[This feature was published in the March issue of ProPrint magazine]
Many would say they saw it coming, but that didn’t make it any less of a shock. On 20 February, the third largest print group in Australia collapsed. The shockwaves were felt immediately. It will be a long time until they fade.
By the time you read this, deals will likely have been done for Geon. New owners will have been found. For many, life will have moved on. But there is still a need to reflect on the largest corporate failure in Australian printing history and analyse what happened over the days that followed.
When was the writing on the wall for Geon? Some would go back to November 2005, when Gresham Private Equity took a controlling stake in Pacific Print Group. Others would say it was last year, when Geon’s debt was bought by a pair of investments funds, New York-based KKR and Australian-based Allegro. Others still would say it came on the day KKR and Allegro, collectively known as KKRM, replaced Gresham as Geon’s owners.
But the day things really started to unravel is right there in black and white in a report from Geon’s administrators, PPB.
On 5 November, PPB’s Phillip Carter was called by one of Geon’s directors, “who had concerns as to the solvency” of Geon and its associated companies. Over the coming months, PPB met with Geon directors multiple times. One of the options on the table was voluntary administration.
Things came to a head on 20 February. Geon had been trying to secure a $3 million finance facility from KKRM. When the new owners would not agree to this lifeline, Geon was left with no other option but to file for administration.
PPB was brought in as administrator with the job of looking after the interests of the unsecured creditors, including the employees. KKR and Allegro then appointed receiver McGrath Nicol, whose task it is to represent the secured creditor.
As the news was revealed to the industry, another slant to the story was soon being thrown around. KKRM, having essentially failed to save Geon from receivership, then made an offer to buy the company. Its offer would be used to pay off the group’s debts, namely the money Geon owed KKRM.
It was not long before the word “phoenix” was being thrown around. However, the more accurate term would be “pre-pack”. This arrangement, while an unknown concept for many in Australia, has been common enough in UK printing.
Standing for “pre-packaged insolvency”, it essentially means the restructuring plan is arranged before the company files for administration. Fans of the arrangement say it is the best way to swiftly secure the company and jobs. After all, the value of a business immediately stats to deteriorate once it is placed in administration.
But critics of pre-packs say they are bad for unsecured creditors. Without a proper bidding process on the open market, how can the administrators and receivers ensure the deal provides the best return for unsecured creditors?
In a memo to staff, Geon chief executive Graham Morgan compared Geon’s situation to last year’s sale of rival Blue Star. Both groups had struggled to perform, largely because they were lumbered with too much debt during the consolidation period. Both had teetered on the edge of failure.
“The process Geon is going through is similar to what has happened at many other print businesses that were acquired by domestic private equity firms, including our key competitor Blue Star,” he wrote.
Suppliers pointed out one key difference. When Tom Sturgess bought out Blue Star New Zealand and Geoff Selig acquired Blue Star Australia, they both made it abundantly clear that suppliers would be paid. In the Geon situation, it was feared that suppliers would be left to foot the bill.
In the days that followed, suppliers decided enough was enough. Printers, including IPMG chief executive Stephen Anstice, also spoke of a boycott.
“We cannot conceive how the reported plan of KKR and Allegro to emerge as the new owners of Geon can be allowed without all creditors being paid and have called on the PIAA to explore what action can be taken to protect the suppliers and staff of Geon,” said Anstice.
“IPMG is considering instituting a policy where we will not support any suppliers who decide to do business with Geon should it re-emerge under the ownership of KKR and Allegro leaving creditors unpaid,” said Anstice.
In an open letter, creditor Avery Dennison said it would not supply Geon until all its debts are paid. “Support to the industry, through supply, comes with it an expectation of all debts being paid and the reported approach by KKRM to its suppliers, in attempting to walk away from this obligation, is both puzzling and disappointing,” wrote David Martin, general manager of Avery Dennison Materials Australia & NZ.
In a letter passed to ProPrint, receiver Shaun Fraser urged the paper merchants to recommence supply. “We explained to you that during the receivership, any order committed to by the receiver would become a liability of the receiver and on that basis is afforded ‘super priority’. There is, therefore, no credit risk for suppliers during the receivership period. You have indicated that a pre-condition of continued supply is that your pre-appointment debt is paid in full. This is not possible. Any such ‘hostage’ payment would be at the expense of employees as that payment could only be made from circulating asset recoveries, against which employees have a priority claim,” wrote Fraser.
The stakes are high. In the middle are the employees. It would not be the first time that administrators, receivers or would-be purchasers of a failed business have used jobs as leverage to justify a controversial sale. But this time, suppliers would not be swayed.
