Thursday, 9 August 2012

The second coming is more likely

Is Gunns likely to be a takeover target?

Highly unlikely. A takeover implies assuming all the contingent liabilities as well, the ATO debts, class actions liabilities etc. A buyer would need to be extremely desperate or badly advised to venture into that spider’s web.
If desperate buying assets and leaving the liabilities behind may be preferable.

Are shareholders likely to put in more funds?

Highly unlikely now that the net asset position of the company is negative.

When the recapitalisation was mooted the reasoning was simply so existing bank debt could be repaid and the company would have unencumbered assets of $750+ million as a 50% contribution towards the pulp mill Joint Venture.

The latest announcement suggests Gunns’ net assets are possibly a negative $150 m if the $120 m of hybrids are counted as debt and a negative $30 million if the hybrids are considered as equity.

The hybrids usually referred to by the acronym of FORESTS (Frankable Optionally Redeemable Equity Settleable Transferable Securities) are similar to Gunns’ ordinary shares because they are listed on the ASX but pay a regular quarterly return, or at least they did until a month ago, like a bond or a term deposit. This and the fact that hybrid holders were entitled to a full redemption at face value ahead of ordinary shareholders in the event of a wind up, was the attraction for investors.

But if Gunns’ net assets are a negative $150 m counting the FORESTS as debt, this means that the first $150m of additional shareholder contributions will simply benefit the FOREST holders as a de facto donation from ordinary shareholders to FOREST shareholders.

Why bother? Fred Hollows or MSF may be preferable?

And tax deductible.

It may be recalled that Richard Chandler Corporation at one stage was going to contribute $150 m.

Had that happened the only people smiling would have been the FOREST holders.

I’d say RCC had a good look at Gunns’ books and knew what they doing when they decided to walk away.

Are hedge funds likely to buy Gunns’ debts from the banks at a discounted figure?

Again this is unlikely.

It was recently suggested in the media that hedge funds might acquire Gunns’ secured debt, let’s say $500 m worth, at a discount, say of 30% discount, or $350 m in total. Banks could then walk away. The hedge funds as the owners of $500 m worth of debt for which they only paid $350 m would make a tidy profit if all went according to plan.

But with negative net assets the prospects of secured debt not being paid in full is starting to loom as a real possibility, and hence ‘buying’ debt is less attractive.

Not to mention the extra hassles likely to result from the maze, otherwise known as Gunns’ MIS business (see below).

Can Gunns just keep trading?

The ASX announcement on 6th August was a statement that its liabilities exceeded its assets. This doesn’t necessarily mean that Gunns will be unable to pay its debts as and when they fall due, because asset values may increase or trading in the future may produce enormous profits.

However this is unlikely to happen.

Hence incurring debts which cannot be paid will require the Directors to have deep pockets of their own because they will eventually have to pay if Gunns can’t.

To the extent that banks keep providing credit as suggested by the announcement, Gunns can keep trading. The banks may be willing to cooperate until Xmas provided there are no breaches of the banking arrangement agreed in January 2012.

But whether suppliers are willing to keep dealing with Gunns is the question, or whether they will require payments in advance that will necessarily put Gunns at risk of breaching the aforementioned banking covenants.

Whether Gunns lasts until the formal solvency declaration in September is questionable. Until then it is clinging to the notion it is a going concern.

The recent ASX announcement is almost like an announcement of appointment of a Voluntary Administrator, because the Directors have in effect told the market they are insolvent and therefore, by implication, are personally guaranteeing future debts which the banks are happy to fund at this stage.

That sort of arrangement won’t last long, particularly as some of the cash hemorrhaging relates to ongoing management costs associated with the 230,000+ hectares of MIS plantations including the Great Southern plantations taken over by Gunns.

It is highly unlikely the banks will extend facilities beyond Xmas meaning that the senior debt of $340 m and the working capital facility ($152 m at 31st December 2011) will have to be repaid.

Will Gunns be handed over to a Voluntary Administrator, a Receiver or a Liquidator?

There’s not much left of the company.

• A softwood sawmilling business at Bell Bay and in SA.

• About 50,000 hectares of hardwood plantations on its own land.

• About 50,000 hectares of plantation land with MIS crops belonging to investors.

• About 90,000 hectares of native bush and reserves.

• A MIS business with negative value managing 180,000 hectares on leased land including the aforementioned 50,000 hectares on its own land.

• A small interest in a trust that owns the Green Triangle 45,000 hectare softwood estate (ex Auspine).

Mr L’Estrange has done a reasonable job as unofficial Administrator, the balance sheet is a lot tidier than it was. Although he’s been terribly tardy, selling forestry assets has never been harder.

However, more than ever, Gunns is little more than an MIS company.

The reality was it has always been quite dependent on MISs, despite what people like the boss of Gunns Plantations Ltd Ian Blanden said in Business Spectator on 25th May 2009,“(o)ur business model is very different ………. We are a forest products company who have established an agribusiness investment or forestry investment arm. We’re not an MIS company………..we’re an end user looking for a resource, not a resource searching for an end user…..”

MISs without new money are not sustainable. Ask Bernie Madoff.

Why John Gay talked himself into taking over Great Southern’s headache will remain yet another of life’s mysteries.

Although maybe the fact that Gunns booked a $68 m paper profit on the deal which only cost $5 m may be one of the reasons?

An amount, incidentally, that has been written off since the MIS business now has a negative value.

The MIS business run via Gunns Plantations Ltd GPL now has a separate Board from its parent and is likely to appoint a Voluntary Administrator VA who will have as his prime focus looking after MIS Growers’ interests and dealing with the parent, Gunns’ Ltd.

The parent is likely to appoint a Receiver at some stage when the banks deem it’s time to start hurrying things along, if and when Mr L’Estrange starts faltering.

MISs need a Responsible Entity RE. It’s difficult to envisage a Johnny come lately picking up the baton. It’s likely to remain with GPL, whether or not a VA is appointed.

The likely outcome is that the owners of the land with the ex Great Southern MIS crops, New Forests will purchase the trees from the MIS investors, thus relieving GPL of RE obligations.

Although the possible purchase price has just plummeted following the ASX announcement.

It’s also quite possible that MIS crops on Gunns’ land will be sold to a large investor like New Forests. This will provide some cash for Growers and Gunns, as well as allowing for GPL’s role as RE to become redundant.

With the MIS assets gone, the wind up becomes a more orthodox exercise.

A Liquidator in other words for both Gunns and GPL.

Why write off the pulp mill expenses now?

Directors have concluded that it is no longer likely the mill will eventuate under its banner.

Hence there is no alternative but to write off the pulp mill expenses as impaired and expensed in the P&L statement.

Where to?

Gunns won’t be a participant in a mill, someone else might….. but the Second Coming is more likely.

The death of MISs, the dispersal of the MIS plantation ownership to other interests, the recent acknowledgment by GPL that its plantations aren’t all that flash anyway with MAIs of 18 not too dissimilar to other timber companies, the fall in stumpage prices, all suggests the E nitens plantation estate might shrink at the end of the first rotation.

Without a guaranteed feedstock a pulp mill won’t occur.

The demise of the State’s 300,000 hectare hardwood plantation estate is likely to be as rapid as its rise.

No comments:

Post a Comment