Ion Suffered A Death Of A Thousand Deficiencies

RICK Nagul can remember how he and colleagues at Ion chuckled as they passed around a news clipping from The Age in May 2002. The article, headed "Darling Ion tipped to win $400m contract", suggested the car components group had just emerged as the leading contender to supply Holden with hundreds of thousands of engine blocks for its proposed new V6 engines.

The joke, of course, was that the market had dubbed Ion with the twee tag "darling"; not that it was about to be catapulted into the leading ranks of auto parts suppliers in Australia.

Funny, though, that neither Nagul, who at the time was Ions chief financial officer, nor his colleagues twigged to the gravity of the news that VAW, a respected German manufacturer of aluminium car parts and Ions possible partner for the Holden engine-block contract, had pulled out: VAW figured the project would not pay off.

Nagul, however, believed VAW simply was "not nimble enough" to adjust its economic expectations to the smaller Australian market. Ion, for some reason, could. Its managers could make the numbers stack up, and up.

And so, just 17 days later, Ions board approved managements plans to spend about $155 million on four new projects, including $91 million for Ion to build and develop, from spec, a new engine-block factory at Altona in Melbournes western suburbs.

It was the biggest single outlay in Ions relatively short life. Never mind that Ion had no experience in greenfields projects, let alone casting housings for engines. And never mind that financing plans were not in place, and that neither Holden nor Ion had committed to the project.

Because, in May 2002, everything was go, go, go for Ion. Led by founder and managing director Graeme Salthouse, it was an ambitious and confident company, full of big talk, big ideas, big plans, and it was riding a wave of almost unquestioning sharemarket support.

All that ended 2½ years later when, to the surprise of Ions shareholders, directors called in administrators Colin Nicol and Peter Anderson of McGrathNicol+Partners.

What they found was dire. Costs at two of the four projects approved at that May 2002 board meeting, namely Altona and Wingfield in South Australia (where Ion was to make engine cylinders, manifolds and oil pans), had run way beyond budget and continued to climb. At Altona, alone, the estimated costs ballooned from

$91 million in May 2002 to $160 million by October 2004. Wingfield should have cost about $50 million but it came in at closer to $110 million.

At the same time, cash flows at Ions other car parts businesses had slumped as customer demand fell unexpectedly. In short, projected profits had been hugely overstated and Ions cash requirements were increasing.

No single thing undid Ion. A preliminary report published by the administrators almost two years ago, which ran to more than 260 pages, spelt out a litany of concerns in the latter stages of Ions collapse. It highlighted deficiencies in financial systems and a lack of management rigour, and raised serious questions about its apparent lack of disclosure.

What Ion told its shareholders — or what it left out — will be key issues facing the administrators in coming months as they grapple with the impact of a recent High Court decision that, simply, allows shareholders to claim alongside creditors if they can show they were misled or deceived.

To get to the bottom of what went wrong, Ions administrators in recent months have conducted formal examinations in the Federal Court. Witnesses so far have included Salthouse and Nagul, chairman John Pizzey, fellow directors Tom Klinger, Malcolm McComas, Ian Cootes and Michael Beer, as well as key executives and managers at Ion subsidiaries. All have prefaced their responses with a claim for privilege against self-incrimination. The questioning so far has focused on events leading up to, and following, that crucial Ion board meeting of May 27, 2002. Who proposed all these big projects? Who prepared the board papers? Who crunched the numbers? Who championed them through the board meeting? Did directors really study the numbers? Did they ask probing questions? What did anybody at Ion really know about it all?

So far, it has not been a pretty story. What has emerged is a tale of rosy-eyed optimism at Ion that at times was underpinned by fudged figures. Papers presented to the board may have talked up the possible returns, yet both Salthouse and Nagul have conceded they talked down the potential returns when they lobbied governments to secure about $21 million of manufacturing grants.

The court has heard of "personality clashes" between senior managers of Ions operating units and executives at head office, of how a senior operations manager feared Ion was stepping well beyond its competencies in building the engine-block plant, and of unresolved discrepancies in the number of engine blocks Altona was intended to produce.

Nagul, who these days idles his time in jail at Loddon Prison near Castlemaine, conceded in court that Ions managers sometimes "embellished" its financial position to suit the circumstances. Naguls minimum four-year prison term is unrelated to his time at Ion. He quit Ion in August 2003 when it became clear that he faced criminal charges for theft and obtaining financial advantage by deception in relation to his previous job at paper group Spicers.

Nagul told the Federal Court last week that the May 2002 board papers he helped prepare suggested the Altona engine-block plant would generate an internal rate of return of about 18.9 per cent even if Ion got no help from government.

But documents Nagul and Salthouse showed the Federal and Victorian governments in June 2002 projected a return of just 12.2 per cent. As well, Ions board had agreed that any debt for Altona should be kept off the balance sheet until revenues started flowing, yet submissions to the governments made no mention of the off-balance sheet debt.

Nagul said "the numbers presented to the government showed a more pessimistic view" and that it was simply part of "the argument to entice, to make them more inclined to assist with the project in terms of financial development, and that was that". He said the 12.2 per cent figure was used "to embellish the case for government assistance", although he claimed it could be justified if queried.

In court on Monday, Salthouse conceded that Ions managers put the most pessimistic spin on their presentation to Victorias then minister for manufacturing industry Rob Hulls: "That interpretation is consistent with our endeavours with the State Government, yes".

Neither 18.9 per cent nor 12.2 per cent met Ions stated 20 per cent hurdle rate of return for a project. In early 2004, after Ion was committed to building the Altona engine-block plant, Naguls successor recalculated the projected return and found it would end up closer to 12 per cent. When former director Michael Beer was asked why directors gave the green light to Altona if it was going to fall short of 20 per cent, he suggested Ion might have been confident it could secure government funding.

Beer could not recall the boardroom discussion of May 2002, but he suggested directors and management would have considered how the new project might influence Ions relationships with car maker Holden, the government and other business partners.

At the time, he said, Ion was in lots of discussions about expansion proposals. It had acquired several manufacturing businesses in the previous few years, which were profitable and generating good cash flows.

"There was strong confidence by the board that the company was continuing to deliver on its cash forecasts …," Beer said. "I dont think the board was concerned that just because this was a large project we should not do it."

"And the difference between 19 and 20 (per cent) is not material," he said, adding that calculating internal rates of return can be contentious and imprecise because there are so many variables to consider.

Ion was in "a very strong financial position" at the time, and so to take on a project of this size was, Beer said, a logical thing to do.

But when counsel for the administrators showed Beer the documents that Salthouse and Nagul handed the Bracks Government and the Federal Government in June 2002,

Beer expressed surprise at the 12.2 per cent figure.

"Almost 19 per cent (as shown in the board papers) is close to 20 per cent," he said. "Twelve per cent is a long way away from 20 per cent."

Ion did not get any government money for Altona, and it secured just $4 million from the South Australian Government to help build Wingfield.

Ion is now under a deed of company arrangement. Its Castalloy plant at North Plympton in SA, which exported wheels to Harley-Davidson, has been acquired by a subsidiary of the giant motorcycle company. Its transmission factory at Albury was sold, as was the land, building, plant and equipment at the defunct Wingfield site, and the Altona site was sold to Australia Post in mid-2005 for about $10 million.

The examinations will resume at a later date, when attention is likely to focus on what Ion told its shareholders and when.

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