smh article on gnspa redemption

Flood of GNS shares to hit market 2nd half 2009


The Sydney Morning Herald - Business News, World News & Breaking News in Australia



Gunns threatened by Forests

Environmentalists will be happy to know that Gunns is in danger of being chopped down by its own Forests. In fact, the timber group will have to take care of its Forests before it even contemplates erecting a pulp mill in the Tamar Valley.

By Forests we mean a toxic hybrid issue concocted by Gunns' bankers JPMorgan and Macquarie three years ago, whose conversion threatens large-scale share dilution.

Forests stands for Frankable Optionally Redeemable Equity Settleable Transferable Securities. No, this is not a joke. Surely a box of Monte Christo cigars will have been bestowed upon the banker who dreamt up this acronym.

Anyway, Gunns is looking to wrap up its $430 million capital raising by early October, before the interest rate on its Forests resets on October 14 to an expensive 12.5%. Management says it intends to pay the 250-point step-up and then redeem the hybrids in the second half of 2009.

Despite the mooted 35% to 40% dilution from this capital raising, Gunns' major shareholders, such as CBA and Perpetual, have agreed to tip in for their entitlements. They have little choice. Already overstretched with $1 billion in debt, Gunns itself faces being pulped into oblivion if it doesn't get the capital raising away.

Like so many other companies in the present downturn, the timber group procrastinated about raising equity, punting that the market would recover while its stock price was slowly being felled by opportunistic shorts and anxious investors. In so doing, it watched its cost of capital rise.

Poor management

What happened? A good old acquisition binge and debt splurge by chairman John Gay and his cohorts. A few numbers tell the story: Gunns spent $52 million on acquisitions in 2007 and $221 million in 2008 as it sought to swallow South Australian softwood group Auspine.

At the same time, they chewed through $129 million and $131 million in working capital. Capex rose from $81 million to $105 million and proceeds from borrowing were $665 million and $560 million in 2007 and 2008 respectively, surpassing repayments in both years.

Poor management, full stop. Interest cover is roughly 1.7x and even leveraged buy-out merchants insist on a respectable 2x interest coverage. The interest bill last year at $72 million was higher than the $69.5 million in net operating cash flow.

As for the pulp mill, a new $2 billion spend is an extreme long shot as Leighton's boss Wal King noted the other day. Now there is talk of a Swedish partner coming to the table, although green groups have been searching high and low for the candidate and found no one who would fess up to it.