An independent expert has cast doubt on whether RGM Media’s proposed $8 million convertible bond issue is fair for existing shareholders.
However, the cash raising appears to be the only option for the fledgling media company, which has struggled to generate revenue despite the ongoing high costs of its foray into film and TV production.
It is in a precarious financial position with few other options after posting negative operating cash outflows of $4.3 million in the nine months to September 30, on revenue of just $2.1 million.
The company listed on the Australian Securities Exchange in August 2010 and planned to produce three films by the end of that year – the $US25 million Point Break 2, the $US30 million Bullet Run and an untitled Lasse Hallstrom picture.
However, none materialised and it sold the rights to Point Break 2 to Alcon Entertainment in September despite spending at least $US3.8 million on the project.
“It is expected that by December 2011 the executive production business of RGM will see its first revenues from its 25 per cent share in the rights associated with Point Break and the remake of the 1991 cult classic,” the report by independent expert, Nexia ASR, which has assessed the potential bond issue, said.
“Further revenues are expected to be delivered by RGM’s production of Asia Apprentice, an Asian production of the Mark Burnett Apprentice franchise.”
Nonetheless, management forecasts indicate the company’s trend of negative earnings – operating losses (before interest, tax, depreciation and amortisation) jumped almost four-fold in the June half year – are unlikely to change in the immediate future, according to the report.
While the price of the first two tranches of the bond issue are not “fair” they are “reasonable”, according to the report, with few other fund raising options available (the third and final tranche of the bond issue is fair and reasonable but is also dependent on RGM raising a $200 million co-financing film fund with a distributor).
The report said further equity raisings are unlikely to be supported (the original capital raising was not fully subscribed), a proposed debt spiral facility could not be activated and is now in dispute, while the issue of up to $15.77 million in convertible notes to RGM Entertainment Pte Ltd, which shareholders approved in March 2011, is now unlikely to occur. (RGM Entertainment Pte Ltd has already advanced $1.38 million for working capital.)
Nonetheless, the current capital raising – which includes an immediate $4 million cash injection – should meet the company’s immediate and medium term needs, according to the directors, and also avoid interest costs of 20 per cent a year on bridging bonds.
The investment company buying the bonds, Sculptor Finance, will buy the bonds at a discount of up to 15.25 per cent compared to the value of RGM’s shares, according to the independent expert. It valued RGM’s net asset backing at 2.6c per share and net tangible assets at -1.1c per share.
It discarded the value of RGM’s artist management business’ contracts because “some have lapsed/are not in writing and the ability of the company to assign or separate these from the relationships between the artist and the key employees in the business is difficult to assess”.
It also did not include the value placed on its film investments because the accuracy of such valuations is difficult to assess. They include a $US3.5 million contribution to four unnamed films produced by Fox International Pictures (which are not yet in production) and a $2 million direct investment in the Point Break film.
Despite its low valuation, the independent expert adopted 9.1c per share as the appropriate fair value to reflect the share price at the time (RGM shares are now trading at about 3c).
Shareholders will vote on the proposed deal, as well as a potential name change to One North Entertainment, at a general meeting on December 12.
Contact this reporter at bswift@www.if.com.au or on Twitter at @bcswift.