Investors prepare for a bitter pill March 29, 2010
FOR all those Sigma Pharmaceuticals investors with faces now the same purple as the company's corporate livery after a month-long suspension of their shares and a near-vacuum of information, it looks as if the wait is almost over.
That the medicine to be prescribed somewhere between today and Wednesday by Sigma will be bitter is a given - companies do not keep their shares off the market for more than a month because the news is good.
The problem with Sigma, and recycling company CMA Corporation, whose shares have been in limbo for about the same length of time, is that their behaviour amounts to continuous non-disclosure - the antithesis of what the Australian Securities Exchange's much-vaunted Listing Rule 3.1 and its disclosure requirements aim to achieve.
The ASX acknowledged as much on Monday afternoon last week when, after Sigma had blithely announced that its results would be delayed until this week, the exchange fired off a ''please explain''.
Sigma's short statement at lunchtime that day had effectively said, ''ummm, look, you know how last Friday we indicated we would reveal all tomorrow with our results? Dreadfully sorry, but can't quite make that date - can do Wednesday week though, OK? Cheery bye.''
That was Sigma's fourth attempt at deflecting detail since it voluntarily suspended trading on February 25 (the reason supplied was it wanted to update ''earnings guidance'', which it never really did). The ASX's letter demanded more detail and reminded management not to forget that, even though the shares were not trading, ''the company is still under a legal obligation to comply with ASX listing rules''.
Sigma's response, which was not released until most people were at home watching the evening news, finally confirmed that it was having to renegotiate its borrowings with its lenders because not only were its trading results worse than expected, but it was going to have to cop a very large hit in the neck on the carrying value of assets on its balance sheet - a move that would breach some of the terms of its borrowings.
If you really want to do your head in, think about the fact that the bulk of this hit, probably more than $320 million, is really the result of Sigma having bought itself at an inflated price back in 2005.
''Eh? Bought itself?'' Yup. This really only makes sense to accountants, but in brief - in August 2005 Sigma Co. and Arrow Pharmaceuticals announced a share-swap merger. Arrow issued lots of its shares for the Sigma ones, bought the company, and changed its own name to Sigma. That was the easy part.
Two problems then emerged. Accounting rules dictate that no matter which body buys which, the one that ends up in effective control is deemed to have been the acquirer - in this case, Sigma Co. This meant the price of the deal had to be calculated in terms of the value of Sigma Co. shares (not Sigma Pharma shares) even though Sigma Co. shares were never issued.
Because Sigma Co. shares had risen from $9 each to $13.54 by the time the merger was done, more than $320 million of ''goodwill'' (the difference between the actual value of real assets and the price paid) had to be added to Sigma Pharma's balance sheet.
With regulators demanding that companies take a hard look at themselves post-GFC, Sigma now has to write off that excess goodwill. This has created a domino effect. Not only will the writedowns come straight off trading profits, they will wipe out retained earnings - the pool from which companies pay dividends - hence no dividend for Sigma shareholders.
Worse, the wipeout triggers clauses in Sigma's loan documents with its bankers, which means that much of the delay has probably been due to haggling with the banks over new terms.
CMA Corporation, which did manage to produce results but still has not reinstated its shares to trading because its directors are also talking turkey with banks and potential investors, also has a bunch of hostage investors - many of whom, as with Sigma, supported share issues late in 2009.
That trading suspensions can drag on for so long after management has turned on the ''fasten seatbelts'' signs, but given passengers little indication whether to expect mild turbulence or a wing falling off, does little for the reputation of the market.
Even though Sigma has until March 31 to publish its results, its February trading halt created an expectation that shareholders were going to get a feel for the numbers well before now.
All the extended non-disclosure has managed to achieve is a series of increasingly dire speculations by media and analysts on what has gone wrong - quite probably ensuring that its share price is thoroughly spanked when trading resumes, no matter how benign the ''non-cash adjustments'' to its numbers are. It also highlights something anyone who has ever held shares in a troubled company has known for a long time - banks do not give a fig for equity holders.
Unless Sigma has been misleading the market in what it has said so far, it would seem that apart from a mild trading downturn, nothing wholly ''new'' has occurred except a change in accounting treatments. In that case, the company ought to be no more of a lending risk this month than it was last, which makes the apparently drawn-out process of renegotiating its debts seem like lenders preying on the vulnerable - because they can.
