Dynamic duo in ever-shrinking ITC deal

By Shoeshine

Friday 18th October 2002

Ain't it wonderful how two people can look at the same asset and come up with such wildly different valuations?

Independent valuer Grant Samuel looked at Tranz Rail Holding's Auckland rail corridor and valued it at $10 million to $20 million. And that's including the operating business.

The government looked at it and agreed to pay Tranz Rail $81 million, just for the track and right-of-way.

Tranz Rail told the government it was worth $600 million. But even Treasury wasn't dumb enough to buy that one. Tranz Rail's value reflected the cost of establishing a new corridor from scratch, ploughing through a bunch of houses.

That, as officials noted, was irrelevant as the corridor already existed.

Similarly, Grant Samuel, in an appraisal report to IT Capital shareholders, valued motor technology developer Conceptual Solutionz at $1.25 million. ITC's directors valued it at $400,000.

The difference might be accounted for by the fact Grant Samuel wasn't allowed to talk to Conceptual Solutionz's founder and 50% shareholder, Peter Parsonage, but had to rely on information supplied by ITC management.

That is, information from chief operating officer Maurice Bryham and chief executive David McKee Wright, who owned the other half of Conceptual Solutionz and were seeking to sell it into ITC in exchange for a major shareholding.

The deal involved McKee Wright and Bryham selling to ITC their Conceptual Solutionz stake and two others 40% of software developer Datasquirt and 70% of wheeled boat maker Sealegs.

In exchange they would get 47.6% of the company through shares and options issues. Some of the shares they would pay for, injecting $1.2 million cash into the struggling company.

They also got a three-year $300,000-a-year management contract.

In Shoeshine's humble opinion the deal always sucked because ITC's other shareholders would be surrendering to the Dynamic Duo some of their exposure to the very promising Deep Video Imaging while accepting in return exposure to three untried and much less promising start-ups.

But shareholders had their backs to the wall a fact with which ITC made sure they were well acquainted and voted the deal through.

The next move in this farcical tale was for the duo to drop Datasquirt, easily the best of the bunch, out of the deal. Their injection consequently dropped to $1 million but the management contract was unchanged.

What did shareholders make of this? We'll never know because ITC's board didn't think it necessary to ask them it said the resolution on the first deal simply asked for approval to issue 137.5 million shares.

Shoeshine reckons Deal Two sucked even more than Deal One.

Grant Samuel's $5.5 million valuation of the three stakes was made up of Datasquirt, $3 million; and Sealegs and Conceptual Solutionz, $1.25 million each. The board's valuation was Datasquirt, $2.1 million; Sealegs, $3 million; and Conceptual Solutionz, $400,000.

So shareholders in fact approved (although they might not have known it as Grant Samuel stuffed up its table) an issue of shares to buy two stakes worth $2.5 million but ended up paying $3.4 million.

The next step in the farce came on October 3 when ITC announced it was reversing the Conceptual Solutionz buy, and cancelling the shares issued to pay for it, because the duo had been unable to reach a funding agreement with Parsonage.

Conceptual Solutionz had ceased trading 10 days before this was announced. The Stock Exchange's market surveillance panel is looking into why this was not disclosed.

The duo's management contract remains unchanged even though they are managing two fewer investments than they were suppose d to when it was approved.

ITC has $2 million and reckons its cash burn rate is $60,000-80,000 a month, of which $25,000 goes to the duo.

Why Sharon Hunter, the blemishless pin-up of gushy magazines, agreed to sit on the board of this outfit is something of a mystery. Must have been talked into it by her old mate Bryham.

Conspicuous by his absence is the Shareholders Association's Bruce Sheppard, who complained noisily about the first, approved, deal but has kept any thoughts he might have about the rest of the farce to himself. But then it must be a lot more fun grandstanding at Telecom's annual meeting.

Thanks, Devonport

As a resident of Auckland City Shoeshine feels obliged to offer his sincere thanks to all those who live on the North Shore.

This is because they're going to have the privilege of subsidising his power bills until 2073, not that Shoeshine's likely to be around for that long.

This happy situation arises through Vector's takeover of United Networks, the former Power New Zealand.

Vector is owned by the AECT (Auckland Energy Consumers Trust), which obliges Vector to overcharge its customers, collect the profit by way of a dividend and then give it back to its customers.

This isn't efficient as it means Vector has to make a profit and pay tax on it but it seems to keep the punters happy.

Shoeshine's electricity industry mates tell him Vector's charges in fact represent somewhat less than WACC on ODV (the weighted average cost of capital on optimised deprival value).

A recent change to the trust deed commits Vector not to increase prices for residential customers by more than the annual inflation rate.

While Vector will soon be reaping its profits from United Networks customers as well as its own, United Networks' people won't get the AECT dividend.

United Networks' charges represent somewhat more than a WACC return but unless they are cut by order of the regulator the wealth transfer is cemented in for another seven decades. Thank you, Devonport.

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