By OH BOON PING
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LAST week, lifestyle products group OSIM International posted a $99.44 million net loss for FY08 - driven by its fourth-quarter $77.31 million write-off of its investment in US specialty retail company Brookstone.
A look at the stock charts shows that the market has reacted positively to the news as its share price rose from its close of 5.5 cents last Wednesday - before the announcement - to 6 cents yesterday.
Such bullishness is perhaps justifiable given that the impairment charge is a non-cash item, and the move will free it of any future share of Brookstone's losses.
This is important since loss- making Brookstone has been a drag on OSIM's profit numbers since it was taken over in 2005. For the 53 weeks ended Jan 3, 2009, Brookstone reported a loss from operations of US$129.4 million, compared to income from operations of US$39.9 million for the 52 weeks ended Dec 29, 2007. Sales for the comparative periods fell 11.7 per cent to US$496.7 million.
However, it is interesting that OSIM will retain its 55 per cent stake, and some wondered why OSIM need not report future Brookstone losses given its majority stake.
Under a number of accounting standards such as the US Generally Accepted Accounting Principles (GAAP), a company, say Firm A, which owns a stake and exercises control over Firm B, is required to consolidate the latter's financial statements with its books. Often, a shareholding of over 50 per cent is taken as evidence of board control.
OSIM's case, however, is unique. This is because the Brookstone investment was structured as a joint venture with Temasek Holdings and JW Childs, and OSIM said that it does not have board control, despite holding four out of eight seats on Brookstone's board. This came as all major decisions require unanimous board approval, said OSIM.
Plus, the other shareholders had pumped in more money (US$150 million) compared with OSIM's US$90 million, and Brookstone's borrowings 'have no recourse to OSIM', clarified CFO Peter Lee.
Therefore, its choice of reporting the investment as an equity stake instead of a consolidation is appropriate, given the circumstances.
From an investment standpoint, the company is also not liable for the subsidiary's losses since shareholders and company are distinct entities. Given that the maximum loss to any investor is capped at the initial cost of investment, the move to write off the Brookstone stake means that OSIM should not bear any more losses starting from the next financial year.
A second issue concerns the choice of writing off its investment instead of a disposal.
Indeed, Brookstone, which operates 305 retail stores throughout the US and Puerto Rico, is still a functioning business and is definitely not worthless.
Granted, prevailing market conditions mean that disposal at this point is not likely to fetch an attractive premium or any premium at all. But surely, the loss from any disposal will not have been greater than the $77.31 million loss which OSIM took on in Q4.
True, holding on to its 55 per cent stake, albeit incurring a hefty write-down, means that OSIM can opt to write back the investment on its books, should Brookstone turn around later. And if Brookstone is subsequently sold, OSIM can still book the proceeds as gain.
But if this is the case, then the partners in the joint venture certainly need a clear business strategy to stop the bleeding, and the track record thus far just does not inspire much confidence.
For OSIM, writing off the entire investment is certainly prudent, but henceforth it should seriously consider offloading its stake in a 'loss' cause.
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