From Videos To Invidious
Sydney Morning Herald
Wednesday July 16, 1997
The fall of Network Entertainment is a lesson for small private investors on the lack of protection they have in investing in new listings and the pitfalls in putting money into sexy, so-called growth industries.
It is also a lesson in not placing faith in big names and big promises.
There is plenty of evidence that the big profit promises made in offer documents, which all too often entice the less-experienced investor to part with their money, are not met - particularly at the smaller end of the market.
Network's voluntary administrators from accountants Price Waterhouse intend to either sell the business or find a new investor to recapitalise it. But the chances of shareholders receiving a cheque out of this are next to nothing after the secured lenders get their slice.
The main lender, Commonwealth Bank, is secured against Network's assets but the value of some of these assets is doubtful.
Stock in hand and debtors have a value but some of the other assets are certainly more questionable.
Whether in total these assets can fetch the $5 to $6 million owned to the bank is something that will be determined by the Price Waterhouse administrators.
The bottom line for Network is that it has run out of cash and cannot continue as a going concern in its present form.
The question investors must be asking is how did it get into so much strife after raising $12 million from investors?
How is it that the business in which they put their money could have had such good prospects nine months ago and now be in need of an administrator?
Were investors fully informed about the true financial state of the business in the prospectus or the troubles after listing?
The simplest answer as to why Network collapsed is that it became a vastly different business operation very quickly after listing.
It lost contracts that accounted for 90 per cent of the business: the video distribution rights for Columbia TriStar and Warner. It was unable to replace them with new lines of cash-generating businesses.
But there is undoubtedly more to it than that.
The mere fact that over the past few months three of the directors who were around for the float have resigned - including the chairman and former Coalition leader John Hewson - tells volumes about the internal troubles and turmoil since listing last December.
The management was well aware of the escalating problems after issuing no fewer than three profit downgrades since listing.
But perhaps of more concern is the fact that the Australian Securities Commission had been undertaking a continuing surveillance operation in relation to Network Entertainment since its listing.
The ASC, which registers prospectuses but does not vet the forecasts made, wasn't happy with the company's disclosure levels nor with some of the accounting methods.
The ASC - which asked the company to address some disclosure issues within a couple of weeks of listing - is still looking at some of these issues.
Unfortunately, the ASC's concerns were never made known to the public so investors may not have known that there was any problem with the disclosure or accounting in the prospectus.
The other clear lesson is that when a company has only a few years trading record, it cannot necessarily be relied on to sustain the profit growth.
And while Carmel Travers, Bonita Boezeman and John Hewson have some profile in the business community, they do not have an established record as directors of public companies.
Clearly, they soon were unhappy enough to exit before the music stopped.
Hewson presumably went on the board because of his directorship of ABN Amro, the broker which had sponsored the listing. Amro received the lion's share of the $2.3 million in fees for the float, which even at the time appeared excessive, given the equity raising was for only $12 million.
In terms of management, the company appears to have maintained the overheads of a larger business than it ultimately became after it lost the video distribution contracts from the large US film producers.
It also experienced some degree of misfortune when the sell-through market did not live up to expectations.
So what is left of Network is now a far cry from the company which listed on the Stock Exchange in December and boasted a sharemarket capitalisation of $35 million.
It would have seemed at the time to those who fought for a piece of what was an oversubscribed issue as a very attractive business.
It had big-name Hollywood studios, a high-profile chairman and was in the glamorous entertainment industry - the way of the future.
It did not seem to be the punt that it ultimately became.
More importantly, the system of checks and balances that should protect investors from putting their savings into dud companies failed.
© 1997 Sydney Morning Herald