By Shoeshine
Friday 20th September 2002 |
Text too small? |
Following Frucor Beverages, packaging group Vertex has proved to be the second company the pair has flogged off to local investors using forecasts that proved to be wildly optimistic.
Surely even New Zealand investors will have become Bain-averse by now. Then again, maybe not.
Bain and PEP walked away with $66 million for a company that now has a market capitalisation of around $42 million, so local investors are some $24 million poorer just 10 weeks after the float.
With a Securities Commission report on the way the board and senior management have retreated behind their briefcases but the explanations they gave before going to ground raise more questions than they answer.
In the prospectus dated June 7 Vertex forecast ebit (earnings before interest and tax) of $5.2 million for the September 2002 first half, and $11.2 million for the March 2003 full year.
In a letter published in this newspaper on June 21 managing director Paddy Boyle, stung by criticisms of the float financials, said the directors "have reconfirmed their confidence in the profit forecasts contained in the prospectus." This was almost halfway through the half year.
On September 4 Boyle warned Vertex would miss the forecasts. September first-half ebit would now be $4.42 million, down $780,000, and the full year would yield $9.99 million, down $1.11 million.
Those figures don't look dramatic but the market has been savage. Investors are now wondering whether even the revised forecasts will be met.
The problems, according to Boyle, were in the company's two "blue sky" growth units Technical Injection and Securefresh.
TI is a high-specification custom injection moulding outfit making plastic components for agricultural, animal health and human health equipment. Securefresh owns the patents to extended-life meat packaging technology.
Without giving dollar figures, the prospectus said TI's sales doubled between March 2001 and March 2002 and were forecast to rise 65% in the 2003 year. Securefresh's sales were forecast to double for 2003.
So what happened?
According to Boyle, Securefresh's problems were down to the Australian drought, "market changes" and "delays in customer take-up of new case-ready technology."
At TI there were unanticipated delays in customers' planned product launches and "weak export sales." In particular, Boyle said, one US customer had varied its orders substantially. At some times TI was running only 10 of its 17 machines.
A review by an operations specialist identified internal problems. For instance, a customer would ask for a product to be modified but TI would fail to pass on to it the extra costs.
And at a group level the final stages of restructuring turned out to be more expensive than expected.
All this, and the last two items in particular, raise the question of why Bain and PEP, after only 20 months of ownership, were in such a hurry to sell out.
Wouldn't most investors have hung around at least until the glitches in the new products divisions were ironed out and until the restructuring was completed?
And wouldn't any sensible board have made sure all this was sorted out before signing off on a prospectus?
The Securities Commission will no doubt be sifting through these matters in fine detail and its report will make fascinating reading.
It has had a bit of practice lately with its report on the August 2001 Wakefield Hospital prospectus.
The two cases cover similar ground.
The Wakefield report looked at the requirements on prospectus issuers to disclose risks and to ensure forecasts comply with the rules.
It found the offer document was misleading on three fronts. It failed to adequately describe the risk a substantial contract would be lost. The forecasts failed muster because it wasn't stated they were based in part on the assumption the contract would be kept.
And by the time the shares were issued that assumption had been downgraded to "best-estimate" status.
It found the directors hadn't done adequate financial due diligence before signing off, but accepted they had an "honest but mistaken belief" the contract would be retained.
While the Securities Regulations don't say so the commission reckons prospectus forecasts are misleading if they don't conform with Financial Reporting Standard 29.
This says that "where significant assumptions are subject to a high degree of uncertainty then the uncertainty, together with its potential effect on the prospective financial information, shall be disclosed."
The Securities Act exposes directors to civil and criminal liability for making an untrue statement in a prospectus. That includes any statement that is "misleading in the form and context in which it is included."
In Wakefield's case the commission noted it was for the courts to determine liability and it invited IPO shareholders and the Companies Office to consider whether they wanted to travel that path.
Whether the company cops or the shareholders can be bothered remains to be seen. The legal gymnastics required to get a conviction in cases like these and the slap-on-the-wrist outcomes generally mean it's not worth the effort.
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