Friday, June 22, 2012

The Unravelling Of KIT Digital

Just how bad are things at KIT Digital ? Very.

I suspect this one will take years to unravel. The company carries $264m of 'goodwill' on its balance sheet - more than its market cap.

The company is clearly up for sale, and the share price, which lost 75% of its value after news of mis-statement of the company's financial arrangements came to light, has bounced slightly on this news. But who would pay a fifth of a billion for this mess ?

Moreover, I'm seeing CVs flying around and a deep concern amongst customers.

Quite extraordinarily it does still have that market cap of over $200m - for a company with revenues of about that last year and with the need to restate financials, fight class suits and is hemorrhaging staff and clients, this seems to indicate that there may be a stupid buyer out there already. Caveat emptor is all I can say.

Worse still, the company has consistently found being paid a problem and its current receivables are around a third of annual revenues, implying 120 debtor days - so, either weak financial controls or clients disputing bills. For a company of its size, this is around $40m it should have in its coffers if it was properly run.

The company was started by Rob Petty in Australia around 2003 as Roo Media and, by my very rough estimates (please correct me if you know the right figure which has been skewed by many, many rights issues and scrips) has raised nearly $530m over the years, including a very recent round that has lead to a class action suite.

To spend a decade building a company that is still loss making, having gone through half a billion of other people's money should in itself be criminal in my opinion.

The company sought to roll up the internet TV services business, and has been moderately successful in doing this with some notable acquisitions, not least UK integrator ioko, who are responsible for the internet TV systems of AT&T, Telstra, the BBC and Sky. But that's easy when money is no object. The trouble is, the whole marketplace isn't worth the half a billion it has spent doing this.

The remnants of the pioneering internet TV company that I built, Narrowstep were among the assets that KIT (eponymously named after its disgraced formed boss Kaleil Isaza Tuzman, the subject of the infamous Startup.com) bought. Now, the former COO of Narrowstep, who worked that company into the ground after my departure, Barak Bar-Cohen has the unenviable task of sorting out the mess as the stand-in CEO. Questions clearly need to be asked about what he knew as a member of the company's Board at a time when alleged irregularities occurred.

But the result is that this sector has been blown wide open. There are hundreds of millions' worth of contracts in the balance (corruption by a supplier invariably results in most major commercial contracts being immediately terminatable) and other loss making companies in the sector such as Brightcove and Ooyala must be rubbing their hands.

I surely am.