Aristocrat facing $250m payout for damages

Aristocrat shares fell 28? to $4.91 in response to the verdict, which enables disgruntled bondholders to recover damages from the company.

In a statement to the ASX yesterday, Aristocrat said it would wait until a determination on the amount of damages was made before deciding whether to appeal against the verdict, handed down by a jury in the US District Court.

The dispute stems from $US130 million of convertible subordinated bonds issued by the company in May 2001.

At stake is whether Aristocrat could buy the bonds at face value of about $US130 million, or whether the bondholders could cash in on the company's then strong share price and convert the bonds into shares that would have been worth almost double that.

The company took the steps in December 2004 to call for the redemption of the bonds, thereby terminating bondholder conversion rights. Various bondholders then took action.

In August 2005, a US court found that bondholder conversion rights had not been terminated as of December 20, 2004, when the company called for redemption. However, the court also concluded that the bondholders would also not be able to convert to Aristocrat shares, and, as such, only monetary damages were available.

The amount claimed in consequential damages is the difference between the cost of the bonds, and the value of shares the bondholders bought on the open market when Aristocrat refused to let them convert the bonds into shares. If it cost a bondholder more to buy the share in the open market than the value of the share on the date of the breach, the additional cost should be included in that bondholder's damage award.

"The company expects that the precise amount of consequential damages recoverable by these claimant bondholders will be determined by the court following further briefing by the parties," the company said. "The amount of general damages for the company's breach of the bond indenture also remains to be determined by the court. This amount will also be determined by the court following further briefing by the parties."

Analysts said yesterday it was difficult to predict what damages the court would award against Aristocrat, and that previous estimates no longer applied because of the stronger Australian dollar.

"It is very difficult for us to determine an accurate number in terms of what consequential damages could quantify given it is specific to an individual bondholder's claim," UBS analyst Sam Theodore said in a note to clients.

"In [an earlier] note we had previously estimated potential liability from this claim at [about] $A200-250 million. However, we note this was calculated at a 70? assumed currency. Given the significant move in currency this now represents $A160 million to $A186 million.

"As you will see, however, we did not include an amount for consequential damages as such, as long as consequential damages are less than [about] $A65 million there would not be a change to our overall $A assumed liability thanks to the currency move."

JPMorgan analyst Stuart Jackson estimated the worst-case scenario to be a total damages payout of $210 million.