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Weldon's bet on Clear Grain Exchange was 'highest-risk strategy'

Wednesday 4th May 2016

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NZX's acquisition of Clear Grain Exchange in 2009 was a high-risk strategy that assumed it could add value to the barely profitable Australian business even though former chief executive Mark Weldon had been told it could take five to 10 years to make money, the Wellington High Court was told.

Counsel for Ralec, Tim North QC, cited internal NZX documents from the time to build his argument that Weldon saw the grain exchange as a vehicle to expand by creating an 'Agri-Bloomberg' valued at between A$750 million and A$1 billion, exponentially more than the A$6.9 million upfront plus earnouts that NZX had agreed to pay. Instead, the grain exchange missed targets and the parties to the deal ended up in an acrimonious dispute.

NZX had been "confident it can add real value to Clear", rather than seeing it as an established platform, North said, citing a July 2009 internal strategy document. NZX was looking to invest in the "blue space, where there are no or few competitors, or products don't currently exist", he said, adding that total investment of $140 million had been planned to build out the acquired businesses.

"It's the highest risk strategy that could be imagined, and they're going to spend $140 million on it," North said. "It's a bet, it's like spending half your net capital on a bet. This is a significant shift away from what it's required to do as the regulator of the stock exchange."

In its opening submissions, NZX accused Ralec of producing "wildly inaccurate" forecasts of future performance, but Ralec's North said NZX had relied on its own due diligence in making the acquisition. Weldon had asked Richard Koch, managing director of Australian agricultural news business ProFarmer which NZX acquired in 2008, for analysis of Clear and had been told Clear was five to ten years away from making money, North said.

"Weldon, who was the conduit between management and the board, did not tell the board it was five to ten years away," North said. "There is a clear clash between Mark Weldon and his board."

Weldon today announced his resignation from his latest position, as chief of private equity-owned media company MediaWorks, citing too high a personal toll after a string of high profile staff departures and questions about its future.

Weldon had been excited by the prospect of creating an agricultural version of the New York-based financial data and analytics firm Blomberg and based his potential valuation on the business being worth "at least 1 percent" of Bloomberg if successful, North said. 

"Clear would be used as a baseline from which to build. It was NZX's value being added," he said. "The strategy was not a contractual obligation on Clear. It was a commitment made by NZX to Clear."

North said forecasts brought to the NZX board in August 2009 weren't based on information from Clear.

"Forecast work was not done by anyone from Clear - it was done internally at NZX, without reference to financial information provided by Clear," he said. "Each member of the due diligence team had to write part of the business case and plan provided to the board. That business case had come solely from NZX, and not from Clear. There was no reliance at all by the board on Clear's forecasts."

Records of the financial status of the Ralec assets were provided before acquisition, showing Clear Interactive had made a loss of A$4.2 million in 2009 while Clear Commodities had made a profit of A$88,000, North said yesterday.

Ralec is facing stock market operator NZX in what’s expected to be a nine-week trial over the grain exchange purchase. NZX is suing for between A$20.7 million and A$37.6 million, and Ralec has countered with a suit totalling A$14 million plus bonuses.

NZX claims Clear’s former owners, Grant Thomas and Dominic Pym, and their companies Ralec Commodities and Ralec Interactive misled NZX when it bought the commodities trading platform, while Ralec's claim is that NZX starved the grain exchange of the capital to grow.

The grain exchange was set up to take advantage of the break-up of the Australian Wheat Board monopoly and was looking to capture a slice of the A$100 million to A$150 million growers spent annually on commissions to sell their products.

NZX wanted to use the exchange to expand its agricultural products offering and use it as the basis for an agri-portal for spot market and commodity data, though that hasn’t eventuated due to Clear’s muted trading volumes.

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