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Breaking News AFR 5 Jan 2012

PaperlinX deal looks dead at birth

CARRIE LAFRENZ AND JONATHAN SHAPIRO
KEY POINTS
(1) Equity holders and bond holders cannot agree on the buy-out offer.
(2) The bond holders want more money for their hybrids.
(3) The equity holders won’t sell.

A stoush is brewing between PaperlinX’s hybrid and equity holders which may derail private equity’s $120 million conditional bid for the troubled paper merchant.

Days before Christmas, PaperlinX announced it was considering a non-binding proposal from a buyout firm to acquire both equity and the Step-Up Preference Securities.

Equity holders stand to receive $55 million based on a 9¢-a-share offer while hybrid holders would receive $62 million, or $21.85 a security.

However, hybrid holders believe they are entitled to a bigger share under the terms of the holding. Also, the priority ranking of the hybrid holders may mean that in the event of a wind-up of PaperlinX, they might come out ahead of equity holders.

“It’s inconceivable that the higher ranking hybrid investors would agree to a deal that would see ordinary shareholders walk away with almost 50 per cent of the proceeds,” said Brad Newcombe, who holds 6000 hybrids.

“Typically, in a situation of competing stakeholder interests, the lion’s share of the spoils goes to those higher up the capital structure, in this case the hybrid investors. That’s why the current proposal appears doomed .?.?. There is no way we will agree to a deal when we sit higher up the capital structure,” he said.

Orbis managing director Simon Marais, who owns 18.29 per cent of PaperlinX, said the way forward for the two parties was very different.

“Bond [hybrid] holders want the company wound up and equity holders want them to step aside,” he said.

Mr Marais bought into PaperlinX about 18 months ago. On July 1, 2010 the stock was trading at 17.5¢. PaperlinX closed yesterday at 8.1¢ per share. The company has been a serial underperformer and is tipping a first-half loss of $26 million.

At the same time as announcing the private equity interest, PaperlinX said business had continued to deteriorate, particularly in Europe. Paper consumption globally is in decline.

While the company’s debt position has improved considerably since selling off Australia Paper in 2009, its balance sheet remains under pressure. JPMorgan is tipping net debt of $154 million at June 2012, three times PaperlinX’s current capitalisation.

“The bond holders won’t get a dividend for a long time,” Mr Marais said.

“As long as the company is alive and doesn’t wind up we have the upper hand. If it goes under then bond holders have the upper hand.

“I’m not sure anything can happen [with the private equity player]. I think it will be difficult.?.?. Perhaps the only issue to be forced is for the equity holder to turn off the tap for five years and hybrid will fall to a much lower price,” he said.

Any takeover of the company whereby hybrid holders are bought out at a discount would need to be approved by the hybrid holders’ trustee, The Trust Company, thus creating a barrier to any deal getting over the line if the terms are not attractive enough to noteholders.

The private equity bid is conditional on securing both equity and hybrid holders’ agreement to the respective offers.

Gabriel Berger is a private investor who helped to establish an activist group and holds 56,000 hybrid notes. He and others will vote down the scheme unless they get full face value or are converted to ordinary shares as per the hybrid terms, heavily diluting equity holders.

While due diligence continues with the private equity suitor, PaperlinX is also mulling separate offers for parts of the business. It also remains in a strategic review. Chief executive Toby Marchant told The Australian Financial Review earlier this week that the board had not yet formed a view on any proposal.

Mr Marais said a break up does not make sense for equity holders.

“The moment you break the company up, you realise the value,” he said. “This doesn’t make sense for equity holders to do that because they can’t get back any money since bond holders get paid first.

“The way it will be settled is this management or new management will get the company back on the right footing and perhaps buy the hybrids bit by bit back over 10 years.”

He added that PaperlinX should not pay any distribution to debt holders for the next decade, which also means equity holders would not receive any dividends.

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