Very interesting read from Business Spectator:Destra's twin...

Very interesting read from Business Spectator:

Destra's twin bombshells

The chief executive of Destra Corporation, Domenic Carosa, who is one of the chief victims of the Opes share security scandal, dropped two bombshells during and after the Business 3000 breakfast in Melbourne this morning.

The first will have implications for ANZ and its potential liability over Opes. The second puts the acid on Prime Media chairman Paul Ramsay. Prime is set to own about 40 per cent of Destra. Carosa told his audience that the experience he has gained from founding and developing Destra means that: "If I have done it once I can do it again." Carosa, who had most of his Destra equity trapped in the ANZ-Opes net and sold out by the bank, seems unlikely to stay with Destra without worthwhile equity.

Carosa inspired the audience by explaining that he started the company soon after leaving school and had developed it into Australia's largest independent digital media and entertainment company. Destra was a tiny company, but became a world leader in helping the music majors understand the way the internet would change music distribution. Its latest half yearly profit rose by more than 400 per cent.

Like so many others entrepreneurs caught in the ANZ-Opes net, Carosa believed in himself and his company so he borrowed to maximise his Destra stake. Carosa said after the breakfast that he had signed a so called "2005 Opes agreement" which he claimed gave no warning of the fact that the ANZ would gain its security by pooling all the stock in the net.

The first Carosa knew of the potential pooling problem was when Opes collapsed. Carosa pointed out that there was a later agreement which the more recent Opes borrowers signed, which does notify borrowers of the pooling agreement. One of those who signed the 2008 agreement was another Destra director Paul Choiselat who is testing the 2008 agreement (not Carosa's 2005 agreement) in the courts.

When ANZ chief executive Mike Smith invited David Crawford to help investigate the ethics of the ANZ in the Opes deal, he was taking a clear risk, because Crawford has a well deserved high reputation in the area of ethics. Crawford's brief is of course much wider than ethics, but ethics will be at the core. Crawford will first have to check whether the "no warning" claims by Carosa and others are correct.

I fully recognise that sometimes these situations are more complex than all the parties claim. On the one hand, ANZ says Opes transactions were at arms length, while in the case of Carosa his position is complicated because one of his associates signed a later agreement that contained a warning – and Destra itself used Opes to finance a stake in Beyond International, a TV production and distribution group (which was also sold out by the ANZ).

But for the moment let's assume Carosa's "no knowledge" statement after Breakfast 3000 is correct. Crawford will then have to decide whether it was ethical for a large bank to lend to Opes fully knowing that Opes was on-lending ANZ money to clients like Carosa without warning them of nature of the ANZ's security. If the facts are as simple as that, then I have no doubt what Crawford will decide – and Mike Smith and the ANZ directors need to prepare to bring out the cheque book.

Enter Paul Ramsay, chairman of Prime. Almost a year ago Ramsay paid 26 cents per Destra share to take a 15 per cent stake in the company. He clearly wanted to back Destra and its CEO and founder Carosa.

Carosa told the breakfast that eight hours before the 2000 share crash, Destra's public issue was completed. Another eight hours and the issue would have been impossible.

Now, almost eight years later in mid-March 2008, the company announced a five-for-11 non-renounceable rights issue at 10 cents a share, underwritten by Prime. The aim was to retire short-term debt, reduce senior debt and increase working capital.

The entitlements were established on March 27. Four days later Destra shares were suspended. Some 10.5 million Destra shares (3 per cent of the capital) that were held directly and indirectly by Carosa were taken by ANZ as part of its Opes security net. On re-listing, Destra shares traded below the 10 cent placement price and Prime will now end up with about 40 per cent of the capital.

Carosa did not talk about looming negotiations with Ramsay during the breakfast, but afterwards he certainly gave the impression that if Ramsay wants him to stay at Destra then he must have substantial equity going forward.

Ramsay of course may decide he does not need Carosa, in which case he might need to take control of the company with a takeover bid. Sometimes entrepreneurs don't work well in large public companies because they find too much of their time is spent on the bureaucracy.

An interesting alternative for Ramsay would be to contract Carosa with equity, but then finance a case against the ANZ over the 2005 agreements. Presumably that would not be necessary if Destra director Paul Choiselat wins his case based on the 2008 agreement.

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What price are we looking at if Prime do make a takeover offer?