In Saturday’s paper I broke the story that the four major institutional investors of Tasmanian logging firm Gunns had met with the company in July and August of last year to express a number of concerns with the company, executive director John Gay and the bell Bay pulp mill. That article can be viewed here.
To celebrate my return from my holiday, and thus reappearance on envirowire, I thought I would outline more clearly and in more detail everything I understand to have happened which didn’t make the paper.
The information of what were confidential meetings was given to me by three sources, two of which attended a number of the meetings. The information from the meetings did not necessary derive from all three sources, but all three confirmed most of what was in the story before it was published. I have promised all three anonymity, which is not always the best journalistic practice but sometimes has to happen, because they fear a mix of confidentiality laws, being reprimanded by Gunns and breaking the confidence of others.
The four major investors as of 29 September 2008 (which are the numbers given to me) are:
Perpetual Ltd: 104138316 shares or 16.57% of the company
Concord Capital Ltd: 81850027 shares or 12.86% of the company
Perennial Investment Partners: 60110754 shares or 9.56% of the company
Schroder Investment Management: 58435844 shares or 9.3% of the company.
The four investors control 48.29% of the company.
The first indications about the fears about the structure and behaviour of Gunns I have been told about occurred at a January 2008 meeting. Representatives of all four met with Gunns CEO John Gay and reportedly left “furious” because they believed Gay was not listening to their concerns about the Gunns business model.
In January 2008 Gunns had just received a new line of credit from their bankers of 12 years ANZ. That credit was then spent on a number of small Tasmanian logging firms and used to begin the initial approach for a takeover of Auspine. But Gunns was also carrying a large amount of debt, and by spending very quickly the extra credit they had been extended the four investors (and it is said ANZ) became worried about the practices of the board who were not reigning in the expansionist executive director (and chairman) John Gay.
Two of the investors, namely Perpetual Ltd and Perennial Investment Partners, also asked that Gunns put more international experience on the board. Both companies were worried that while rapid expansion was occurring, it was only happened within the Tasmania borders. They were particularly worried that Gunns had only one plan to expand its revenue base and increase its operations for the offshore pulp market; the pulp mill.
It was not know whether concerns about the pulp mill project were being expressed directly in January, that would certainly come later, but a lack of a back-up plan if the mill wasn’t built certainly was. There were some doubts in January from analysts whether the project could attract the $2.2 billion in funding it needed, in fact there had been doubts for a while.
Certainly there were doubts enough for ANZ who pulled out from funding the project in May 2008. ANZ partly let the rumour develop that they had done so because of environmental principals. But those who know suggest that is only a very small part of the decision. ANZ was only set to finance 5-10% of the mill and were perturbed that five years since the project was announced no other financiers had come on board. At the same time ANZ was writing massive amounts of money off from failed stock broking firm Open Prime and had many other money problems relating to the global financial crisis problems.
ANZ did not walk away lightly. They have been with Gunns since 1996 and have extended a lot of credit to the company, they need to see it succeed if they are to recoup those debts.
Gunns had another problem. Their other source of potential finance, Swedish forestry company Sorda, according to one of my sources “took a good look at the project then walked away.”
By this point Gunns had spent $100 million on the project, but they were carrying that money as an “asset” rather than paying it off yearly through their budget. A Gunns spokesman told me on Friday (not it the story printed) that their accountant KPMG had ok-ed that system, and the company considered the $100 million as an asset because it was part of the “infrastructure” associated with the pulp mill which will be built. In short the $100 million will be paid off through profits of the mill.
The doubts of the investors, and ANZ for that matter, turned to fear in June when Gunns warned them of their 2007-08 financial results. Gunns’ debt had risen to over $1 billion. The interest payments on that debt alone had reached $72 million yearly, eclipsing the $69.5 million in revenue.
And John Gay was still not listening. The company was being bullish about its finances, and Gay continued to look to expand even though the credit crunch had hit and most other ASX 200 companies were looking to consolidate debt and halt expansion plans.
Gunns shareprice had also fallen two-thirds as doubts about the company’s ability to carry such debt grew among financial circles.
So in July and August the four major investors and ANZ began appearing on Gunns’ door looking for answers, and in reality looking for change. Those meetings have not brought about every piece of redirection the investors want, as one person put it to me on Friday it is “an ongoing process,” but they got some wins.
This is a list of everything I understand was expressed by one, many or all of the investors and ANZ to the Gunns board.
- Debt to equity ratios has to be alleviated through a capital raising exercise by floating extra shares and selling assets. Gunns did both in September 2008, raising close to $500 million and the company considers it has addressed its debt problems.
- A large part of that debt-equity discussion surrounded the Bell Bay project and doubts were expressed that the company could not take on the $2.2 billion of debt needed to fund the project. Perpetual is known to have expressed this view quite directly.
- Gunns sought provisional support to raise the credit needed for the pulp mill but the investors refused to give it.
- The investors said the pulp mill project should be funded through an external equity partner, rather than Gunns taking on the full brunt of the debt. The investors also argued Gunns should be the minority partner in the project. Gunns still holds out hope that it will fund and completely own the project.
- The investors asked the Gunns board to write off the $100 million it has already spent on the project because of fears the pulp mill wont get built. Gunns reiterated the advice of KPMG.
- Perpetual and Perennial Investment Partners again asked for more international experience to be put on the board.
- All four investors asked for board “renewal” which is aimed at creating greater independence in Gunns management. In short, the investors are worried John Gay and Robin Gray have too much power in the direction in the company and greater board oversight would avoid the debt-equity issues the company was having.
- The investors asked John Gay to step down from his role as chairman, which he will do early this year. He stays on as executive director.
- Concord and Schroeder Investment Management said directly that they would move against anybody who has been on the board for more than ten years.
- Concerns were expressed the public relations image of the company needed to be softened.
The results of these meetings are now known. Gunns began a capital-raising program in September. John Gay steps down as chairman soon. It is now understood Gunns will appoint a new member to the board before this year’s AGM. And Sydney PR firm Cato Counsulting has been hired to address the image of the company.
There is no indication that a current board member will resign. No indication Gunns will abandon the pulp mill, nor stop expanding its operations. No indication whether they will seek an equity partner for the project (though John Gay said to me last Monday it was an option).
Will the investor’s fears have a wide effect on the company? The investors legally can’t call for the pulp mill to be scrapped, but most regard Gay and Gray as the main proponents of the project.
As one source, very close to one of the investors told me on Friday “Change the board, change the company.”
It remains to be seen exactly what that will mean, if indeed it happens.
