Don't Drink The Water

Journal Star reporter Jennifer Davis had an update regarding the misadventures of the city of Peoria attempting to purchase the Illinois-American Water Company in Saturday's edition.

In 1998, a group of Peoria investors got together and formed a company specifically to loan the city of Peoria $1 million to investigate the possible buyout of Illinois-American Water Co. This company, the Peoria Area Advancement Group, LLC (PAAG), claimed that if the due diligence should prove that it would not be financially feasible for the city to purchase the water company, they would forgive the loan.

On April 7, 2005, the city’s water selection committee voted that the valuation of $225 million for the water company made it financially infeasible for the city of Peoria to purchase, under the 1998 PAAG/city arrangement. Shortly thereafter, newly elected councilman Bob Manning, who is also a CPA, examined Illinois-American’s books and determined that it was feasible for the city to purchase the water utility. But an estimated $2 million would be needed to complete the due diligence.

Also in that same month, legal council for PAAG claims that an agreement between the city and PAAG outlined specific steps the city needs to undertake to be considered “due diligence.” Eventually in Sept of 2005, the city council overwhelmingly voted down to purchase Illinois-American. And guess what; PAAG wants their money back.

The issue is now supposed to go to arbitration. It’s somewhat difficult for me to comment as I’ve never read the complete agreement(s). But here’s some common sense observations.

The business model that PAAG is built upon is woefully weak. Aside from trying to create the illusion that these investors are acting as “concerned citizens,” no astute businessman would have invested in this scheme. This has the makings of investing in a junk bond. The premise is that PAAG would loan a cash strapped municipality a seven-digit figure. This borrowed money would not be invested, but instead, be used on expenses (for due diligence); money that most likely would not be recovered.

Should due diligence indicate infeasibility to purchase the water company, the investors are out there investment. However, if it should prove financially feasible, and should the city pursue a purchase, they get their investment back plus interest (I don’t know what the interest rate was set at).

Sounds like a bad risk/return ratio, doesn’t it? A lot of risk for little reward. Read between the lines. I’m sure there are some unwritten strings attached to this money. PAAG investors were investing in influence to set on how the water company deal would be structured, how it would be run and establish conditions that would become beneficial to their other Peoria companies. Basically, they wanted their hands in the cookie jar. Now the jar’s empty and PAAG is crying.

It really depends upon how the agreements were worded is what will determine if PAAG gets their money back. I think PAAG is getting what they deserve.

Common Sense of it All: In the movie Wall Street, Gordon Gekko claimed that greed is good. Figuratively speaking, you could argue that. You could argue that it is what motivates people; be it money or other things. But greed, especially strong greed, will get you nowhere. Fools and their money are soon parted.