The market took the news in its stride, it’s been factored into the Aristocrat share price now for quite a while, but bit was still a shock yesterday to learn that incompetence (or perhaps being too clever) had cost the company a massive amount of money.
A move that may or may not have been an attempt to pull a swifty with US bond holders backfired badly: the bonds were worth $US130 billion and the long running legal action over the company’s attempt to "call’ them early, has finally been settled at a still huge $US212 million (or around $225 million).
Aristocrat has had a $US240 million provision in its accounts now for some time to cover the settled cost and the fact that the final amount is short of that shouldn’t be allowed to hide the fact that the whole thing was avoidable.
The management and the board though who were involved in the decision, are no longer there, so the thirst for blood should not re-erupt.
It does clear the way for the company to now focus on the turnaround, which is being made harder by the impact of the credit crunch and recession in major markets in the US and Japan, and by the maturation of the Australian market, where it is starting to see push back from anti-gaming advocates that could limit its growth.
Aristocrat said in a statement issued yesterday that a settlement agreement had been reached under which neither it nor the bondholders would appeal any aspect of the US case, in exchange for a further reduction of the total damages payable by Aristocrat of approximately $US10 million ($A10.65 million).
The final damages payable by Aristocrat will be approximately $US212 million, and payment to the bondholders is now underway, the company said.
The final reduction of $US10 million in damages followed the US District Court’s ruling in July that the damages be reduced by about $US18 million.
Aristocrat also said on Wednesday it had reached a settlement with the trustee of the bonds, which would see an account currently held by the US District Court returned to the company.
The net amount of those funds was expected to be about $US9 million ($A9.59 million) after Aristocrat paid outstanding amounts owed to the trustee, the company said.
"These settlements now bring the convertible bonds litigation to an end," Aristocrat said in a statement.
"In addition, the Company has also reached a settlement with the Trustee of the bonds.
"As a result, the funds held in an account currently maintained under the District Court’s supervision will be returned to the Company.
"It is expected that the net amount of these funds will be approximately US$9 million, following payment of outstanding amounts owed by the Company to the Trustee."
The case involved $US130 million of Aristocrat bonds that were due on May 31, 2006.
The case has been going since 2004, or just after Aristocrat had called for the redemption of the bonds in a notice that purported to terminate the bondholders’ conversion rights (into Aristocrat shares) under an indenture agreement.
The bondholders subsequently sent conversion notices in an effort to convert their bonds into Aristocrat shares.
In 2005, a US District Court ruled that Aristocrat was in breach of the indenture, finding that Aristocrat’s communication in December 2004 did not constitute an effective call for redemption and the bondholders’ conversion rights were not terminated.
And in 2006, the Court ruled that monetary damages would be sufficient to compensate bondholders for Aristocrat’s purported breach of the indenture.
A trial to determine what, if any, consequential damages should be paid by Aristocrat to bondholders also went against the company.
Aristocrat shares fell 3c to $3.89 yesterday as the news probably surprised some newer shareholders without much background in the case.
But it means the case, which has dragged on for years chewing up management time and mounting legal costs, has been concluded, but at a huge cost.
Aristocrat management warned in an August briefing for the company’s interim results that the interest bill would rise once the case was settled.
"The Group also expects an increase in its debt funding costs if it makes damages payments in the second half as a result of final judgements being issued in the convertible bonds litigation.
"In the interim, we will incur costs associated with hedging the damages liability.
"We also repeat our expectation that broader growth in core markets will not manifest before the later part of 2011, with momentum likely to build significantly from 2012."
