Money in, money out

One of Chalkie's favourite best advertising tag lines of recent years is L'Oreal's "because I'm worth it".

And not just because she certainly is. Liliane Bettencourt, the founder's daughter and L'Oreal's main shareholder, is worth about US$32.7 billion (NZ$39.5b), according to Bloomberg.

In a symbiosis of self-confidence, it suggests customers are so special they shouldn't skimp on cosmetics, while simultaneously justifying the high prices charged by L'Oreal. Genius.

Such chutzpah is a sine qua non for any successful business and it's clear that some people are especially gifted in this respect.

Chalkie is particularly in awe of the Henry brothers Gerald and Brian, whose latest offering, Arria NLG, has absorbed some big-name investors in this part of the world, including Gareth Morgan, Theresa Gattung, Rob Morrison, ACC fund manager Blair Tallott, Telecom chairman Mark Verbiest, Contact Energy general counsel Paul Ridley-Smith and Strategic Finance director Marc Lindale.

The company is involved in some cutting edge software that translates reams of raw data into plain English in a process it calls "natural language generation" or NLG.

The technology was developed by scientists at the University of Aberdeen in Scotland and spun out into a British company called Data2Text, which became the core entity of Arria NLG.

Arria, also a British company, was to have listed on New Zealand's NZX last year, but changed its plans and listed on the London Stock Exchange's Alternative Investment Market (Aim) in early December.

Chalkie recalls seeing a little brochure on Arria in a fund manager's office a while back as it sought big-money backing. It was shiny, with nice photos and graphics, but was vague to the point of obscurity on the sort of details an investor would require.

Presumably those putting money in got a bit more info, but Chalkie wonders whether they got as much as appeared in documents Arria produced for its Aim listing. These reveal much about Arria's origins, including what the Henrys brought to the party.

The brothers have some bad history as former bankrupts after the failure of 1980s company EnergyCorp, and Gerald Henry was convicted and jailed in the US for mail and wire fraud in 1996.

But Brian Henry is known more recently in this country for his involvement in successful US software company Diligent Board Member Services, which is now making good money despite a shaky start on the NZX and some slapdash corporate governance. So it seemed only natural to see him turn up in the thick of another early stage software outfit.

Indeed, Arria could easily be promoted as "from the people who brought you Diligent" - as well as Brian Henry, its founders include his brother Gerald and former Diligent director Sharon Daniels.

With Arria now boasting a market capitalisation of £147 million (NZ$292m), the team can notch up another victory, plus acquiring shares worth millions of dollars for themselves.

The way some of those shareholdings was achieved is particularly impressive.

Arria was incorporated in October 2011 under the name De Facto 1922, becoming Arria NLG in March 2012.

The listing documents state that Arria's initial focus was the development of retail optimisation software technology known as SQM3. This led to it buying intellectual property rights through the acquisition of SQI3 Solutions Ltd and Global IP Inc.

It then moved into NLG software and bought into Data2Text, ultimately sidelining the retail idea and writing £1.5m off the value of SQM3.

"In March 2013, and following a strategic review of the business opportunities available to the group, the directors have determined to focus on developing the NLG software in advance of SQM3 in the near term," it said.

The write-off was recognised in the accounts dated September 30, 2012.

It all sounds simple enough - until you look at the dates and valuations.

Arria NLG bought 20 per cent of Data2Text in May 2012 for £325,000, payable in instalments over 12 months, with an option to buy the rest later.

It bought SQI3 Solutions from Gerald Henry several months later on September 28, 2012, paying £3.1m in the form of 5m ‘B' preference shares. SQI3 Solutions apparently owned the intellectual property associated with the SQM3 concept.

The purchase was followed by Arria's acquisition of Global IP from Daniels and her business partner Bob Craig on September 29, 2012, for an identical consideration of 5m preference shares valued at £3.1m. Global IP's assets were apparently the exploitation rights for SQM3 in the US.

Given Arria was busy raising US$20m from investors for its NLG business from July 2012, Chalkie reckons it is more than a little odd that it bought two companies from related parties several months later, only to decide it didn't need them after all.

Chalkie asked Brian Henry, via his PR adviser Michelle Boag, why this should be, but did not receive an answer by press time.

The valuation of SQI3 was also remarkable when you consider that it was achieved on the very same day the company was incorporated - September 28, 2012.

Accounts for SQM3 Ltd also suggest the retail concept was far from a viable business. After being incorporated in October 2011 as De Facto 1923 it reported zero revenue for the year to September 30, 2012, and was reliant on its parent company Arria for support.

Chalkie reckons ascribing a value of £6.2m to SQM3 looks generous. You would think that after deciding to focus on NLG, a capital-hungry early stage company like Arria would choose to sell SQM3 for cash, if it was really worth anything.

However, it didn't, and Henry, Daniels and Craig kept all the shares they were paid. These shares ultimately converted to ordinary shares on a one-for-one basis, which means at Arria's current share price of £1.15, Gerald Henry's 5m shares have a market value of £5m, while Daniels and Craig got shares worth £2.5m each.

Those figures don't count the other shares awarded for various considerations bringing Gerald Henry's stake to 6.4m shares, Craig's to 5m and Daniels' to 3.7m.

Brian Henry, who left Arria's board in October 2012, accumulated 6.4m shares. It appears that most came from an allocation of ordinary shares to the co-founders between March and June 2012 at a nominal value of 0.1p each.

It is interesting to note that the Henry brothers ended up with more shares each than the scientists behind the technology. Aberdeen University NLG software specialists Ehud Reiter and Yaji Sripada ended up with 5.3m each, as did Data2Text founder and entrepreneur Ian Davy. The university itself ended up with 4.9m shares.

Of course, the value of these shares is ultimately dependent on Arria making a go of it and with revenue of just £816,178 in the year to September there's a lot of work still to do. But so far the Henrys have done remarkably well to parlay their skills into a hefty chunk of change.

Chalkie should also tip his hat in passing to Wellington investment-banker Andrew McDouall, who helped raise US$20m in preference share capital between July 2012 and January 2013. According to the listing document, McDouall received an allocation of 1m ordinary shares in November 2012 at a nominal value of 0.1p each, a stake now worth on paper about $2m.

Meanwhile, Gerald Henry remains involved as a consultant, receiving fees from Arria of US$140,935 in the year to September for services provided via Auckland company Arria Design Group. He continues to receive a retainer of US$18,333 a month.

The Auckland company, which has some common shareholders in Daniels and Craig, also invoices Arria NLG for the rent of its offices, the mobile phone and utility bills of Henry and two staffers, as well as US$11,000 monthly retainers for two of its directors.

Chalkie understands Arria Design Group's services are principally in marketing and graphic design. With such dollops of cash flowing out to related parties, Chalkie hopes they are worth it. So far the company has raised more than US$40m from investors and at last balance date had less than £4m left.

- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.