Kordia dogged by Orcon warranty claims

A dispute is simmering between the private buyers of ISP Orcon and New Zealand state-owned networking company Kordia

State-owned broadcast and network services company Kordia is involved in what is described as a warranty dispute with the new owners of New Zealand internet service provider Orcon.

Kordia sold Orcon last year to businessman Warren Hurst and a trust of private investors for $38 million, according to a Treasury valuation report (pdf) on Kordia prepared by Ernst & Young.

A warranty dispute involves disagreement over warranties, indemnities or disclosures provided by the seller of a business to the buyer.

An annual financial review of Kordia (pdf) by Parliament’s Commerce Committee released last week refers to “persisting historical legal issues” related to Orcon. Committee members asked if there was any risk to the company from “a series of warranty challenges”.

“We were told that the claims are being vigorously defended and the company believes they have little substance. A resolution should be achieved by the end of the financial year.”

Kordia, which bought Orcon from founder Seeby Woodhouse for $24.3 million in 2007, provided $13.25 million of vendor finance to partially fund the sale of Orcon.

Kordia’s annual report for the year to the end of June 2013 says this is “non-contingent” and subject to “credit risk”.

$9.2 million of that is listed in the Treasury valuation as a non-current asset, in other words not due for repayment this financial year (to the end of June 2014). $3.8 million is listed as current, or due for repayment in the 2014 financial year.

Again according to Treasury $3.1 million of the $13.25 million of vendor finance related to lease receivables, mainly for equipment in customer premises.

ASB is reported to also have partially funded what appears to be a highly leveraged Orcon deal with loans to the value of $20 million.

Meanwhile, Orcon has recently gone to market for investors, or even to sell the business again, and a number of parties are reported to have performed due diligence.

The Treasury valuation of Kordia also refers to the warranty dispute.

“Kordia Group Limited has received notification of claims made against it in relation to the divestment of the discontinued operation (Orcon Limited). The Directors believe the claims are without merit and are taking the appropriate actions to defend the Group’s position.

“At this time, it is not considered possible to reliably quantify what the potential impact, if any, will be on the Group.”

Warren Hurst and Orcon CEO Greg McAlister declined to comment.

Hurst told Computerworld last year that he began eyeing Orcon to get his hands on a Cat 5 soft switch to help his other business, Vivid Networks, to win more business. He then became interested in other aspects of the business, including its routing and datacentre capabilities in Australia and the US and its wholesale bandwidth business. 

Members of the Parliamentary committee also enquired about Kordia’s Australian business. They were told that a two-year, $80-million mining project  Kordia was delivering was “on track for a successful, if slightly delayed, completion”.

That appears to refer to a deal with Australia Pacific LNG to roll out a voice and data network for a Queensland coal seam gas project.

Kordia was building a private network featuring microwave backhaul, LAN and WAN services, mobile voice, broadband wireless, PABXs, radio telemetry and integration with existing systems.

Kordia said its order book in Australia was healthy but intense competition was putting pressure on margins, which vary between 5 and 7 percent.

“The market tends to be cyclical and the company is very selective in choosing contracts to bid for. The New Zealand business is more profitable, but around 75% of Kordia’s revenue derives from Australia, where 30 percent of its revenue comes from on-going project-based contracts.”

Kordia also reported it is facing new entrants in its broadcast market since the switch to digital. Kordia told the committee its “near-monopoly” ended with the analogue service.

“Other digital specialists are now entering the market, and broadcasting companies have a choice of transmission provider.”