I wonder if the 34,549 SRS shareholders who don't hold a marketable parcel of shares will bother to vote. Interesting to note that 7 years ago there were 49,500 PPX shareholders, now there are only 36,030 SRS shareholders. The number holding more than 100,000 shares has increased x 6. So it will only need a few dozen top SRS shareholders to vote in favour to pass the resolution. I've voted my million + in favour. Spicers facing a resolution to its long-running hybrid problem
Jun 8 2017 at 11:45 PM
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Spicers chairman Robert Kaye used all his legal skills to resolve the titanic fight at the company between hybrids and ordinary equity. Supplied
by Tony Boyd
The bitter four-year battle between hybrid holders and ordinary shareholders at paper distributor Spicers is finally headed to a sensible resolution that should pave the way for a re-rating of this beaten-down stock.
After multiple failed attempts to resolve a problem that left the company's strategy completely paralysed, Spicers shareholders and hybrid holders will next week vote on a scheme that will allow the hybrids to be exchanged for shares.
This is a textbook case study of a board and small management team working towards finding a pragmatic solution while simultaneously bringing the company back from the brink of insolvency.
Much of the praise for the resolution of these issues must be heaped on Spicers chairman Robert Kaye, non-executive director Mike Barker and finance director Wayne Johnston.
Spicers, previously known as PaperlinX, was spun out of Amcor in 2000. Its market capitalisation peaked at about $2 billion in the 2004 financial year and its revenue peaked at $7.8 billion in 2007.
Disruption wave
In March 2007 the company issued $285 million of hybrid securities. The idea was that these step-up preference securities (SPS) would strengthen the balance sheet and provide increased financial flexibility to pursue opportunities. The funds were used to expand into the paper merchant business offshore.
But when the company was hit by a wave of disruption that smashed the traditional global paper markets, the hybrids did the opposite of what was intended.
The balance sheet was threatened because the hybrid holders refused to do a deal with ordinary shareholders. Instead of providing flexibility, the hybrids were a millstone around the company's neck.
Under Kaye's chairmanship, the company retreated to Australia and New Zealand and expanded into signs and display. It allowed its UK merchant business to go bankrupt.
During the long-running negotiations over the resolution of the hybrids problem, two hedged funds from New York – Blue Pacific and Coastal – became influential players after buying up more than 20 per cent of the hybrids on issue.
They pushed hard to get control of the company but could never get over the fundamental problem that the hybrids could not vote at a shareholder meeting.
The ordinary shareholders were always cautious about a deal because in the event of insolvency they ranked last.
Hybrids not equity
One critical message is that hybrids are not equity.
The scheme being voted on next week includes the issue of 1.4 billion shares in consideration for the acquisition of the hybrids. When the deal is done the hybrid holders will own about 68 per cent of the expanded capital.
The market cap of Spicers is about $19 million. That suggests hybrids with a face value of $285 million are being purchased about 4.5¢ in the dollar.
The vote comes at a fortuitous time for Spicers. The company recently reported its first net profit in about eight years. For the first time in many years the company's operating cash flows were positive.
Kaye, who will step down to make way for new directors, is quietly confident that shareholders will approve the hybrid resolution plan next week. He says the future of Spicers looks bright and the company can participate in sector consolidation.
There are a few telling lessons from the Spicers case study. First, a board must keep bowling up options for solving complex problems. Second, digital disruption is inexorable but unpredictable in its impact and its timing. Third, solutions will be found when it becomes obvious that all parties will otherwise lose.
