ANZ keeps problem child on short leash

OPINION: The news that ANZ Bank had extended ProvencoCadmus's banking facilities yet again reminded me of the cliche doing the rounds when Australian tycoon Alan Bond got into a spot of bother in the early 1990s, which eventually saw him bankrupted and imprisoned.

If you owe the bank a dollar and you can't pay, you've got a problem. If you owe the bank $1 million (in Bond's case it was billions), the bank's got a problem.

ANZ was banker to both Provenco and Cadmus ahead of their merger in May last year and has continued to support them since, but is keeping them on a very short leash. The latest extension is only until the end of August and was given only a week before the previous extension was due to run out. But the group has long been in breach of its banking covenants.

ANZ must have taken the view that the current management was more likely than a receiver to realise enough to repay it, though it looks like a reasonably close call.

At June 30 last year, the bank was owed $48.8 million, and by July it was clearly getting nervous because the group needed an additional $8m in working capital, and it had major shareholders Todd Capital, which owns 13.2%, and Peter Maire, who is also a director and owns 6.3%, to underwrite this extra amount.

The bank will be breathing easier now - after the sale of its finance book and its Vantex division, bank debt is down to $29.4m. While the initial plan had been to raise fresh capital after the merger, the board decided that was too difficult and it looks to me as if the best assets were the ones sold.

"That certainly is a conclusion you could draw, but it's not actually right," says chairman Rick Christie.

When Provenco bought Vantex, which distributes electronic equipment, back in 2005, the acquisition had made sense in the business conditions then prevailing, Christie says.

But the whole idea behind merging Provenco and Cadmus was to create a stronger eftpos equipment company - this was the part of the group identified as core immediately after the merger, he says.

Now the company is down to its "core" operations and it still has way too much debt. It has $14.6m of capital notes in addition to its bank debt and fresh capital is clearly needed.

ProvencoCadmus looked decidedly unhealthy in April last year ahead of its merger and the numbers have only worsened.

It reported a $36.3m net loss for the year ended June 2008, and then a $25.6m net loss for the six months ended December. The company wrote down its assets by $11.2m in the June 2008 year, but it clearly wasn't enough.

Its loss on asset sales in the six months ended December was $2.5m. It also wrote down the value of Vantex's goodwill by $17m in that period, cutting it to $23.7m. But it couldn't sell it for that much, eventually accepting $22.5m.

So you'd have to question the $23.9m book value of the goodwill in the remaining payment solutions business, as well as its future. Its trading loss in the six months ended December was $3.8m, down from $5.1m in the same six months a year earlier.

But the board is still determined to resuscitate the company. "I'm not a quitter. I don't think my board's a quitter either. If there's a way of getting this business back on track again, we're going to find it," Christie said. He's been on Provenco's board since January 2005, and took over as chairman in November 2007, before chairing the merged company.

The Todd family and Maire didn't become wealthy by accident - the Todds were Provenco's major shareholder while Maire had been Cadmus's.

Maire says his biggest frustrations are how long the merger took to achieve, and how much the economic environment has deteriorated in the meantime. "It was a damned good strategy three years ago." If the company had been in a position to sell Vantex a year ago, it would have got well north of $50m for it.

As he sees it, the merged company now has the advantage of selling Cadmus proprietary technology through Provenco's much more substantial distribution channels - it sold about four times as many terminals as Cadmus. (Previously, Provenco had distributed major global manufacturer Hypercoms terminals.)

Despite the awful timing, it's still the correct strategy, Maire says.

Perhaps his most compelling argument is what happened at Navman back in 1998 in the depths of the Asian crisis. "We were virtually insolvent and the market was really shitty but we managed to raise capital and carry on with the plan." He sold Navman in mid-2004 for a reported $108m and its various parts are still in business.

"The [ProvencoCadmus] business isn't short of opportunity. You can make anything work if you stick at it."

* Jenny Ruth is a freelance financial journalist.

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