gunns to buy timbercorp's plantations?

'Timbercorp's only hope
The 18,500 investors who bought timber in plantations to be managed by Timbercorp as a way of reducing tax have every reason to be frightened. The banks and other lenders who have loaned Timbercorp around $800 million should be petrified. Timbercorp is insolvent and will not be able to manage the forests which are now in long term danger, although the administrators will handle the issues over the short term.

The Timbercorp plantation investors need a new manager and the only one available in Australia is Gunns, the Australian timber giant. Timbercorp's lenders may also need to call on the company's expertise.

This is where the Timbercorp plantation holders may get lucky. The price of pulp is on the rise again and according to European reports that two of the world's top pulp makers are competing to enter a 50/50 joint venture with Gunns to develop the Launceston pulp mill. And if the reports are right, then the Tasmanian pulp mill will go ahead because if just one of those pulp companies signs up then European bankers will almost certainly back the project. Gunns will not comment on the reports.

This week the Tasmanian newspapers are reporting that shaft tubes and boilers for the pulp mill power plant which were ordered about two years ago and have been stored overseas, have arrived in Australia. My guess is that this is more a logistic exercise rather than a signal that the starter's pistol is ready to fire. Nevertheless on my arithmetic, Gunns appears to have already invested $100 million in the preliminaries and plant orders. This prior expenditure will count towards its equity should the deal proceed.

However if we assume things at Gunns will get cracking before June 30, then Gunns will be in a much better position to take on the management of the Timbercorp plantations and perhaps buy the Timbercorp owned land if the price is right and the administrators can overcome the difficulties created by Timbercorp’s sale and lease back of land. Timbercorp got into trouble because its financial model was akin to a spec builder who, to stay solvent, had to keep selling houses.

Timbercorp bought land and was funding it through borrowings. The land did not generate substantial operating income until the timber was sold – often 10 to 15 years after planting. The cash to pay interest on the borrowings and manage the forests came by selling more plantations, usually just prior to June 30 each year to maximise tax efficiency. Last year sales fell and they do not look at all good this year. So suddenly the cash flow to service the debt and maintain the forests has dried up. Meanwhile the plantations are not mature enough to generate cash flow.

Those who had loaned Timbercorp $800 million, including the banks, suddenly realised they were vulnerable and turned off the money tap. It was all over for Timbercorp.

Gunns has a substantial forest management business but CEO John Gay was too experienced to rely on the sales of forests each year to be viable. Gay is well known as an enthusiast for timber lands and forest management and if Timbercorp's model can be simplified this is a great chance for Gunns to secure excellent timber assets and expand its investor base.

The two other potential buyers in Australia are Great Southern and Futuris. Neither of these companies is in any position to take on Timbercorp assets, the collapse will affect their plantation sales in the next two months which will put their own timber operations under pressure. Gunns may even be offered their operations as well.

It is possible overseas buyers will come in and the administrators will be trying to secure a second buyer so as to make John Gay pay a higher price. But at least Timbercorp forest holders know that there is one buyer should the Gunns pulp mill goes ahead. Timbercorp's plantation holders should watch every Gunns pulp mill announcement in coming months. '

http://www.businessspectator.com.au/bs.nsf/Article/Timbercorps-only-hope-pd20090423-RD8UP?OpenDocument&src=sph