Business

Wait nearly over for MGX`s masochists

MGX`s executive chairman Peter Flack remains firmly optimistic despite a number of recent setbacks, not the least of which was the release of diabolical financial results for the half-year ended in December 2002. (For the record, MGX reported an attributable loss for the period of R457 million on turnover of close on R690 million.)While Flack, a respected turnaround specialist brought on board late last year, concedes the results are “shocking”, he points out that they reflect the state of the company in December (and “for quite some time before that”), and are therefore not unexpected.MGX submitted its final proposals on dealing with its massive R550 million debt to a consortium of its bankers, including CitiBank, BOE, RMB, SCMB and Investec, in mid-May and Flack believes the strict remedial measures undertaken at the company should swing the balance in its favour.Others are not so confident. Flack`s reputation notwithstanding, they question whether the banks will be willing to accept the risk of throwing good money after bad into an IT market that has yet to emerge from the doldrums.Comments Flack: “We owe the banks hundreds of millions of rands and, if I was in their position and thought I could recoup this money through liquidating the company, MGX wouldn`t be here right now. The fact is the banks won`t get their money that way and, indeed, stand to lose a substantial amount.“On the other hand, if we are right, and are successful in turning the company around, everyone will get paid and there will be something for shareholders as well. That`s the gamble.”It`s a gamble of quite some magnitude that makes it worthwhile analysing just how Flack intends to create the proverbial phoenix from the ashes of MGX in what would be one of the most astonishing turnarounds in South African corporate history. Rotten to the coreFlack insists the problems have never lain with the underlying subsidiary companies, but rather with what he terms “a mess” at the centre of the organisation – coupled with the huge debts incurred by the well publicised and “disastrous” acquisitions of Computer Configurations Holdings (CCH) and EC-Hold.“If you can ring fence that debt, or convert it to equity, or have a rights offer, the problem is solved. There`s nothing wrong with the underlying businesses, they just don`t make enough money to finance an interest bill of R8 million a month.”So what went wrong at the centre? Flack says that in all his years of experience he has never come across a company the size of MGX that was so lacking in the procedures and processes needed to run it properly.“It was difficult for us to understand how people could manage with so little information,” he says. (The less charitable might add that the results speak for themselves.)What information there was, was so poorly presented that Flack says the turnaround team had difficulty in identifying the company`s subsidiaries and had to boost its financial team considerably to even begin to understand what went before.“Before you can move forward you have to establish exactly what there is in a company and that`s been very difficult because of what we feel, rightly or wrongly, has been a culture of divide and rule at MGX – one of deceit, if not downright dishonesty,” he says.This culture apparently had permeated throughout the organisation, resulting in minimal answers to questions and much obfuscation.“I sometimes wonder it this was not attributable to fear on the part of the more junior people. Dishonesty often arises from acts of omission rather than those of commission.“So, for a long time, we had to deal with surprise after surprise, including the well-reported R9 million pension shortfall. Why, one has to ask, did it take five months for this to come to light? This is not the only ugly thing to emerge, but we`re a victim of the old cliché that when you`re in a swamp surrounded by crocodiles, first concentrate on the crocodiles.“That`s what we`re doing now, but when we succeed in getting the company into a steadier shape, probably by around this time next year, there will certainly be further investigations,” says Flack.His task has not been made easier by having to deal with five banks, each of which has different levels of debt, security and exposure. This said, it was quite an achievement by the parties involved to launch the R100 million life boat announced at the beginning of the year.“We put that package together at the same time we were trying to get to grips with the company and are currently in the process of trying to run with strategic planning and execution while negotiating the refinancing package. It`s not easy,” is Flack`s rueful comment. The sum of the partsThe approach to the actual turnaround of the business has been simple: the downsizing of the group into three core businesses – Metrofile (a document management and storage company), Graphics Data (a similar European-based operation) and Software Futures (a software development company) – and attempting to sell off the remainder, as well as some property assets, to help service some of the debt.The latter includes its Business Continuity Solutions (valued at around R85 million), Enterprise Solutions (valued at around R30 million) and Storage Solutions (we`ll leave that aside for the moment) arms. Flack hopes to realise some R148 million from the disposals, an amount he accepts is far below the levels required to make any significant inroads into the