Phoenix Mark III May Yet Arise
Friday, April 5th, 2013

P050413

Phoenix Mark III May Yet Arise

On March 8, the Peachester macadamia farm in Queensland’s Glasshouse Mountains was sold to Grant Pastoral for $2.5 million. As there were nine other parties bidding at the auction, Pierpont has to assume the sale represented a fair market price.

It also represented the continuing retreat of Nexis Holdings plc from the Queensland property market – a retreat which makes Napoleon’s from Moscow look like a walk in the park. If you’ve never heard of Nexis you’re lucky, because Pierpont has heard from a couple of the former shareholders and they’re as unhappy as Bonaparte in a snowdrift.

Pierpont does not know all the details of Nexis, but from the snippets he has picked up on the internet, it has a deeply troubled past, beginning with the launch of Phoenix Technology Corporation in 1998. The Phoenix business model was to take solid waste and recycle it into building panels. As such, it would achieve two laudable goals: reducing pressure on the planet’s landfills and helping to provide affordable housing.

Phoenix’s chairman, Walter Filler told shareholders that it would cost $600 million to build a manufacturing plant but the net return would be $250 million a year. Except no plant was ever built.

Phoenix burned through $8 million in its first two years as a public company. Perhaps its most considerable feat was that it managed to arouse the ire of the Australian Securities & Investments Commission, which said its capital raisings had been faulty and ordered it to offer to return to shareholders the money they had subscribed.

Holders of $2 million worth of shares asked for their cash back but by then Phoenix was in liquidation, having produced no accounts for the last two financial years of its life. Shareholders were wiped out and so were the creditors, who were owed $7.3 million.

Showing great resilience, Walter bounced back by forming Nexis in 2001 to pursue exactly the same business.

Possibly because he had left a few scarred investors behind in Australia, Walter created Nexis as an offshore company. Nexis was originally registered in Hong Kong and then shifted to the UK. Perhaps because Walter was born in Germany in 1948, Nexis listed first in Frankfurt and then on the Berlin Stock Exchange.

Listing requirements for Berlin did not use to be onerous. Five years ago they appear to have been non-existent because Pierpont knew one small Australian exploration company which had no sooner listed on the ASX than it received a brief letter from the Berlin Stock Exchange saying it had been listed there too. The company had not applied for the listing and it was the first any director had even heard of the Berlin exchange.

So listing on Berlin can be involuntary. Nor did Berlin ever ask for a single scrap of data from the company, so Pierpont can only conclude Berlin must be a delightfully worry-free exchange.

Let’s fast forward to the year ending October 2010, when Nexis reported a 42 percent increase in profit to €28 million and shareholder equity soaring from €1.4 billion to €3.8 billion. With a share price at €3, its market capitalisation was stated as €10 billion.

Pierpont has not the foggiest idea how this success was achieved or even whether it was achieved. Nexis’ accounts for the year to October 2010 show revenue of €78 million, but give no clue how it was derived. Operating cashflow is shown as €117 million negative.

The auditors were equally puzzled. They said:

1. The value of Nexis’ investment in intellectual property (€3.8 billion) had been based on directors’ projections of future income streams, although the businesses had not begun commercial operations.

2. The company had paid for the investments by issuing 1.5 billion shares, but the volume of shares traded was too low for their value to be adequately assessed.

3. They had been unable to confirm the existence of the company’s €4.3 million bank balance because it was held by a third party.

Nonetheless, Nexis had managed to buy a chunk of Queensland. In 2010 it bought two macadamia farms – Peachester and Wilson’s Pocket – for $20 million, followed by the $25 million purchase of the 1,640 hectare Yalanga farm outside Noosa. Peachester and Wilson’s Pocket have now been sold for some $5.5 million – leaving Nexis (more probably its lenders) with a loss of $14.5 million.

The bigger story is about Yalanga, to which the rest of today’s column will be devoted.

If there is a competition for Queensland’s worst land deal for 2010, Pierpont is prepared to nominate the sale of Yalanga farm by Suncoast Pastoral Company as a contender. Originally it seemed a great deal. for the owners, Will and Joy van Zetten, who were on the verge of retirement. Nexis offered $25 million for Yalanga. The price looked good, considering a valuation of Yalanga for the Commonwealth Bank was only $14 million.

Nexis offered to pay half the price in cash and the rest in shares. The van Zettens were originally wary of the scrip offer. Will had made his money in pipelines and (wisely) had never held shares before.

But Walter showed them a document saying that Nexis built and owned recycling plants, that its share price was €0.80 and that it had a contract with China to build 300,000 houses. According to Will, Walter said the shares would be worth €4 or €5 by 2011 and in five years time, probably €10.

