When golf is just a good investment spoiled

The acrimonious legal divorce of a PGA venture may be over, but Jason Nissé discovers that the recriminations go on
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The rights issue launched by sports rights group Parallel Media closed on 20 January last year. Shareholders, who had seen the company lose more than £100m in value, run up losses of over £70m and in essence give away a large part of its business to two of its directors, agreed to stump up £2.08m which they thought would keep Parallel going.

What was left was a group whose "main asset" was a 49 per cent share in a joint venture with these two directors, Seamus O'Brien and Tony Morgan, called Asian Tour Limited (ATL). It ran a series of 10 golf tournaments affiliated to the European Professional Golfers' Association (PGA).

But only three weeks later, on 13 February, a letter arrived at Parallel's central London HQ in Knightsbridge from Mr O'Brien and Mr Morgan. It said that the joint venture was "technically insolvent". Unless Parallel was able to inject money into the business, it would collapse.

The letter prompted months of frantic negotiations, legal actions and recriminations which led to a deal earlier this month ending the relationship between Parallel and its former directors. All claims were dropped and the former directors are being paid $500,000 (£270,000) for their 50 per cent stake in the joint venture. Parallel is taking control of eight tournaments in a new business called the Asian Tour, with the blessing of the European PGA, while its former partner, World Sport, will hold on to two events. It brings to an end a bitter feud that ripped the business apart.

Investors, whose shares are now worth just 3.25p each compared with a peak of over 160p, have been left dazed and confused. How can it be that its prospectus - supported by undertakings from Mr O'Brien and Mr Morgan that it was correct, and backed by a clean audit statement from BDO Stoy Hayward - failed to highlight problems that would undermine the whole group? Mr O'Brien blames David Ciclitira, Parallel's chairman. "Though we were managing the golf events, Parallel was responsible for bringing in the sponsorship," he says. "Carlsberg, which was supposed to be the main sponsor for the tour, had not agreed a deal. This left a cash shortfall and meant we were not even able to pay the prize money for the Malaysian Open, which was taking place that month."

The warranties he and Mr Morgan gave for the prospectus only related to past events, not future forecasts, he says. "95 per cent of that prospectus had nothing to do with us."

Mr Ciclitira admits the sponsorship deal with Carlsberg was delayed, and that Parallel had to dip into its reserves to pay the prize money for the Malaysian Open, which was won by Indian golfer Arjun Atwal. But this delay was well known, he argues, and when it came to sorting out the issues with Carlsberg, Mr O'Brien objected to a deal.

The sorry tale started in July 2001, when two companies, Parallel Media, run by Mr Ciclitira, and World Sport Group (Jersey), run by Mr O'Brien and Mr Morgan, merged and reversed into a small quoted company called Orchard Furniture. Orchard was a shell - a quoted company with no real business which can be used as an easy way on to the stock market.

Orchard was an attractive shell because it had £15m of cash. At the time, the group raised another £13.54m - £1.9m of which went in fees to City advisers including Invesco and BDO Stoy Hayward. This left a company with cash of £27m and businesses valued by these advisers at nearly £66m.

Within a few months, all the cash had gone, the businesses were in disarray and the group was in trouble. If you ask Mr Ciclitira, he will blame Mr O'Brien and Mr Morgan. The two former directors, who are now based in Singapore, have a different take. What is clear is that the two sides did not get on, and that Mr O'Brien and Mr Morgan, who had control of the group bank account, used the cash to pay off debts that had been accumulated at World Sport Group, writing cheques for over £15m in the first three weeks after the merger.

"The creditor list was rather larger than we had been led to believe," says Mr Ciclitira. The cash drain was such a worry that one of the non-executive directors - former Nomura banker Ron Littleboy - was detailed to investigate what happened. His report led to the resignation of Mr Morgan as finance director, though Mr O'Brien insisted he stay on the company's board as a non-executive.

Mr Morgan is dismissive of Mr Littleboy's report, saying that he resigned as a scapegoat for the company's poor performance. "It was difficult to run the finance function because of interference by the other directors," he comments.

The first accounts produced by the group after the merger, for the six months to December 2001, were a tale of woe. A £74.1m charge was taken for impairment of goodwill - the loss of value of the businesses bought - bringing a pre-tax loss of £75.5m. This was blamed on the 11 September attacks and subsequent fall in global advertising, as well as the collapse of two major sports management groups, ISL and Sports World.

Most of 2002 was spent with the two sides trying to find a way to divorce. A deal was struck in the autumn that led to the demerger, and the rights issue was launched on 23 December.

City observers point out that the rights issue was curious. Almost half the money raised was to be set aside for the City firms which backed the fund raising. Little of this has been paid and, a few weeks ago, Seymour Pierce became the first of these firms to sue Parallel for £340,000 it says it is owed.

Parallel has counter-sued, claiming Seymour Pierce allowed a false prospectus to be published for the rights issue. It argues that the group ended up having to obtain an emergency cash injection of over £5m from outside investors to stay afloat. Its suit claims the amount Parallel really needed to raise in the rights issue was around £7m. Richard Feigen, the director of Seymour Pierce who handled the rights issue, says: "I know they are claiming we did not do the proper investigations but that is wrong. We had undertakings from the directors and there was a clean audit from BDO Stoy Hayward, the reporting accountants." BDO said that it stood by its report into Parallel: "The audit was carried out professionally."

Graham Axford, a former head of corporate finance at stockbroker James Capel (now HSBC Securities), has been working to sort out Parallel, having become deputy chairman. He delivered a sheaf of papers last year to the Financial Services Authority, which has not replied. Because Parallel was listed on AIM, the issues should be investigated by the London Stock Exchange, he says.

Mr Axford is frustrated that the regulators show little interest in what has happened at Parallel: "It is only a few million. It is probably off the FSA's radar. "But this is the sort of story that tarnishes the City's reputation and discourages honest investors."