Blue-eyed deal!

Still struggling Blue Diamonds Jewellery Worldwide emerged as the talk of the market yet again last week for multiple reasons including a deal on the biggest shareholding between related parties.

eChannelling Plc last week sold 13.6% stake for Rs. 133.4 million and in the process booking a capital gain of Rs. 63 million. The block amounted to 13.672 million shares. Of the parties who bought, the biggest block of 11 million shares or 10.65% was taken by British American Technologies Ltd., (BAT) at Rs. 10 each or Rs. 110 million.  BAT owns 22.4% stake in eChannelling Plc.

Blue topped the list of mostly traded stocks last week with 61.8 million shares or 14.5% stake changing hands for Rs. 565 million. Apart from the crossing at Rs. 11, Blue closed the week unchanged at Rs. 8. The Net Asset Value of Blue is Rs. 2.27 per share. The sale by eChannelling comes less than two months since it purchased the Blue stake on 8  June at an estimated price of Rs. 5 per share. The sale price reflects a 100% increase over its purchase cost.

eChannelling and BAT enjoys three common shareholders W.D.J.R. Silva, W.T.L. Weeraratne and D. Perera.  

Post eChannelling buying 13% stake, Sri Lanka Insurance followed suit by 12.7% stake in Blue on 23 June.  

              eChannelling had the stake sans a Board seat in Blue whilst SLIC continues to hold stake without representation on the Board of Blue as well. SLIC also owns 23.5% stake in eChannelling via General Fund (16.4%) and Life Fund (7%) as at 31 March, 2011.

The sale by eChanneling comes despite a top eChannelling official telling the media that SLIC and eChannelling was on a joint partnership to rescue and turn Blue into profitability.

It wasn’t clear whether BAT will seek a Board seat on Blue, better glitter for which remains elusive despite its management strongly controlled by four executive directors with industry knowledge.  They are W.G.B.M. Ranaweera, G. de Kretser, K. V. D. D. A. Dias, and M. M. N. Priyantha.

Last week Blue released its interim results for first quarter of 2011/12 financial year which confirmed its struggle. Loss from operations grew to Rs. 4 million as against a loss of Rs. 2.3 million a year earlier.  Finance cost of Rs. 2.6 million led to a pre-tax loss of Rs. 1.5 million as against Rs. 3.5 million figure in the first quarter of 2010 financial year.

The bottom line at Blue however was a high Rs. 22.3 million (as against a loss of Rs. 3.5 million) thanks to an extraordinary Rs. 23.8 million gain from settlement of credit facility.

Explaining the latter Blue said that the company had obtained a credit facility from a Finance company for a sum of Rs.10 million in 1999/2000. The outstanding balance of the said facility remained at Rs.38.8 million with accrued interests as at the financial year end 31st March 2011. During the current quarter the Company and Finance company had agreed to accept Rs.15 million as full and final settlement for the credit facility and, the Company recognised non payable accrued interests as a gain in the quarter.

The settlement via Rs. 15 million also saw Blue’s noncurrent liabilities being reduced to Rs. 9.3 million from Rs. 48.2 million as at 31 March, 2011. Its current liabilities rose to Rs. 36.2 million from Rs. 31 million. Accumulated losses at Blue were Rs. 876 million, marginally down from Rs. 900.5 million as at end FY2010.

As per provisional results value of jewellery held by Blue was Rs. 42.8 million, down from Rs. 46.8 million a year earlier whilst revenue grew from Rs. 13.6 million to Rs. 17.9 million. Gross profit declined from Rs. 5.6 million to Rs. 4.5 million.

In late June directors of Blue Diamond Jewellery Worldwide (BLUE) announced that the proceeds of its Rights Issue announced on 15 October 2010 would be used to make an investment with Fior Drissage Jewellery Ltd (FDJL), an associate company.

BLUE has executed an agreement with FDJL for a period of 15 years authorising it to manufacture jewellery using the Carbonlokd (Floating Diamond) setting concept, to cater to the local market exclusively. This would facilitate BLUE to earn a minimum of a 5% of the labour value earned on the jewellery manufactured and sold in Sri Lanka by FDJL. In addition, BLUE would be entitled to any dividend declared on its equity stake (16.7%).

Further to safeguard and to protect interest of BLUE, four separate agreements were also executed with executive directors Bandula Ranaweera, Godfrey de Kretser, K.V.D.D.A. Dias and M.M.N. Priyantha who are privy to the technical knowhow of the concept. As per the conditions neither any one of the four directors could leave the company for a minimum period of three years from the date of signing nor can the company remove them for a period of three years except for the reasons set out in the agreement.

Failure to comply by either party will result in having to settle the other party the applicable remuneration at the time of leaving the company for the remaining period as compensation. The four directors are precluded from divulging the secret process for a period of three years after leaving the services of the Company. “This would no doubt not only strengthen the Company but would enable the Company to maintain and safeguard its secret process,” Blue Diamonds Jewellery Executive Director De Kretser said in a statement.