Daylight Robbery

or, hybrids … the gift that keeps on giving

We know that PaperlinX is solvent, because we haven't been advised to the contrary, but it now needs $20M for unspecified reasons. 

$20M is nearly 50% of PaperlinX’s market cap, so it’s a material sum of money to need.

Assume that PaperlinX decided to make shareholders pay for their own losses, like BlueScope Steel was recently forced to do.

You may care to read BlueScope vs PaperlinX below before continuing.

Using the same general terms as BlueScope’s recent capital raising, the figures for PaperlinX would be:

1	Last trade, Mon 21 Nov	$0.083
2	Issued and paid-up shares	603,580,761
3	Entitlement	4/5
4	Discount	40/61

1 x 2 x 3 x 4 = $26,280,500

$23.3M is the maximum possible capital raising. Mitigating factors against this sum would be:

·        BSL has a market cap exceeding $1Bn and was looking to raise an underwritten $600M. By comparison, the PaperlinX figures are miniscule. Small numbers don’t cut the mustard with the big end of town;

and

·        There are strong political reasons for keeping BSL alive; jobs, jobs and possibly the most important of all local jobs – a federal seat. By comparison, PaperlinX is hardly a key industry or employer in Australia.

Which would be the easiest and quickest way for PaperlinX to raise $20M:

1.    A capital raising from PPX holders, like BlueScope;

or

2.    Don't pay two distributions to PXUPA holders?

By two simple board resolutions PaperlinX raises $20-22M without having to justify the reasons to anyone, never paying interest and never repaying the capital. And this sum is nearly 50% of PaperlinX’s market cap.


This means that any financial analysis, like return on equity, is permanently flawed because PaperlinX gets "free" funds. What a joke. I hope this anomaly is considered when assessing executive performance.

And PaperlinX can do it again next year!

This is daylight robbery.       Willie Sutton was right.

PS This post was originally written on November 22, 2011; soon after BlueScope announced its capital raising. The parallels between BlueScope’s and PaperlinX’s capital needs were obvious.

On December 16, the AFR reported under the by-line Book-build after BlueScope investors spurn feel of steel.

“BlueScope Steel’s long-suffering retail investors have snubbed the company’s heavily discounted $600 million rights issue, with less than half the offering taken up.”

So we were right, PaperlinX would have no chance whatsoever of raising fresh equity capital. This makes the stopped hybrid distributions an even more serious breach of good faith by the Board.

BlueScope vs PaperlinX

Most Aussies would be familiar with the plight of another buggy whip business, BlueScope Steel (BSL). BlueScope was spun off from BHP in 2002; similar to PaperlinX being spun off from Amcor in 2000.

As an aside, never buy spin-offs. See here investors’ outcomes over the past five years arising from choosing BHP vs BlueScope and Amcor vs PaperlinX. 

Maybe a coincidence; but maybe not as the businesses of PaperlinX and BlueScope weren’t wanted by their parents.

Anyway, BlueScope is beset with problems and not having free funds at its disposal (aka hybrid debt) had to do the decent thing and raise fresh capital. The basic terms were a fully underwritten 4-for-5 rights entitlement at 40¢, a discount of 34.4% to its pre-announcement close of 61¢.

Return to the PaperlinX story above …