Guvera ignored JP Morgan advice to delay IPO, court hears, as investigation resumes into streaming firm’s collapse

Failed music streaming firm Guvera ploughed ahead with an IPO despite being told not to by financial experts JP Morgan, Sydney’s Federal Court has heard.

Resuming the public examination into Guvera’s collapse, adjourned from December, former Guvera CEO Darren Herft admitted it did not heed a recommendation in early 2016 to delay the public offering.

When it tried to list in June of that year, the IPO was blocked by the Australian Securities Exchange and Guvera unravelled.

It also emerged during the hearing that Snapchat had been one potential funder and entered negotiations to invest $100m in 2015.

But later that year the social media platform pulled out of the JP Morgan-brokered deal, leaving Guvera desperately short of cash and struggling to pay for music rights and other bills. Other potential deals also fell through.

In the earlier hearing, the court heard that Warner threatened to withdraw content unless it was paid, while email exchanges with Sony, Warner and Omniphone – a music content hosting company – appeared to highlight Guvera’s struggles in honouring repayments.

The public examination, instigated by liquidators Deloitte, is exploring the circumstances behind the demise of Guvera, which left shareholders $180m out of pocket, and whether Guvera had traded while insolvent.

Resuming his questioning of Herft, Deloitte barrister Ben Katekar turned to the IPO and quizzed the former CEO on why Guvera pressed ahead with the attempt to list after two senior JP Morgan directors had advised against it.

The court heard the bank had urged caution following the failed listing of Guvera rival Deezer and the inability of Sydney-based investment bank JBWere to raise capital for Guvera during the latter part of 2015.

One of those urging Herft to delay an IPO until the back end of 2016 was JP Morgan’s San Francisco-based global head of internet digital investment banking.

“You went to the top of the top and he told you not to go ahead with the IPO and you did not take his advice,” Katekar told Herft. “By seeking to go ahead with the IPO in early 2016 you were acting contrary to what JP Morgan had told you. Why did you go ahead with the IPO?”

Herft responded by saying the company was not in a position to wait another 12 months to list.

“It was too urgent?” asked Kaketar.

“It was urgent to look to fund the company, correct, that is why you go to an IPO, to raise funding for a company,” Herft replied.

Pressing the issue further, Kaketar asked: “How could you possibly have thought, going against JP Morgan’s advice, that the IPO was going to be successful?”

Herft said JP Morgan had previously advised Guvera that it would raise $100m during 2015, investment which had not materialised.

“We as a board were treading carefully with listening to JP Morgan’s advice at that time,” he said.

Asked, then, if he no longer trusted JP Morgan, Herft said he could not say yes or no.

Earlier, the court heard how Guvera made a loss of almost $81m in the year ending June 2015, up from the $29.5m the prior year. Herft pointed out that Spotify lost $400m.

“This is not a cheap industry to be in and we had secured very unique global music rights,” he said.

The court heard that during 2015, JP Morgan was seeking to raise $100m in the US for Guvera with JBWere and PricewaterhouseCoopers looking to raise a similar amount in Australia. Neither capital raising was successful, although Snapchat had shown interest. At that stage JP Morgan had valued Guvera at $915m.

Herft said he met senior executives of the social platform in California but a hoped-for $100m deal ultimately collapsed towards the end of 2015.

Herft was also quizzed about a fund raising event in Hawaii in February 2015 which raised $40m. Included in the presentation slides to potential investors was reference to Blinkbox, a music streaming firm acquired from UK supermarket Tesco, a deal which Herft said provided Guvera with 3m users.

The court heard how Herft resigned as a director of Guvera’s UK operation after objecting to the acquisition even though it had been heralded as a “cornerstone” of a future IPO.

Herft denied he quit in protest but acknowledged he believed the deal was flawed and that he “did not see eye to eye” with UK director Michael de Vere.

Katekar attempted to show that Herft positioned Blinkbox as an “attractive proposition” to potential investors in Hawaii even though he believed the acquisition had been a mistake.

“I don’t think I commented on the attractiveness (to potential investors),” Herft responded. “I advised them that we had acquired Blinkbox and I advised them that as a director I did not vote in favour of the acquisition.”

Katekar countered: “You told investors you had just acquired Blinkbox UK and that was a positive matter they should take into account when considering whether or not to invest.”

“Yes,” Herft replied.

Later, as questioning circled back to Blinkbox, Herft recalled that he told potential investors the business was losing GBP1m each month, but did not inform them that he disagreed with the acquisition. He said he “could not recall” if he told them he had resigned over the deal.

While de Vere had argued Blinkox could generate $10m for Guvera over 12-18 months, Herft said he was unconvinced.

Asked why he did not approve of the deal, which led to a falling out with de Vere, Herft said he did not agree with the Blinkbox user or engagement numbers or the ability for the company to be monetised “in the way Tesco and Blinkbox had provided”.

“I was not confident with any of the information,” he said. “It was losing significant money – over one million British pounds per month – and I did not have confidence it could be turned around to that level. Could it be turned around, yes, but at that level, no.”

Herft argued in court the deal “was not favourable to Guvera Australia” and that by objecting he was “acting in the best interests of the company”.

“We accepted a million dollars of cash burn a month for a new entity. That cash could have been going to Guvera Australia,” he said.

Katekar painted a picture of hopelessly optimistic sales targets projected by Herft. In September 2014, he told the court Herft informed the board that Guvera should be live in approximately 65 countries and targeting ad sales averaging US$100,000 per month per country.

Yet by January 2015, total income for that month had reached only US$19,000 worldwide.

“That’s not much is it,” Katekar observed.

Herft insisted he had remained confident of growth following a deal with mobile phone provider Lenovo – which had the Guvera app pre-loaded on phones – while it had signed an agreement with Grey Advertising New York which he described as “one of the biggest  agencies in the world”.

But in order to meet advertiser expectations Herft said it needed a critical mass of engaged users, but only Australia at that stage was nearing that number.

All the while, costs and monthly losses were increasing, Katekar said, rising from a $1.5m loss in September 2014 to $3.6m in January the following year.

Herft agreed that expanding into new markets, and the associated costs of technology and music rights, had led to increased cash burn, something he had told the board was inevitable.

Towards the end of proceedings, Herft acknowledged Guvera needed funds at the back end of 2015 but stressed all start-ups need cash to grow and survive in the early years.

“That was made very clear to everybody,” he told the hearing. “Maybe it’s not understood clearly enough but the music industry is not an industry where you can just open your doors in the first 12 months and generate revenue. It’s impossible.

“It’s not like opening other business, like a law firm, when you can have clients next week. Guvera was a company that needed significant capital investment to build the assets, the technology, patents and infrastructure, and to secure the music rights.”

The examination was adjourned until March 23 when Herft will face further questioning.


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