eVentures floating in cyber-hype

By BRIAN GAYNOR

The eVentures float has exposed New Zealand investors to a strong dose of Wall Street's optimism and hype.

The new company is undertaking a huge public relations campaign, with television and double-page newspaper advertising. It also hosted a high-powered presentation at the Stamford Plaza Hotel in central Auckland on Wednesday and has issued a flood of media releases.

Chairman Craig Heatley has adopted an incredibly optimistic attitude, even though the issue is badly timed and overpriced.

The recent return to reality on the Nasdaq market seems to have escaped Mr Heatley and the other parties associated with the eVentures float. These include Telecom, The Warehouse and organising broker JB Were.

First, the details. On March 17, eVentures issued 160 million shares to eVentures Partnership (a United States-based joint venture between Japan's Softbank and epartners) and 40 million shares to parties associated with Mr Heatley. These 200 million shares were issued at 15 cents each.

The current issue is 35 million shares to the public and five million each to Telecom, Todd Capital and The Warehouse.

These 50 million shares are being issued at 60 cents each. In other words, these three big companies and the New Zealand public are contributing $30 million, or 50 per cent of the capital, but will receive only 20 per cent of the shares.

In addition, 4.2 million options have been granted to staff. These have a base exercise price of only 15c per ordinary share.

A further 11 million options have been issued to Mr Heatley and one million to each of the other directors, including Dr Roderick Deane and Stephen Tindall. The directors' options are exercisable at 60c.

Wednesday's presentation was fronted by Mr Heatley, Mark Booth, eVentures chief executive Cindy Mitchener and Clark Perkins of JB Were. Mr Booth, who represents epartners, is a former chief executive and managing director of British Sky Broadcasting (BskyB).

Mr Heatley and Mr Booth claim the internet presents enormous business opportunities, and eVentures is certain to become New Zealand's No 1 internet company because of its shareholder structure. The basis of this claim is that nine of 10 internet companies fail, but eVentures "will swim in the pool of successful companies developed by Softbank and epartners."

Mr Booth maintained eVentures had "exclusive rights" to franchises in the Softbank-epartners portfolio, but the prospectus says these franchises could be established in New Zealand without eVentures' participation.

The positive feature of the shareholding structure is that eVentures will normally have first choice of the Softbank-epartners franchises and free access to their software developments. The negative is that eVentures can operate these franchises only in New Zealand.

About 8 per cent, or $5 million, of eVentures' capital will be devoted to identifying growth-oriented New Zealand internet companies. These enterprises could expand overseas, but there is little to suggest that Cindy Mitchener and her management team have the expertise to identify and nurture these start-up companies.

Unfortunately, eVentures is heavy on style but short on content. There is no list of the Softbank-epartners franchises available to eVentures, no profit forecasts and no indication of the New Zealand companies it has targeted.

All we know is that eVentures has already established the E-Loan franchise in New Zealand, it is planning to launch Contest2win.com and MessageMedia and is talking to Buy.com.

E-Loan, which is listed on the Nasdaq, offers house, car and business loans, insurance products and branded credit cards. The company reported a net loss of $US38 million, before non-cash deductions, for the December 1999 year on revenues of just $22 million.

After the market closed on Thursday, E-Loan announced a net loss of $11.4 million for the March quarter on revenues of $7.1 million.

The group's share price has slumped from a July 1999 high of $US74 to $7.56. It has a total market value of $US318 million.

Asked when E-Loan would make a profit in New Zealand, Mr Heatley said the investment should be able to "wash its face" after three years.

Contest2win.com, which has been set up only in India, offers a variety of contests for registered members. It will expand to the US, Australia and Britain by the middle of the year.

MessageMedia, which is also listed on Nasdaq, supplies a wide range of e-mail and direct marketing services. The company had a net loss of $US46 million for the December 1999 year on revenues of $10 million. It reported a net loss of $18.6 million for the March 2000 quarter on revenues of $7 million.

The group's share price has fallen from a July 1999 high of nearly $23 to $4.88. It has a market capitalisation of $US271 million.

Buy.com is an online retailer that first listed on Nasdaq in February. Shares were issued to the public at $13 and quickly jumped to over $35, but finished on Thursday at $7.16.

For the year ended December 31, 1999, Buy.com had a net loss of $US130 million on revenues of $597 million. Net loss for the first quarter of this year was $32.9 million on revenues of $207.6 million. Buy.com has a total market value of $US924 million.

eVentures will establish franchises in New Zealand that are experiencing strong revenue growth in the United States, but are wallowing in a sea of red ink. The recent sharp correction on the Nasdaq market -- which has been particularly savage in eVentures' B2C (business to consumer) sector -- is because investors are concerned that many internet companies will never earn a profit.

One of the most surprising aspects of the eVentures issue is the participation of Telecom and The Warehouse. Their investments are extremely small and the latter's involvement is inconsistent with its policy of focusing on its core operations.

It also raises the question: should Dr Deane and Mr Tindall hold options in their own name when they effectively represent Telecom and The Warehouse on the eVentures board? Two of the overseas directors hold their options on behalf of the organisation they represent.

The most important questions concerning eVentures are: why have eVentures Partnership and Mr Heatley been issued shares at a 75 per cent discount; and why are there no restrictions on the sale of these shares? A discount could be justified if eVentures were importing franchises with proven and profitable track records. But most of the franchises mentioned in the prospectus are reporting huge losses in the United States and may never be profitable in New Zealand.

Mr Heatley is convinced eVentures will be an enormous success. He told the Stamford Plaza presentation that "my friends would have taken the issue instantly." After the meeting he claimed eVentures shares would list at a premium to the 60c issue price and the company would be as successful as Sky TV.

He can afford to be optimistic. Because at 65c a share he will be sitting on a profit in excess of $20 million, whereas public shareholders will barely have their heads above water.

Mr Heatley's enthusiasm is infectious, but he gives the impression that "I can't disclose much information, but trust me I know what I am doing." Investors should always demand more than this before committing their money.

The eVentures issue closes on Monday and the company will be listed on the main board of the Stock Exchange on May 9.