuring" undertaken since July 2001.

In response to an Australian Stock Exchange query Boult was able to reveal the next day that "the March 2002 results were adversely affected by a significant systems migration of one of the remaining legacy systems and a partial migration of another, impacting on a large pool of RMG customers that contribute a significant proportion of RMG's monthly revenue."

That this sort of stuff is still going on two years after the company was formed is another demonstration of what is already well known - mergers and acquisitions that look great on paper can be hellishly difficult to pull together operationally.

RMG doesn't have a lot of time to get it right. Its far larger rival, Baycorp Advantage, will no doubt be watching with interest. And global heavyweight Dun & Bradstreet this week said it would set up shop in July on both sides of the Tasman in competition with Baycorp.

Neither, to Shoeshine's knowledge, has been known to stuff around large pools of their customers.

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