debt.So far, success in this endeavour has been mixed, to put it kindly. Enterprise Solutions has been sold for R19 million and heads of agreement are in place for the sale of Business Continuity Solutions, although it is unlikely that MGX will realise its own valuation.Plans for a management buyout of Storage Solutions hit a serious stumbling block last month following a report by Business Day that US storage equipment vendor StorageTek had cancelled the exclusivity of its distribution agreement with MGX and that several key staff members had defected to rival MB Technologies – allegedly for huge sign-on bonuses and grossly inflated salary packages.Flack immediately attacked MB Technologies CEO Leo Baxter for engaging in predatory business practises and pointed out that MB Technologies had put in a bid for the business just a week before. Flack`s ire aside, the loss of the StorageTek exclusivity, coupled with unconfirmed reports that the vendor is considering withdrawing its licensing from Storage Solutions altogether, is a major blow to any chances of MGX receiving significant value from the sale of its weakened subsidiary.A further irritation for Flack is the ongoing dispute over a longstanding Securities Regulation Panel (SRP) ruling regarding a payout to the minority shareholders of the aforementioned EC-Hold.“This has dragged on for close on four years now and we really don`t know how close to a settlement we are. Shortly after we took over operations we approached the SRP and said we disagreed with the previous management in that we held that minorities should be paid – the question, however, remains: which minorities?”MGX maintains that those shareholders that held the stock at the time of the original ruling and still hold it are eligible for payment, while the SRP maintains that all shareholders who held the stock at the time, regardless of whether they have sold it in the interim, should be recompensed. The situation is, in Flack`s words, “bizarre” and is unlikely to be resolved in the near future.An interesting recent sidebar to the EC-Hold question has been the sale of its software development subsidiary, Magic SA, to three individuals from previous management. The amount here (believed to be around R2 million) is inconsequential, but the individuals involved deserve a mention.The first two, EC-Hold`s Tsvi Appel and Amir Lubashevsky, are no surprise, but the identity of the third have raised some eyebrows. Former MGX CEO Chris Hills is the one to pop out of the Magic hat.Flack has, however, scotched market speculation that Hills might be making a comeback at MGX. “He accepted his severance package some weeks ago and, in any event, it is highly unlikely that either the board or the banks would countenance his return,” he saysWe`ve focused heavily on the negatives so far, but there are some positives. Firstly, of the three companies expected to make up the core of the new MGX, two (Metrofile and Graphics Data) are profitable, while Flack contends that Software Futures is close to break-even point. Promises, promisesThen there`s the potential of a black empowerment injection through Vulisango Holdings, a grouping that Flack maintains has an excellent reputation. “I have a long history of dealing with Vulisango and our relationship is based on trust. When dealing with Vulisango it`s a question of them being the door rather than being the conduit through it,” he says.It`s all very promising, but of no avail if the financing package does not come through. Flack confirms that clarity should be forthcoming this month and that, if the green light is given, actual implementation should be completed by mid-September.“Customers and suppliers will then be able to confirm, for the first time, that MGX has survived and we will have to go through the next round of strategic planning and budgeting, followed by a thorough clean-out.“Then will be the time to look at appointing a new board and finalising our strategy to build the new company into a concern turning over between R900 million and R1 billion, with profits after interest and tax of around the R100 million mark,” he says.The timeline Flack has set himself for this is between two and three years and, if successful, he could certainly play a role in reversing what has become the all too familiar scenario of hitting the liquidation button when local companies run into trouble. It`s going to take some doing though.On the question, admittedly somewhat tongue in cheek, of whether he would advise existing shareholders to hang on to their equity Flack concludes: “I think if you`re still a shareholder, you`re a masochist of biblical proportions, but seeing as you`ve suffered all this pain – and you`re not a widow or an orphan, you might as well hang on to them now.”Philosophical words, indeed.

31 May 2003

MGX`s executive chairman Peter Flack remains firmly optimistic despite a number of recent setbacks, not the least of which was the release of diabolical financial results for the half-year ended in December 2002. (For the record, MGX reported an attributable loss for the period of R457 million on turnover of close on R690 million.)

MGX submitted its final proposals on dealing with its massive R550 million debt to a consortium of its bankers, including CitiBank, BOE, RMB, SCMB and Investec, in mid-May and Flack believes the strict remedial measures undertaken at the company should swing the balance in its favour.

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