Weldon, Clear's former owners had 'battle of wills' after acquisition, witness says

There was a "battle of wills" over spending on the Clear Grain Exchange between former NZX chief Mark Weldon and the trading platform's former owners after NZX acquired the business in 2009, Wellington's High Court has heard.

In the 17th day of a hearing that could run for 11 weeks in total, Garth Taylor, a former senior accountant at NZX, was called as a witness.

Taylor described "teething issues" after the acquisition as vendors Dominic Pym and Grant Thomas clashed with NZX senior management over expenses, with NZX's cost-conscious culture different to what Clear management was used to. 

"There was a bit of to-and-fro-ing on some of the categories of expense claims," Taylor said. "The senior Clear team appeared not to have had anyone in the past challenge them on cost decisions. It subsequently became apparent that the senior Clear management team continued to struggle to put forward analytical business cases for expenditure proposals."

The stock market operator is suing Pym, Thomas, and their companies Ralec Commodities and Ralec Interactive for providing "wildly inaccurate" forecasts prior to NZX buying the Australian grain trading platform in 2009. Ralec's counterclaim says NZX and former chief Mark Weldon under-funded the business, meaning it couldn't meet earn-out targets.

NZX bought Clear for $A7 million in October 2009, with two earn-outs of A$7 million tied to performance. The initial target for the first earn-out was trading of 1.5 million tonnes of grain by June 30, 2010. If that was missed, Ralec could still get the earn-out, provided Clear reached 3 million tonnes by June 2011 or 4.5 million tonnes by June 2012. The second earn-out payment was based on NZX being able to create a successful agri-portal.

Taylor told the court today that marketing was a particularly fraught issue, with Thomas and Pym engaging in a "battle of wills" with Mark Weldon after asking for a budget of "many millions" to provide rebates to large customers.

"I recall regarding this as ludicrously large as Thomas and Pym had told us only recently during due diligence that they expected to easily achieve 1.5 million tonne volume forecast based on their current level of operational expenditure," Taylor said. "There was quite a bit of pushback on this and Weldon explained businesses at NZX did not get allocated large unspecified budgets - no one got a blank cheque for expenditure."

Taylor said he created a generic template for a business case for major expenditure Thomas and Pym could have used to apply for the marketing spending. He expected Thomas and Pym to be in touch to develop a case for the marketing expenditure, but they never contacted him. 

Taylor recalled meetings on July 30 and 31, 2009 where Weldon had outlined NZX's agricultural strategy, the importance of grain, and the point at which proprietary trading data became valuable, which Weldon estimated was at market share of 15-20 percent.

During this discussion, both Thomas and Pym were bullish about Clear's prospects, Taylor said.

"They said they expected Clear to achieve its revenue goals for the upcoming season and told us that given the size of the grain market Clear would easily achieve its target of 1.5 million tonnes of grain, and this was a conservative forecast," Taylor said. "They said the key to this was the Graincorp alliance agreement, from which they were expecting volumes in the region of 1 million tonnes. They said Clear and Graincorp were aligned, and they had relationships with all other Australian bulk handlers."

Thomas and Pym explained that Clear had a largely fixed cost base, so additional trading volume could be achieved without material increase in expenses. 

"This was a very exciting time for NZX, so there are aspects I remember quite clearly," Taylor said.

Figures which Taylor saw, provided by Clear to Australian accounting firm Wellingtons, showed Clear was projecting net profit of A$166,000 for 2010, based on forecast revenue of A$3.725 million and expenses of A$3.564 million. Wellingtons director Andrew Butler had explained that Clear was pre-revenue and the forecast revenues were simplistic and high-level but NZX's due diligence team relied on them, Taylor said. 

"We understood the forecast involved uncertainty but also understood it was the vendor's best assessment of the level of likely revenues based on their knowledge of Clear and the market," Taylor said. "I did not regard it as a draft, and it was not marked as such - it was marked final forecast. Nor did I consider it was something I could not rely on."

While the due diligence team's work was hampered by the absence of a hard copy of Clear's financial statements, Taylor said that by the time a draft paper from Aug. 21 recommending the acquisition of Clear was written, the collective view was that it was "reasonably likely" Clear would hit the 1.5 million tonne target.

The due diligence team came up with two scenarios for the September 2009 board paper ahead of NZX's acquisition of Clear in October. The lower scenario, nicknamed "slow adoption", was based on 900,000 tonnes of grain going through Clear in the 2009-2010 year, while the higher, called "momentum", was based on 1.2 million tonnes. Taylor said those were conservative numbers, but that after the due diligence it had done, the team was confident enough not to model the "false start" scenario it had modelled for an earlier board paper.

Under the momentum scenario, grain tonnage would exceed six million tonnes in the third year after NZX acquired Clear, triggering the A$7 million earn-out. That earn-out wouldn't become payable under the slow adoption scenario, Taylor said, adding that the net present value for the momentum scenario was A$8.2 million, but was lower at just $1.9 million under the slow adoption scenario.

"Clear was much more valuable to NZX if it succeeded, with the uplift in value to NZX far exceeding the level of the bonus payment," Taylor said.

(BusinessDesk)