Spicers is owed more than $1 million. In a statement the paper merchant wrote: “As a small supplier to Geon and an unsecured creditor, Spicers has determined that it is not in a position, nor is it Spicers’ role to attempt to ensure the financial future of one of our customers. Spicers empathises with the plight of Geon and in particular its staff, but it cannot put its own business and employees at risk by agreeing to supply significant stock with no certainty concerning the future relationship.”
Administrator PPB estimated unsecured debts totalled at least $16 million, across more than 400 creditors. That figure did not include employee entitlements, which could rise as high as $20 million.
It would be impossible for many suppliers to find a silver lining in this. It is expected some of the smaller suppliers may not be able to wear the bad debt and will become casualties themselves.
Suppliers are stuck between a rock and a hard place. Damned if they do and damned if they don’t. Stop supply and Geon may close, ruling out any chance of repayment. Recommence supply and they would get branded as “the worst person in the world”, as one supplier told us.
The other potential losers out of this will be the credit insurers. Kirk Cheesman, managing director of insurance broker NCI, said: “The credit insurance has been very good to the paper industry. They have paid a lot of claims; they have really supported the industry but there comes a time when they will view it as a high-risk industry.”
Any pain for the insurers could, by extension, hurt print and paper companies in the form of higher premiums, or even insurers pulling out of print altogether. Cheesman said it was unlikely an insurer would react solely to the Geon situation. “They would review the past three years; there are a number of components that dictate the pricing of a policy.”
There are two ways to perceive the saga. The widely held theory – and one to which a majority of the industry seems to subscribe – goes like this: a pair of investment funds engineered a situation whereby Geon could get rolled into insolvency then be bought back without the debt. Unsecured creditors would lose out. Suppliers fought back, saying enough is enough. They refused to supply the receivers because they disagree with the idea of premeditated plan for Geon to re-emerge, debt-free.
While an attempted phoenix or pre-pack seemed to be the dominant theory, there were others, especially those within Geon, who saw the strategy in a whole different light. They said KKRM did intend to repay unsecured creditors at least some of the pre-appointment debt.
One Geon insider told ProPrint that the real reason suppliers stonewalled the receivers was because of pressure from the rest of the industry, particularly the line in the sand drawn by IPMG. This source suggested the primary reason for the blockade was not so much the fear of a phoenix but merchants buckling to a campaign by other printers who saw the opportunity to remove a rival.
It is unlikely to be a popular theory. But there are at least a few things backing it up. For one, the new owners of Geon would need the support of suppliers going forward. It seems naive on their part if they assumed suppliers would happily sell to them despite having lost millions to the company’s previous incarnation.
But if this were true, and if KKRM had intended to repay creditors, wouldn’t they have been shouting it from the rooftops, rather than letting scuttlebutt run riot?
They never shouted, but the receivers did hint that KKRM would honour debts racked up before Geon collapsed. In his letter to merchants, McGrath Nicol’s Shaun Fraser wrote: “As you are aware, the secured creditor has expressed interest in acquiring the business through the receivership process. The interest outlined to us would involve acquiring the majority of operations. They have expressed a willingness to recapitalise the business and work with unsecured creditors on agreeing on go forward terms, which would include options for the repayment of Geon’s pre appointment debt.”
Fraser goes on to claim that KKRM and the receivers tried to open constructive dialogue with the suppliers, who “rebuffed good faith offers to open a dialogue around continuing to supply the business”.
Which scenario is more accurate? In such a complicated situation, one of complex financial instruments and heightened emotions, the reality may be impossible to pinpoint. At time of writing, one version of the narrative was being widely purported. By time of publication, the landscape may have shifted.
It will almost certainly be a moot point, at least in terms of Geon’s future. The damage has been done. The situation was a tinderbox. It sparked quickly and burned furiously. Within days, there was little hope of calm analysis.
On 1 March, just a week after their appointment, the receiver sent out a statement saying because “key paper suppliers of Geon are continuing to withhold supply of critically needed paper… the receivers will need to undertake an urgent appraisal of the business to consider cost-reduction strategies that could involve plant closures and job losses.”
As ProPrint went to press, it seemed likely the group would be broken up and sold. Geon Queensland had been closed. Buyers for other divisions were lining up, including management buyout teams and rival companies.
There will be plenty of time to pick through the ashes of the group’s collapse. It seemed likely they would be the remains of a failed business. The chances of a new company rising from the ashes, debt-free, seemed to have been extinguished.
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