A Heady Climb, Even Quicker Descent

Sydney Morning Herald

Wednesday February 20, 2008

Elizabeth Knight

THE ascendancy of Lance Rosenberg's Tricom to its powerful standing in broking and investment banking was relatively quick. But the pitch of his descent has been much steeper.

Tricom yesterday signed heads of agreement to "sell" the business to Bell Securities but Rosenberg and his partners won't receive a dollar. The consideration - which industry experts are guessing is up to $50 million - will be ploughed back into Tricom to keep it afloat.

The deal is contingent on Bell undertaking exclusive due diligence over the next three weeks and forming the view that the funds required to rescue Tricom will make Bell a sufficient return over time.

It's a small window of opportunity in which Bell gets first dibs on buying a business that, until the crunch in debt and sharemarkets, was making a healthy profit. Most of the money Bell pays for Tricom will pass straight to Tricom's lenders, the largest of which are ANZ and Merrill Lynch.

Tricom lent money to its clients to buy shares which were used as security against the loans. Tricom in turn borrowed this money from banks that ultimately called in the loans when the value of the shares tumbled.

The equity Tricom needs is to cover the shortfall between the aggregate value of those shares and the amount Tricom borrowed to lend to its clients.

The bank loans to Tricom were not secured over the shares, so the buck doesn't stop with the banks - it stops with Tricom.

So why didn't the Tricom clients borrow directly from Merrill Lynch or ANZ? Because Tricom facilitated these transactions. It also made money by lending the shares to hedge funds that needed to cover short positions.

Tricom made a handsome margin from engaging in these deals. And it all worked well while the stockmarket was moving up - which is the direction it had been going for many years. Tricom is the classic entrepreneurial organisation, in that it has been happy to take risks.

Meanwhile Bell has a swarm of accountants and financial experts poring over the Tricom books to ascertain how much it owes the banks and to make some educated assessments of how much worse it could get if the market continues to fall.

Based on its conclusions it will make a judgment on whether this business is worth rescuing.

Once Bell has assessed Tricom's potential liabilities it needs to turn its mind to how to value a brand that has been severely tarnished. It also has to work out the potential damage that this brand deterioration will do to potential revenues.

To further complicate the situation, Tricom is a business built around Rosenberg's network of high-net-worth individuals. This is a man who deals with and is supported by the likes of Frank Lowy and Babcock & Brown's Phil Green. He has a strong layer of support in the Jewish community in particular. This is what Bell will be buying. The share-lending activities are not interesting to Bell, but the stockbroking business and financial planners networks are the key assets.

The plan is that Rosenberg will remain with Bell for some time.

But it's a risky deal. The success in buying a client base is always dependent on the level of attrition - even if Rosenberg stays.

On top of this there is legal and regulatory risk associated with this transaction. There is no doubt that Bell's lawyers will be crawling all over it.

Last week the ASX flagged that its review of Tricom's problems, which led to settlement delays on the exchange a few weeks back, would involve a broad investigation of the broker's activities.

Meanwhile another client - the principals of Allco Finance - has started to make noise about legal action against Tricom for calling in a margin loan over Allco stock.

This is a mess that three weeks of due diligence may not be able to unravel. Bell has some form in acquiring distressed stockbroking assets. But it did so in a strong equity market and without the potential regulatory and legal complications of this deal.

© 2008 Sydney Morning Herald

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