Forge Group (FGE) may launch a lawsuit of its own even as the nation's two largest law firms confirmed that it was talking to aggrieved shareholders about a potential class action.
Slater & Gordon (SGH) and Maurice Blackburn Lawyers told Eureka Report that they have been approached by a number of institutional shareholders to see if Forge had breached its disclosure obligations.
Investors are upset because there were no hints of problems at Forge’s annual general meeting in August – a few months before the shock revelation of Forge’s crisis-stricken Diamantina and West Angelas power station construction projects.
These problem projects, which had threatened to push the company to near collapse, had been inherited through the takeover of CTEC in early 2012 and Forge’s chief executive, David Simpson, is investigating whether Forge has any legal recourse against CTEC.
Forge paid $16 million upfront for the privately-owned Western Australian business and paid performance-based earn-outs of more than $20 million to the vendors in the 2011-12 and 2012-13 financial years.
Simpson only joined the group from UGL after the CTEC deal was done, but he says the due diligence (DD) done by the group’s ex-chief, Peter Hutchinson, on CTEC doesn’t measure up to the way Simpson would have done it.
“We just acquired Taggart in North America, and in that DD we spent a lot of money getting PwC to go back through every single project for three years to see if their pricing model actually delivered after the end of the project,” says Simpson.
“That is a very thorough DD and that is how I would do DD. I don’t believe that was done for [the CTEC acquisition].”
Forge is running an internal investigation on whether there was any wrongdoing by employees and to see if it has a legal case against the vendors of CTEC. The investigation will take a few months to complete.
Cost blowouts in the Diamantina and West Angelas projects didn’t surface until very recently, and had caught Simpson by surprise.
Forge said that there was not enough flexibility in the contracts to allow for variations and rising materials costs, but Simpson is reassuring investors that the projects are now under control under his direct supervision.
“The two projects are fully costed and will be finished by March and May next year,” he says. “On West Angelas, there is only 10% left to go and all of that is just commissioning [work].
“On Diamantina there is 12% to go and all the plant and materials are onsite. We just have to finalise the mechanical and electrical labour, and to do pre-commissioning and commissioning.”
Australia and New Zealand Banking Group (ANZ) has put together a rescue package but Simpson would not reveal how much interest ANZ is charging on the $60 million debt facility, except to say it is “slightly above” commercial rates.
Forge had to be bailed out by ANZ as it had essentially ran out of cash and would not have been able to get past the next few months on its own.
He denied that institutional shareholders had abandoned the group by not participating in any potential capital raising, but that Forge chose to go with ANZ as it was the least expensive option.
His words may have comforted some investors as Forge shares rebounded 11.7% to 76.5 cents on Friday. But that few shareholders will be smiling as the stock was trading at $4.18 before Forge went into a trading halt to finalise the deal with ANZ.
But Forge’s recovery will take longer than the project completion will suggest. You can read our take on Forge and the lessons shareholders can learn from the debacle here.
Forge is part of the Uncapped 100.