Targa rides to Plaintree
Systems' rescue
Thomas Hirschmann
Financial Post, with files from the Ottawa Citizen
Plaintree Systems Inc. has finally found an equity partner, or, to be
more precise, a saviour.
And all at once the network switching company's share price is
moving higher after spending most of the year limping along as a
penny stock.
A downward spiral lasting nearly two years knocked 98% off the
share price while the company was mired in difficulties that pushed it
to the brink of bankruptcy. The Stittsville, Ont.-based company's
market capitalization dwindled to just over $2.7-million by mid-June
from highs well above the $100-million mark.
But the shares (LAN/TSE), which trade in a 52-week range of
$2.20 to 11½, have risen as much as 518% since the company said
on Monday that it will merge with privately held Targa Group Inc., a
high-tech firm specializing in the aerospace industry.
"This [market activity] certainly seems to be a strong vote of
confidence," said Jay Richardson, Plaintree's chief executive.
Yesterday profit-takers moved in and knocked 27.6% off the top,
with the stock closing the trading day down 29½ at 76½.
"There has been some speculation trading," said Chris Shelton, a
trader with Charles Schwab Canada, who noted his clients that hold
Plaintree "like that it's an aerospace deal. It's a good industry [to
operate in.]"
The Targa deal, which must be approved by Plaintree's
shareholders, would see Plaintree purchase Targa for a 49% stake
in its company and $2.8-million in debentures. Targa's management
would control the merged company, with Targa chief executive
David Watson taking the reins from Mr. Richardson. The latter was
named interim CEO in February to lead the restructuring and search
for an equity partner.
Mr. Watson has confidence in the merger. "Targa has a very healthy
financial performance and sound engineering management, two
things that Plaintree was lacking in," he said.
Mr. Richardson said the deal is not driven by synergies as the two
companies are in different business areas. Targa was looking to go
public and this affords them an easy route, he said..
Targa has a history of acquiring struggling businesses and turning
them around, he said -- just what the doctor ordered for Plaintree.
Plaintree shareholders seem to be embracing the deal even though
they have had their hopes dashed before. Missed product releases,
a harsh competitive environment dominated by giants like
U.S.-based Cisco Systems Inc. and failed attempts to enter the
high-end networking environment had sent the company's share
price into a deep slide from a $6.30 high in the fall of 1997.
The company had yet to make a profit after 10 years of business.
Plaintree needed help and a saviour seemed to come in the form of
Canadian communications equipment giant Nortel Networks Corp.
(then Northern Telecom Ltd.)
In June, 1998, Nortel invested $9-million in Plaintree to gain access
to its switching technology, obtaining options to license Plaintree
technology. In return, Plaintree was to provide development and
consulting services. The plan was to negotiate the sale of Plaintree
products by Nortel.
Plaintree's shares jumped 89% immediately following the deal, but
what seemed to be salvation was merely a hedge for Nortel, which
shortly thereafter bought switching company Bay Networks Inc.,
making Plaintree redundant .
The stock began to slide again, until it was delisted from the Nasdaq
in April when it fell to sustained penny-stock levels.
Now, with the pending Targa deal, Nortel again holds Plaintree's
fate in its hands. The Targa deal is contingent on Plaintree's
outstanding preferred shares being converted into common shares.
Nortel, along with financial firm Aktion Corp., must agree to
convert the preferred shares within 90 days or the deal dies.
"Indications are that they are supportive of the deal," said Mr.
Richardson.
Plaintree still hasn't made a profit, reporting a loss of $23.8-million
($1.37 a share) on declining revenue of $13.7-million for fiscal
1999. However, in the first quarter of fiscal 2000, ended June 30,
Plaintree lost just $572,925 (5½), compared with a loss of
$5-million (30½) in first-quarter 1999. The company was able to cut
operating costs to $1.2-million, from $6-million in the year-earlier
period.
The latest numbers show Plaintree is already in a turnaround phase,
said Mr. Richardson. "The integration of this deal and the launch of
Plaintree's next product within the next couple of months will assist
in the profitability turnaround."
Targa is a profitable business and Mr. Richardson said Plaintree's
tax-loss carry forward will benefit Targa's future tax situation.
Plaintree Systems Inc.
CEO: Jay Richardson
Ticker: LAN
Listed: Toronto Stock Exchange
Head office: 59 Iber Road, Stittsville, Ontario K2S 1E7
Telephone: (613) 831-8300
Income statement
03.31.98ÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒ 03.31.97
Operating revenue $000sÒÒÒÒÒÒÒÒÒ ÒÒ15,711 ÒÒ28,832
Net income $000sÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒ (24,147) (12,891)
Earnings per share $ÒÒÒÒÒÒÒÒÒÒÒÒ ÒÒ(1.39) ÒÒ(0.87)
Cash flow operations $000sÒÒÒÒÒÒ (19,592) Ò(7,555)
Cash flow operations per share $ Ò(1.127) Ò(0.685)
P/E ratio: n.m. Dividend yield: n.a. (at 8/19/99)
ÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒ 03.31.96 03.31.95
03.31.94
Operating revenue $000sÒÒÒÒÒÒÒÒÒ ÒÒÒÒÒÒÒÒ ÒÒ31,417
ÒÒ27,192 ÒÒ3,273
Net income $000sÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒ ÒÒÒÒÒÒÒÒ (10,556)
ÒÒÒ(625) (5,994)
Earnings per share $ÒÒÒÒÒÒÒÒÒÒÒÒ ÒÒÒÒÒÒÒÒ ÒÒ(0.78)
ÒÒ(0.06) Ò(0.67)
Cash flow operations $000sÒÒÒÒÒÒ ÒÒÒÒÒÒÒÒ (11,049)
(11,658) (8,080)
Cash flow operations per share $ ÒÒÒÒÒÒÒÒ Ò(0.818) Ò(1.057)
(0.900)
RATIOS
ÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒÒ 03.31.98 03.31.97 03.31.96
Net profit margin (153.69) Ò(44.71) Ò(33.60)
Return on equityÒ (113.01) Ò(42.91) Ò(46.13)
Return on assetsÒ Ò(79.56) Ò(34.85) Ò(33.87)
Current ratioÒÒÒÒ ÒÒÒÒ3.82 ÒÒÒÒ5.73 ÒÒÒÒ4.17
Data supplied by FP DataGroup |
