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SHAREHOLDERS who subscribed $8 million in June last year to Reynolds Wines renounceable rights issue were entitled to conclude from a perusal of the prospectus that the companys dispute with the Australian Tax Office was behind it.
Moreover, its suggested that the handful of professional investors who in the same month put up a further $1.5 million for cumulative converting preference shares in Reynolds were of the same belief. Unlike the investors who took up the rights issue, they had been able to conduct due diligence before subscribing and were led to believe that the tax issues were resolved.
But thats not the case.
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Reynolds directors yesterday placed the company into voluntary administration after the company was last Thursday hit with tax assessments totalling in excess of $10 million. If the talk is right, it is more than double that ¨C about $1 million.
Not surprisingly, some investors who participated in the rights issue are very unhappy and are looking into whether they may be able to initiate a shareholder class action.The administrators, Greg Hall and Phil Carter of PricewaterhouseCoopers, indicated yesterday that more than one party is interested in restructuring Reynolds, so it may that the company will be able to come through this crisis. But if its on the basis that existing shareholders take a haircut, then a class action may yet be launched.
If so, theres a number of parties who could potentially be at risk, including the directors, the auditor Deloitte Touche Tohmatsu and perhaps the underwriter of the rights issue, ABN Amro Morgans.
In that regard, its believed that Reynolds, because of its tight cash position, does not carry directors and officers insurance. That is thought to be connected to Rupert Clifton-Blighs sudden resignation from the Reynolds board last Friday.
Clifton-Bligh was only appointed to the board ten weeks ago as the nominee of Berren Asset Management, which is the responsible entity for the listed International Wine Investment Fund. Clifton-Bligh is the investment manager of IWIF, which took $7.5 million of last years converting pref issue. That investment is now at risk ¨C which may provide fodder for the dissidents who late last month failed in an attempt to wind up IWIF.
Its suggested that Berrens D&O insurance was up for renewal but the insurer was no longer prepared to cover outside board appointments of directors. That would have exposed Clifton-Bligh to potential risk as a director of Reynolds so he resigned.
If the administrators cannot come up with a restructure, Reynolds may face liquidation in which case its assets, including a modern winery, would be sold at distressed prices. In such a scenario, employees rank first, followed by secured creditors, unsecured creditors (including the tax office) and, finally, hapless shareholders.
ANZ Bank is a secured creditor, and is owed $0 million. Intriguingly, the converting preference shareholders are also secured, taking out a second mortgage which ranks after ANZ. It seems that was the only basis they would invest, which suggests that, despite their due diligence, they must have had some reservations about the companys position.
The tax office move came like a bolt out of the blue as far as Reynolds was concerned, and according to the directors its action was contrary to expectations. Moreover, the board had just reached agreement, subject to shareholder approval, for a $10 million convertible note issue to provide much-needed working capital.
It is suggested that professional investors had already committed to participate in the note issue, which would be convertible in 18 months time, but neither they, nor the directors, were prepared to proceed in view of the tax office demands. IWIF was to be a minor participant.
Reynolds was formerly Cabonne, a tax-driven vineyard manager, but expanded to become an integrated wine company, exporting its premium brand wines to the US and UK. Its tax dispute stretches back to the mid 10s, before it was listed.
Significantly, each set of accounts issued by Reynolds since at least the December 001 half year have been qualified on a going concern basis, because of the tax dispute. That qualification did not find its way into the prospectus for last years rights issue. Had it done so the company may have found it harder to raise the $8 million and concurrent $1.5 million converting pref issue.
Reynolds has been at loggerheads with the tax office in relation to fringe benefits tax and disallowance of claims for deductions in relation to employee benefit plans.
At December 001, the total amount of tax and penalties in dispute was $11. million. Unfortunately for shareholders, they didnt see another set of accounts ¨C for the year to June 00 until March 4 this year. The companys shares were suspended for five months because of the delay.
Reynolds actually lodged accounts with ASIC last September 0, signed off by Deloitte, which showed a profit of $5.1 million. Two weeks later they were withdrawn after further consideration by the directors, and in consultation with Deloitte, and the profit was amended to $10.1 million.
In October, Reynolds revealed a further review by Deloitte and disclosed the tax office had issued a summons to wind up a subsidiary, CH Fi nance, in relation to $5.7 million of disputed tax and penalties. In April, the tax office agreed to drop that wind-up position.
Reynolds maintained it couldnt put out the 00 accounts until the tax position was clarified. But thats nonsense. And in March the accounts were issued, which showed that the result had been revised to a loss of $. million. The December half results were released soon after which showed a further loss of $1.5 million.
Its easy to understand why shareholders are so angry.
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