IT Capital wanders lonely as a cloud ...

By Peter V O'Brien

Friday 28th June 2002

IT Capital chief executive David McKee Wright bears the same name as a noted New Zealand poet of bygone days.

Assuming McKee Wright is a descendant of the scribbler's, his comments in documents outlining IT Capital's latest restructuring proposals show he inherited his ancestor's poetic ability.

The company is asking shareholders to approve the acquisition of shares in three companies under the control of McKee Wright and chief operating officer Maurice Bryham, the issue of options and shares to those people and a management contract with Platinum Management, a company indirectly owned and under their control.

McKee Wright said New Zealand was a small economy with a rich history of innovative thinking.

"However, our local markets are generally not large enough o sustain deeply vertical strategies. For this reason we are presenting a new portfolio of companies that extend from the flourishing New Zealand marine industry to the rapidly growing wireless-application market. All of the new companies have global opportunities. However, the diversity of the businesses allows IT Capital to mitigate its risk in any one market segment.

"By diversifying IT Capital's investment portfolio, the company should be less exposed to individual segment downturns such as the recent dot-com crash.

"We are proud and excited to work with a team of individuals who need only to be judged on their track record. The same executive team that brought New Zealand PC Direct and Exonet have again assembled together to bring a 'new beginning' to IT Capital.

"We are very active early-stage (roll up your sleeves) investors who build companies around strong intellectual property and entrepreneurs with the vision to commercialise them.

"We have created $68 million of shareholder wealth over the past 10 years and we look forward to bringing similar success to the shareholders of IT Capital."

McKee Wright and Bryham are comparatively recent introductions to the company and their initiative is the latest of several "new beginnings."

A formal annual report accompanies the restructuring documents. Similar flowery, extravagant language was present in chairman John Robertson's report.

IT Capital shareholders will be asked to approve: entering into a management services contract with Platinum Management (PML); issuing 50 million options that will vest in a series of tranches over 30 months; issuing 15 million shares to each of Bryham and McKee Wright at 4c a share; and buying Bryham and McKee Wright's shareholding of 50% in Conceptual Solutions (a low-horsepower electric motor developer), 40% of Datasquirt (telecommunication commerce system), and 70% of Sealegs International, which has developed a system of motorised, retractable and steerable boat wheels.

Consideration for holdings in the target companies will be 137.5 million fully paid ordinary IT Capital shares.

Grant Samuel issued an appraisal report on the proposals. The adviser company said IT Capital's resources were rapidly diminishing and shareholders were left with few alternatives. "The most obvious (being liquidation) offers no more certainty than the proposed related- party transactions with Messrs Bryham and McKee Wright.

"At the very least the proposed related-party transactions preserve for the time being any future upside exposure in relation to ITC's existing investments, albeit in a significantly diluted share.

"Based on ITC's projected cash burn rate the company will be insolvent in early 2003 without the introduction of new equity."

The last was an interesting comment, given Grant Samuel's probable substantial fee for the information and other assessments and my comments (NBR, June 14). "IT Capital either gets more capital, sees a substantial improvement in the book value of its investments, now written down to $84,000 from December's $8 million, or fades away as another good idea that failed in practice."

Only corporate sadists want to see companies fall but some of these outfits invite sadism with grandiose and extravagant language, which is forever optimistic rather than telling shareholders the unpalatable facts.

IT Capital's executives appear to have accepted their PR spin doctors' texts with minimal alterations. If so they were foolish, and they were equally foolish in their prognostications.

Referring to IT Capital's proposed buying of shares in the three "target" companies, the document to shareholders said: "The information memorandum on each of the companies that the board used as the basis of its assessment include forecasts through to 2006. The board relied substantially on the cash flows and earnings forecast in the years up to 2005 to estimate value.

"Where discounted cash-flow models were used to assess value, a discount rate of 35% was applied. This has been checked and validated using earnings two to three years out and applying a price-to-earnings ratio between five and eight."

That sounds impressive but is no more than theoretical financial nonsense. It is impossible to make meaningful financial projections that far out. Our revered Treasury gets things wrong in a two-to-three-year period, so how can a small corporate do better? IT Capital may win through but it will need more emphasis on Mammon than on the poet's Muse.

Shoeshine returns next week

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