Tuesday, 28 June 2011

Vale Auspine

A history of Gunns undoubtedly will contain a chapter on the Auspine debacle, now edging closer to finality.

The latest ASX announcement advising of the sale of Gunns’ softwood plantation estate in the Green Triangle ( HERE ) presumably refers to the remainder of the plantation trees (about 13,000 hectares) and all the plantation land acquired as part of the Auspine deal (46,000 hectares).

The buyer described as a US based timber investment management company is likely to be GMO Resources, the buyer of the first tranche of Auspine assets, 33,000 hectares of softwood trees sold by Gunns in 2008. GMO is also a 50% owner with Forestry Tasmania of almost 50,000 hectares of softwood here in Tasmania.

The price is $107 million implying the underlying land is worth less than $2,000 per hectare, roughly the same price as that paid recently by the syndicate dominated by a Canadian pension fund, Alberta Investment Management Corporation (AIMCo) which bought 252,000 hectares of Great Southern’s land from the Liquidator for $415 million.

Gunns completed the purchase of Auspine and its related companies in 2008, a purchase that begun with buying shares on the market, a further tranche via a tender and then a successful takeover offer.

Gunns acquired certain assets as well as assuming certain liabilities. Gunns assessed the net value of Auspine at $348 million. It paid cash of $279 million with the balance paid in Gunns shares when the price was $3.35 per share.

The takeover of Auspine occurred at a time when John Eugene Gay was on a rampage. With political patronage and a strong cash flow Gunns was invincible. Being able to swallow Auspine using its own resources was quite a feat.

But It didn’t take long to realise it had taken on far too much debt and more cash was needed.

Preliminary costs of the pulp mill were also requiring more funds.

Greg L’Estrange was appointed in April 2008 as boss of the Timber division to oversee integration of the new softwood business. Gunns was the largest business of its type in Australia at the time with vertically integrated hardwood and softwood processing in diverse geographic locations.

One of Greg’s first moves was to place 33,000 hectares of pine plantations on the market eventually selling for $173 million.
Institutions provided a further $334 million in funds. The smaller retail investors would have chipped in more than their paltry $1 million but for the actions of one of the Directors, an ex premier with undiagnosed dementia who failed to realise that asking retail investors to subscribe for new shares at $1.50 each whilst at the same time snapping up existing shares on the market at $1.40 might undermine the capital raising effort.

Gunns bought Auspine with an assessed net value of $348 million and only had to part with $279 million in cash.

It then raised $335 million from the issue of new shares and sold the bulk of the pine trees for $173 million. A total of $508 million in cash was raised.

It was a back door way of funding the pulp mill while at the same time masking the declining cash flows from woodchipping, MISs and to a lesser extent other forest products.

It was a trick repeated about a year later when Gunns went to the market to raise $145 million to buy hardwood assets from ITC Timber.

But it outlaid only $89 million mostly for inventory which it has been selling to ‘release the synergies of the merger’.

With hindsight it enabled the raising of more cash to survive and continue with pulp mill plans.

The gross value of Auspine’s assets as recognised by Gunns in their books at the date of purchase was $636 million.

There were 2 parts to Auspine’s business - the plantation land, trees and forest roads etc valued at $435 million and the softwood products business, sawmills etc valued at $201 million.

The first tranche of trees sold for $173 million. This proved to be a smart deal as Gunns booked a much needed profit of $23 million, boosting a flagging bottom line.The remainder of the plantation land and trees have just sold for $107 million.

The assets purchased for $435 million have been sold by Greg for a total of $280 million, a loss of $155 million.

If the first tranche produced a profit of $23 million the remainder will record a loss of $178 million.

The bottom line for 2011 will be disastrous and that is before other assets are written down. Even the unsold assets will need to be marked to market as they’re all for sale.

This includes the other half of Auspine, the softwood products business bought for $201 million but which has since needed further outlays of $50 million being the purchase of FEA’s Bell Bay sawmill with access to the GMO/FT softwood resource.

The softwood business now has a book value of $250 million. This includes intangibles of $60 million being trademarks and the goodwill “attributable mainly to the skills and technical talents of the acquired business’ work force”—most of whom have since either been laid off or about to be.

In reality the ‘goodwill’ was the extra Gunns had to pay to gain control of Auspine.

With the closing of the Scottsdale mills there are 2 sawmills in the Green Triangle plus the Bell Bay sawmill.

When Gunns bought Auspine, the softwood enterprise was valued at about 7 to 8 times EBITDA (earnings before interest tax and depreciation).

The earnings have fallen drastically as the effects of the GFC and the high $AUD have impacted. And the earnings multiple used to calculate enterprise value has also fallen with fewer interested buyers.

For the first 6 months of 2011 Gunns’ sawn timber segment which includes both hardwood and softwood made a $9 million loss.

Selling the softwood business may be more difficult given the reported bad blood between Gunns and FT. The business isn’t worth much if there’s no available resource.

The Green Triangle resource has been sold and the Tasmanian resource is 50% owned by FT.

Interesting times ahead.

The current market value of Gunns’ softwood processing enterprise may only be $70 to $80 million valued on a liquidation basis rather than a going concern basis, implying a further $170 million to $180 million may have to be written off.

But not to worry, underlying profit will still be $50 to $60 million. All the losses being incurred are one off events.

What started with a plan just over 3 years ago to produce a vertically integrated softwood behemoth, will end soon in total failure after a cash burn of about $350 million, a truly awe inspiring achievement.

And this is only the financial effects on Gunns itself.

Fortunately as yet there are no claims for compensation.

Once all the softwood assets are off loaded, the principal assets remaining will be the land and hardwood pulp plantations. Currently with a book value of $826 million, a similar discount to that in the softwood industry will see proceeds barely covering borrowings.

It’s little wonder JV partners aren’t queuing to join the next roller coaster.

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