gunns raising is really a takeover

by Chandler Capital
Bryan Frith
From: The Australian
February 09, 2012 12:00AM

http://www.theaustralian.com.au/business/opinion/gunns-raising-is-really-a-takeover-by-chandler-capital/sto





Gunns recapitalisation is really a takeover Source: Supplied

THE proposed $280 million recapitalisation of Gunns is a takeover dressed up as a capital raising.

Gunns has signed a term sheet with Singapore-based Richard Chandler Capital, a private investment group founded by New Zealand-born billionaire Richard F. Chandler, which contains the key commercial terms under which Chandler will invest $150m in shares and bonds and up to $130m will be sought from a renounceable rights issue to existing shareholders.

The recapitalisation would hand Chandler a controlling stake of between 39 per cent and 59.5 per cent of Gunns and the issue will be massively dilutive to those holders who don't take up their entitlements.

However, the recapitalisation probably also represents Gunns' best chance of finally getting its controversial $2.3 billion Bell Ball pulp mill off the ground in Tasmania.

Chandler says it proposes to work with Gunns management to "catalyse" the pulp mill, whatever that means.

The project was announced in December 2004 and the company has struggled since the global financial crisis to secure financing and find a 50 per cent partner, although Finnish pulp giant UPM is said to be again waiting in the wings.

Attempts to find a project partner have also been hampered by fierce opposition from the Greens, environmentalists and community groups.

Management upheavals and a blowout in gearing have also taken a toll, with the result that the share price, which stood at $1.20 two years ago, had fallen to 12.5c before the recapitalisation proposal was announced.

The market sees the proposal as positive, and initially doubled the share price to 25c before easing somewhat to close at 17c, still a gain of 5c, or 360 per cent, on the day. Turnover was heavy at more than 89 million shares.

Timing is becoming critical for the pulp mill project. Gunns received final approval about 12 months ago and had to begin work by August 30 last year to retain its permits. So earthworks have been under way for some months and it is becoming crucial to find a credible partner and secure finance.

The deal with Chandler therefore represents a one-off bet on moving from being simply a woodchip exporter, producing profits in the order of $10m-$20m annually, to a partner in a pulp mill that could earn $200m-$300m annually.

At this stage the details are sketchy, as the terms sheet is non-binding and subject to the parties entering into a definitive and binding subscription agreement and obtaining approvals. It is also subject to due diligence and Foreign Investment Review Board approval.

The term sheet also includes "customary provisions" for payment of a break fee in certain circumstances and matching rights, and a 90-day exclusivity period, which only serves to underline that this is a takeover in disguise.

The proposal is for a rights issue on the basis of 1.3 new shares for each share held, at an issue price of 12c each. ASX approval will be required for an issue at a ratio of more than one-for-one.

The rights issue would raise up to $130m. It apparently is not underwritten, which would increase the likelihood of a shortfall.

The issue will be renounceable, which means holders not taking up their entitlements will be able to trade the rights on the ASX. At Tuesday's closing price of 12.5c, the issue represented a discount of only 4 per cent, and the rights had a theoretical value of only 0.39c per right.

However, yesterday's share price rise has improved the value of the rights to 1.96c, and has increased the prospect of shareholders taking up their entitlements.

Chandler's investment will be in the form of up to $75m with attachable convertible warrants and the remaining $75m, or more, via a share placement, also at 12c a share.

The terms of the bonds have not yet been decided but the warrants will also convert at 12c a share. The bonds will be unsecured and subordinated and will not rank ahead of the Forest notes, so that Forest noteholder consent will not be required for the issue of convertible bonds.

Moreover, under the terms of the Forest notes the placement and rights issue will not give rise to a takeover, which is defined as a recommended takeover bid, a scheme of arrangement in which the bidder acquires more than 50 per cent of Gunns, and circumstances in which a single shareholder acquires more than 50 per cent of the capital.

Theoretically, the latter could occur if none of the shares were taken up in the rights issue. In such circumstances a $150m investment by Chandler would give it 59.5 per cent of the expanded capital.

However, such an outcome is unlikely as it's likely some shareholders will participate in the issue. The major shareholders are Mathews Capital with 15 per cent, Perpetual and Bank of America Merrill Lynch 12 per cent, and Unisuper with 5 per cent.

Moreover, up to half of Chandler's investment initially will be in convertible bonds, which means its maximum equity stake if no shareholders participated in the rights issue would be 42 per cent -- below the trigger for a takeover event. It's possible that when conversions do take place they will be limited to a maximum of 3 per cent every six months to take advantage of the "creeping takeover" exemption.

Gunns has 848 million shares on issue but the recapitalisation would boost that to 3.2 billion, including 1.2 billion from the rights issue and 1.2 billion from the Chandler stake after conversion of the bonds.

Holders that don't take up their entitlements to the rights issue would face massive dilution -- a 10 per cent stake, for example, would reduce to 2.65 per cent. However, they would receive some compensation by being able to sell their rights on-market.

Gunns had $580m of debt in December but the proceeds of recapitalisation together with planned asset sales of more than $300m leave the company debt-free and give it headroom to raise some debt for the pulp mill.

Gunns proposes to contribute trees valued at $700m-$800m, as supply for the mill, and would probably seek additional equity of up to $500m.

Gunns says the recapitalisation will require shareholder approval and it will be obtaining an independent expert's opinion on that. If the expert's report is adverse, the transaction is unlikely to proceed.

That indicates Gunns will be seeking shareholder approval under section 611 (7), one of the takeover exemptions that allows shareholders to approve the issue of more than 20 per cent to a party and to forego their rights to a takeover bid.

But it remains a takeover by any other name.

Gunns' last stated net tangible assets was $1.04, treating the Forest notes as debt, which means there is a value gap, suggesting Chandler's proposed investment is opportunistic and at a cheap entry price. The expert's report will therefore be awaited with interest.