It has been four months since Entertainment Rights PLC went into administration on 1st April 2009 and immediately sold off its business and assets to the original vendors of Classic Media Holdings.
Soon after the Classic Media deal had been consummated in January 2007 and significantly in advance of its administration the board would have been aware that the enlarged company was in decline. The sudden departure of Mike Heap in March 2008 was a clear indicator that all was not well.
It was clear from the 2006 report and accounts that the company was practically insolvent prior to the January 2007 completion of the Classic Media deal. Clearly the board and its (greedy £7 million fee) advisors deliberately hid this fact from shareholders in the deluded belief that such a gigantic international deal would turn the company around.
Instead they heavily overpaid for a tired and worn out catalogue of intellectual property rights that no one else was prepared to pay that much for. They hatched a deal with Genius a video distributor to underpin the values of Classic Media whilst they probably knowingly knew that the deal was flawed from the start and would need to be revisited.
If the advisors had been doing their jobs properly this would have been highlighted in their due diligence and short form reports. If it had been highlighted this deal would never have got off the ground and instead shareholders would have been tapped for a “rescue rights issue” which the board and its corporate advisors would have known most institutional shareholders and private shareholders would have avoided.
The failure was inevitable Mike Heap and the rest of his executive board knew this and ultimately found a way to exit the company with generous pay offs leaving the sleeping non-executives in the mire. Rod Bransgrove who seemed more preoccupied in his Hampshire Cricket business finally awoke when it was too late, he’d taken the company’s “silver dollar” non-exec chairman’s fees for too long. Yes he invested in the company, he also selected Mike Heap followed by Nick Phillips as CEO but It now appears that he along with the other non-executives failed in the proper supervision of the executive board. Perhaps they were too distracted by their other interests to detect the impending failure or had no real connection to the industry that the company was in or was it simply that they didn’t care until it was too late.
As recently as last years AGM, Chairman Rod Bransgrove, CEO Nick Phillips and CFO Elizabeth Gaines were painting a scenario to shareholders that clearly was a distortion of fact, they knew it, the board as it was then knew it, but nevertheless shareholders were deliberately misled. Had the FSA not stepped in and punished the company with a huge financial penalty of £350,000 (discounted for early settlement) for the failure to disclose information thereby creating a false market in its shares. Shareholders may never have been the wiser that this was due entirely to the irresponsible behaviour of its board for misleading the market. This final event turned out to be the beginning of the end for the company and its remaining original board of directors.
So where does the blame for Entertainment Rights failure lie;
1) With the executive board Mike Heap CEO, Elizabeth Gaines CFO and Jane Smith who were aware of the company’s pending failure hastened by the poorly constructed deal to acquire Classic Media.
2) With the vendors of Classic media for overstating its value, then buying it and the enlarged business back for a fraction of its “perceived” value.
3) With the company’s advisors to the Classic Media transaction and their failure to highlight the flaws in the transaction in their due diligence.
4) With the non-executive chairman and fellow non-execs who failed in their fiduciary duties to properly control the executive board.