Paperlinx investor demands action

A deal could finally be reached to wipe out the Paperlinx $260m share liability, but it would give hybrid shareholders 80 per cent of the company.

The share swap, proposed by major Paperlinx investor Blue Pacific, would consolidate the embattled paper merchant’s share structure and secure the company’s long-term viability.

While it would give hybrid shareholders only 38 cents in the dollar for their investment eight years ago, Gaby Berger, acting convenor of shareholder advocacy group PXUPA Investor Group Supporters (PIGS), tells ProPrint they would accept it.

“Now that Paperlinx’s extravagant overseas adventures have ended, it is time for it to address its obligations to their shareholders and to the hybrid bond holders along the reasonable lines proposed by Blue Pacific,” he says.

[Related: The ups and downs of Paperlinx]

Blue Pacific and PIGS have also taken aim at the remuneration of the current Paperlinx board, with the $300,000 package for non-exec chairman Robert Kaye firmly in their sights.

In its letter to the board Blue Pacific says, “About two per cent of Paperlinx's $15m operating profits are going exclusively to one non-executive director, and Kaye only owns about $25,000 worth of ordinary shares,” it says.

“It seems that this level of compensation may not be appropriate for a non-executive chairman.”

Berger goes further saying: “The current board is certainly not acting in the best interests of all stakeholders. It is now time for a new team of non-executive directors.”

“All directors should be Melbourne-based and have relevant commercial experience.”

ProPrint reached out to Paperlinx chief executive Andy Preece and general manager of corporate affairs Wayne Johnston to ask what the company thinks of the proposal, but is yet to get a response.

Paperlinx raised $285m in 2007 with an issue of hybrid securities, also known as SPS and listed on the ASX as PXUPA, at $100 each.

While it seemed like a good idea at the time, as the company’s assets and share price have collapsed the hybrid units have become a millstone around its neck as they became more valuable compared to ordinary shares.

Since the merchant has sold or liquidated its overseas operations, the remaining Asia Pacific business has net assets of just $146.7m. This means the hybrid shareholders effectively own 94 per cent of the company.

Paperlinx now has a market capitalisation of just $18m and with ordinary shares worth so little they are worthless as capital to raise equity from the market, or as incentives for top management hires.

The New York investment firm says the company could be worth at least $125m and moving forward with its proposal ‘can unlock substantial value for ordinary shareholders’.

With the Spicers business profitable, if Paperlinx can reach a deal to retire the huge liability it would have a secure footing to prosper in the local market.

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The proposal follows last year’s spectacularly unsuccessful attempt to buy out the hybrids at 14 cents in the dollar in exchange for 52 per cent of the company.

That offer by former chief executive Andrew Price cost $2.1m and was accepted by less than eight per cent of hybrid shareholders.

Price’s plan at the time was to get Paperlinx out of debt and grow the business to dilute the value of the hybrid shares. This obviously did not go to plan.

“I hope they don’t take it. Our aim is to fix the balance sheet and come back with a much lower offer when it has been repaired,” he said at the time.

Price, who is still a major shareholder in Paperlinx, today stopped short of backing Blue Pacific plan, but tells ProPrint the company “should enter into meaningful dialogue with the hybrid holders and stop pretending like the issue is going to fix itself”.

Price earlier this year tried to raise $100m to fix the European business and try another deal with the hybrids, but says he was told not to pursue it by the board.

“I had a plan which would have dealt with the hybrid issue and preserved reasonable value for the ordinary shareholders,” he says.

“Unfortunately I wasn't permitted to fully research that plan and now with the fire sale of Canada and the closure of the European businesses, it looks to me as the majority of the value of Paperlinx will flow to the hybrid holders.

“As a top ten shareholder obviously I am deeply disappointed at this situation.”

It its scathing letter to the board, Blue Pacific also took aim at chairman Robert Kaye’s $300,000 salary, saying it is too much considering the company’s financial position.

Berger agrees with this assessment, questioning the roles of Kaye, a lawyer, and Michael Barker, an actuary earning $100,000, as leaders in the company, and that Preece’s salary at more than $800,000 may also be too high.

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