Downer
EDI, one of Australia’s largest engineering and mining groups, is the
latest entrant in the annals
of dodgy corporate governance after last night revealing a shock $25
million unaudited loss for the 2005-06
financial year. The news sent shares in the company tumbling $2.46 to
$4.95 this morning as the market wiped its capitalisation by a
staggering 30% or $650 million.

The
board, led by Lindsay Fox’s long-time lawyer Barry O’Callaghan, asked for a
trading half yesterday and made the announcement
after the market closed at 4pm. O’Callaghan, a former partner at Downer
EDI’s legal provider Corrs Chambers Westgarth, knows plenty about
brawling
with the ASX over market disclosures from his days on the Hudson Conway
board when Crown Casino was being built in the 1990s.

Downer EDI had already provided profit guidance for the year of around
$140
million, but left that unchanged, even when there was a $125 million
placement back in May
at $8.40. The substantial institutional shareholders who bought
that stock, such as Axa, Barclays and UBS, would be looking for vengeance today and the class action
lawyers should be coming off the long run.

The loss comprised $163 million of writedowns, although that’s
a net figure. Brokers
are saying that total gross writedowns are in the order of $293
million.

So
what happened? Well, besides the losses on various mining projects (especially a sand mine for Iluka
Resources in Victoria),
the heads of the company’s mining, engineering, telecom and energy businesses
have all been purged. Sounds like boom time in Moscow back in the 1950s.

Adding
in the losses on the contracts and the value lost in the market, you get more
than $900 million all told – an expensive price for poor corporate governance.

What
will gall shareholders is that when the $125 million UBS-managed
placement was made at $8.40 a share in May, Downer had ample
opportunity to update the market on any
problems. That it chose not to, when there was the exchange of
statements over
the Iluka project at the start of the year, will not sit well.

Downer
wants Iluka to pay another $105 million on top of the
$200 million cost of the Victorian project, which has faced a range of
technical and industrial problems from Victoria’s feral construction
unions.

This
is another example where a board and management have fluffed the
easiest thing
known in corporate governance: timely and continuous disclosure.
It’s all very well to purge the management, but the chairman and other
directors will be under pressure to resign as well because this is an absolute shocker reminiscent of the bad old days.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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