Dazzled by the prospect of such riches, the van Zettens accepted..The deal took several months to consummate, largely because Nexis kept asking them to pay various overheads. These included:

1. A broker’s fee of $245,000.

2. $900,000 to the CBA as a deposit pending provision of a bank guarantee.

3. $265,257 for 110,000 Nexis shares. This was to qualify Suncoast to enter a “share pool” in which it could the rest of its shares on market for a potential $9 million.

Yalanga was sold but by March 2011 it was apparent that Walter and Rahoul had not sold the Nexis shares and there was little prospect they could. So Suncoast sued Nexis, Walter and Rahoul, claiming it had been fraudulently induced to sell the property.

Judgement was delivered by Justice Peter Applegarth in the Supreme Court of Queensland. It is as scathing a document as Pierpont has ever read and your correspondent recommends it to any former Phoenix creditors or shareholders who are in vengeful mode.

Justice Applegarth found that Walter and Nexis’ chief executive Rahoul Ray had acted fraudulently. They had not used a finance broker, so no $245,000 should have been payable by Suncoast. Also the CBA had not required Suncoast to put up $900,000, so Suncoast should not have paid that either.

The judge’s most biting remarks were reserved for the false picture Walter had painted of Nexis’ business and share price. He said there was some evidence that Nexis had a pilot plant in Europe which produced panels, but “Nexis was not engaged in the business of manufacturing and extruding panels for housing construction using waste products. It was simply untrue to represent that it was.”

“There were no plants under construction. Mooted projects in China and India never went anywhere. It did not derive revenue in the way alleged. There is no evidence that it had a contract for construction of 300,000 houses that were to be built in China,” the judge said.

“Nexis was not a substantial company. The shares that [Filler] proposed to provide as part consideration for the purchase price of Yalanga were practically worthless. They could not be freely traded. There was no market for them.”

Walter did not give oral evidence in the case, but one of his former directors, Richard Walker, did. Richard had been a non-executive director of Nexis from 2008 to 2010 and fell out rather badly with Walter, who at one point accused him of trading shares that should have been escrowed. Richard told the court he did not see any plants under construction while he was on the board, nor any evidence of a contract for 300,000 houses in China. He said the share pool scheme was “basically just a concept”. He added: “In order for someone to sell shares, there has to be a buyer”.

The judge calculated that damages owing to Suncoast were $5.5 million plus legal costs. To Pierpont it looks like a Pyrrhic victory. Nexis went into liquidation last January and the van Zettens’ dreams of a comfortable retirement have been devastated.

At settlement of the Yalanga sale, the only cash they received was $5.5 million which paid off a mortgage to Westpac. They were owed another $1.5 million for the various fees they were asked to pay by Ray, which Justice Applegarth found to be fraudulent. That $1.5 has never been repaid to the van Zettens.

The van Zettens received 17 million Nexis shares, which are hard to sell and almost valueless. Richard said in his testimony that he sold a million shares and received about €1,000 for them, or €0.001 each. That’s four noughts short of the €10 the van Zettens were expecting. Far from collecting $25 million or more, the van Zettens had to sell a house in the USA and two apartments in Brisbane – at considerable losses - to pay off their debts.

To finance the Yalanga purchase, Nexis’s subsidiary Coburg borrowed $8 million from the Maroochydore branch of the Commonwealth Bank. With interest, that debt is now more than $10 million and the CBA, holding the first mortgage, has been trying to sell Yalanga since late last year. So Any reader who wants to buy 6.6 square miles of Noosa hinterland should ring Nick Dowling at Colliers International.

The van Zettens have referred Justice Applegarth’s judgement to the Australian Securities & Investments Commission, the Queensland Fraud Squad and the Australian Crime Commission, none of whom have so far taken any action against either Walter or Rahoul for the alleged frauds

The van Zettens also tried to bankrupt Walter but that did not even get to court because Walter reached a Part X agreement with his creditors, aided by the accounting firm of Hall Chadwick. Under the agreement, a majority of creditors agreed to accept 0.4c in the dollar for their debts and the van Zettens were left out in the cold.

The good news is that as soon as Walter has paid the 0.4c to everyone, he will be free to launch another Phoenix or Nexis or whatever. Pierpont rang to ask when Phoenix Mark III or whatever is coming, but Walter refused to talk to your correspondent, saying Pierpont could read for himself all the lies about him on the internet. Anyhow if Wlter or Rahoul come around promising to make thousands of houses out of your local rubbish dump, remember you read it here first.

(ends)

Pip! Pip!

Pierpont

 
 
 

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