Gay is the former chairman and managing director of failed Tasmanian timber company Gunns Limited. His cavalier disregard for conventions and processes culminated with the insider trading charge; he changed his plea to guilty at the 11th hour and admitted he sold 3.4 million Gunns shares based on inside information which he ought to have known would affect the share price. Gunns, once a top 100 ASX company, is the highest profile insider trader snared by the Australian Securities and Investments Corporation. And it’s not as if Gay was a back-office clerk.
It's worth noting that Gay did escape a prison term this morning. The judge told the court the offending was not in the serious category of insider trading. The judge found Gay had been motivated to sell up shares because of a cancer diagnosis more than the receipt of sensitive financial information.
So what went wrong for Gay? Gunns, established in 1875, was a proud Tasmanian native timber sawmiller. It became a publicly listed company in 1986 with Gay as managing director and a board member. The appointment of former Tasmanian premier Robin Gray to the board in 1996 strengthened the links between Gunns and Tas Inc. Gay may have stretched orthodox corporate governance arrangements when as CEO he was appointed as chairman of the board in 2002. Gay and Gray became a formidable team, a duo of corporate hard-heads with impeccable political connections.
At the turn of the century Gunns was still a small company. In 1998 the turnover was $97 million and after-tax profits $3 million. Profits peaked in 2004 at $105 million on turnover of $674 million. Gunns joined the ASX100 and Gay was the darling of institutional investors, providing capital growth and healthy dividends return, at first from woodchipping but increasingly from managed investment schemes (MIS).
Under Gay’s chairmanship, native forest woodchipping and MIS contributed over 90% of Gunns’ profits and cash flow. In profit terms woodchipping peaked in 2004 and MIS in 2006.
Gunns’ political connections reaped rewards as the state-owned Forestry Tasmania allowed what some saw as the overcutting of State Forests for inadequate consideration. Gunns’ pulp mill plans were hatched with then-premier Paul Lennon of the ALP, and eventually required a special act of Parliament to bypass planning procedures when Gunns was found to be critically non-compliant. Dotting the "i"s and crossing the "t"s never seemed to be Gay’s strongest suit.
Gunns was an old fashioned conglomerate. Apart from forest assets, it owned hardware stores, a wine business, pubs, managed grape and walnut schemes, a heritage property and a building operation.
As soon as the act to facilitate the pulp mill been arranged, Gunns acquired Auspine, a South Australian-based softwood business with Tasmanian assets. Over $600 million of assets were added to the balance sheet. Gunns was now Australia’s largest hardwood and softwood company -- and the most indebted. At June 2008, bank borrowings were $1,058 million. At a time when operating cash flows were declining and assets ageing, funds to build a pulp mill had to be borrowed. Did Gay think he was invincible?
Gunns raised $333 million from institutional investors in September 2008 before other MIS companies hit the wall. But it only raised $1.3 million from retail investors when the aim was $130 million; the shortfall necessitated the sale of recently acquired softwood plantations. Debt fell to about $650 million where it remained until the end.
A year later Gunns raised another $145 million from shareholders. The ink was barely dry on the new share certificates in October 2009 when Gay received an internal report outlining Gunns' trading difficulties. He later disposed of 3.4 million Gunns shares. Two months later, the half-yearly report confirmed the slippery slope with a 98% reduction in profits. Institutional investors and bankers, Gay’s long-time loyal backers, were concerned. Gay’s days were numbered. A new CEO was installed but it was like lipstick on a pig. Pretending that it was searching for a social license to build a pulp mill, the reality was exiting native forests and selling assets to reduce debt was the only way to avoid insolvent trading.
Gunns was like an old log truck with bald tyres, laden with debt, careering out of control, trying the cut corners, seemingly oblivious to a nearby cliff. Gay ought to have been aware that trouble lay ahead.
Along the way Gunns managed to outsource the financing of plantations to MIS investors, and harvesting and freight operations to contractors, shifting risks to others whilst maintaining control. This meant Gunns had plenty of cash flow during the good times to take over and hollow out the Tasmanian forest industry. Outsourcing reflects an extension of moral hazard where governments are expected to contribute when things go wrong. Contractors have been assisted. Funds are also needed by FT, now a corporate cripple needing a permanent government lifeline.
Many blame the Greens for Gunns’ failure. Apart from exogenous factors, I argue much of the blame should lie with Gay. Vanishing MIS revenue was not caused by the Greens. MIS legacy costs (and the thousands of leases to MIS growers which prevented Gunns from obtaining value for its plantation land) pushed Gunns over the edge.
Initially a saviour, MIS became a strangler. The decline in native forest woodchipping had been occurring since 2004. All the king’s horses and all the king’s men couldn't put the forest industry back together again. Gay had a role to play in that legacy.
Some are surprised that, given the facts of Gay's case, he has not received some kind of a jail term (the maximum sentence is five years). A monetary penalty is just another cost to do business.
Gay’s mentor, former Gunns’ chairman Edmund Rouse, spent time in the minimum-security facility Hayes Prison Farm for attempting to bribe an ALP member to cross the floor in 1989, following an election that produced a hung parliament when Robin Gray was Liberal leader.
Gay's sentencing today means little will change. It will signify the end of a chapter, not the end of an era. The saddest thing about the whole Gay saga is there have been very few mea culpas and scant evidence that attitudes and processes have changed much.
(posted on Crikey)