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NZF currently lists its half stake in the Mike Pero Mortgages business at $7.5 million however a valuation of the stake, released on Friday has it sitting at $2.76 million.
The $4.74 million difference has surprised NZF directors.
The most recent review, completed by Simmons Corporate Finance, was done after NZF agreed to sell its half share in the business, plus a half share in Mike Pero Real Estate, to its joint venture partner Liberty Financial.
Thornton says, in a statement to the NZX, that its valuation of the business is based on annual impairment testing carried out as part of its annual audit and an external valuation commissioned by the NZF board in October 2011.
That valuation had a range between $6.12 million and $7.59 million.
“The directors of NZF Group are surprised at discrepancy between the outcome of the valuation and the carrying value, which they believed to be reasonable. They acknowledge that they may need to reconsider the carrying value of this investment.”
Thornton blames two factors for the difference.
The first is that the NZF valuation was done on a discounted cash flow basis, while the latest one was based on capitalisation of earnings.
The second reason is that the joint NZF/Liberty board are deadlocked at the moment and the valuer was not allowed access to company information including projections.
“The relationship with Liberty has been strained for some time with active High Court proceedings between the parties and deadlock on certain matters at a board level on Mike Pero Mortgages,” Thornton says.
“The performance of Mike Pero Mortgages is inextricably linked to the performance of the property market in New Zealand. The current valuation does not place much weight on the strong recovery in the property market that is now underway and is forecast to continue for some time to come.”
Whether the sale proceeds at this valuation now rests with NZF Group shareholders.
Thornton says a detailed notice of meeting will be circulated in the next couple of weeks.
He also says that there is uncertainty about the future of the group and its survival, or otherwise, relies on three factors.
One is resolution of the Mike Pero Mortgages sale.
The second relates to proceedings brought against the company by NZF Money (in receivership) and the associated freezing orders which have placed cashflow constraints on NZF Group. A trial date has been set down for February 2013.
The third is a plan to convert capital notes into shares.
“This early conversion should correct NZF Group’s balance sheet (including if the Mike Pero Mortgages sale proceeds at the current valuation) as its liabilities should then, no longer, exceed its assets.”
“The board considers that it is only appropriate to proceed with (conversion) once the first two issues above are resolved.
“The future of NZF Group and its financial position will ultimately be dictated by the outcome of the(se) three matters,” he said.
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