erg is dead?

CATHY BOLT

Struggling public transport ticketing group ERG suspended trading in its shares yesterday ahead of what is expected to be a $30 million capital raising to replenish its coffers after delays and cost blowouts on some of its big contracts.

The previously flagged rights issue comes less than 15 months after the Perth company last tapped its 40,000 long-suffering shareholders for more funds to shore up its balance sheet through a $67 million raising at 20¢ a share.

It also comes just days after it put another request to shareholders to approve a restructure of two loan facilities totalling $45.4 million provided to it by its biggest shareholder, Duncan Saville's Ingot Group.

The restructure will clear the way for Mr Saville to convert outstanding loans to shares at around their current all-time low, potentially lifting his stake from 26.8 per cent to between 40 and 45 per cent. It will also give him more security over ERG's assets in the event of a company collapse.

The moves underline ERG's perilous financial predicament, despite efforts by its chief executive of the past two years, Allan Sullivan, to restructure the business and lift its poor performance in profitably delivering an otherwise impressive order book of contracts around the world.

Its shares were trading at 16.5¢ before the trading halt, a small fraction of the $11.50 they hit four and a half years ago. Mr Saville, an accountant and fund manager, became its biggest shareholder in 2003 after backing another $250 million debt-for-equity restructure.

In an explanatory statement sent to shareholders this week, ERG made clear shareholders had little choice but to approve the loan restructure and increased security.

It said they were needed to assist its "ongoing solvency" and if shareholders rejected them Ingot would have the right to insist on immediate repayment of around $30 million.

It said ERG would not be in a position to do that plus meet the significant working capital requirements on its ongoing projects, which include contracts to deliver systems in Sydney, San Francisco and Manchester.

ERG reported an $11.1 million loss for the year to June 30, after project delays and cost overruns wiped out a first half profit of $15.9 million.

That brought its losses before tax over the past four years to more than $500 million despite $900 million of revenue.

Its annual report this week said it was appropriate to still treat the company as a going concern because it had received an offer from Ingot, expiring on November 30, to underwrite $20 million of a $30 million renounceable rights issue.

Ingot had also increased one loan facility from $15 million to $20 million.

An external expert's report by Ernst & Young on the loan restructure offered shareholders little hope the stock was set for a sharp recovery any time soon.

It valued the shares at between 16¢ and 18¢, based on information from ERG on existing projects and those it expects to win out to June 30, 2011.

Ernst & Young concluded the resolutions to be put to ERG's annual meeting on November 24 were fair and reasonable.

It said ERG's debt levels, financial performance and position had made the sourcing of funds increasingly difficult. Further, it was having increasing difficulty obtaining performance bonds to support new projects without full cash security.
It is believed the latest capital raising will be done by Patersons Securities, lead manager and underwriter to the last $67 million issue.