Eureka - Hybrid Hell is Here

Posted 30 January, 2012                                                    Twitter: @PaperlinXsux

Hybrid Hell. What on earth happened to PaperlinX hybrids? by Rachel Williamson, Chief Reporter  
Eurekareport    Link here

This is a concise and accurate report of PaperlinX's dealings with its hybrid holders PXUPA. It explains why I created PaperlinX-suX in mid November, 2011.

In early January, Gaby Berger formed Pxupa Investor Group Supporters - PIGS.

In one month PIGS has attracted sufficient supporters to block any opportunistic attempt that doesn’t properly recognise PXUPA. Thank you, but we may need more for the future.

Our position is simple, because it is enshrined in the representations made in the PaperlinX SPS [Step-up Preferred Securities] Trust Product Disclosure Statement [PDS].

1.        As Preferred Equity, we are entitled to the first $285 million in the capital structure of PaperlinX;

2.        We are concerned first about preserving our Capital, of $285 million, and then receiving regular Distributions;

3.        As we invested in an Income Security - we require our Distributions paid whenever PaperlinX has sufficient available cash, not at the whim of its directors; and

4.        If there is any Change of Control Event we want our full entitlements pursuant to the PDS.

Experience to date is that the only way for PXUPA holders to be heard and receive a fair deal is to present a united front.

Please read this excellent summary then register your interest with PIGS.

              This blog is the personal opinion of the author and not investment advice.

Week 11 in Review

Posted January 30, 2012                                                     Twitter: @PaperlinXsuX

       This blog is the personal opinion of the author and not investment advice.

Life was comparatively quiet on the PaperlinX front last week during an equally quiet Australia Day week on the market.

But there is always news …

Review of Week No. 11

1.              What are the major shareholders doing at PPX?

2.              Rumour Mill.

3.              What did Mr Market say last week?

4.              Alternative valuations of PXUPA.

5.              World and Australian Equities.

6.              Woolworths beefs up board with three new non-executive directors.

7.              What’s ahead in the diary?

1 What are the major shareholders doing at PPX?

Maple-Brown Abbott (MBA) announced a further sell down to 9.15%. It stood at 12.36% at the start of 2012.

MBA’s previous activity on the register, before January 2012, was in August 2009, which is along while ago. See details here.

Meanwhile Orbis came out aggressively on the same day as the MBA announcement with an AFR headline "Orbis seeks sale of PaperlinX assets”. If you missed last week’s update, the full details are here.

This was the most hostile of a series of public comments by Orbis about PaperlinX dating back to August 2011. Read a couple of others to appreciate the Orbis position.

5 Jan 2012	PaperIinX deal looks dead at birth This is a ‘must read’ for anyone uncertain about what Orbis wants to do to PXUPA Holders. This is war between PPX and PXUPA. It also has Orbis contemplating new management at PaperlinX.
29 Aug 2011	Buy back hybrids, PaperlinX told “PaperlinX’s biggest shareholder has called on the troubled paper merchant to rid itself of its controversial hybrid debt instruments.” To reassure our PXUPA supporters, the only controversial aspect of hybrids PXUPA is that they stand ahead of all ordinary shareholders to the tune of $285m.

We highlight these simply because Orbis is the major shareholder in PaperlinX and apparently the sole spokesperson for the ordinary shareholders.

Curiously, Orbis isn’t buying at these levels but MBA is selling.

2 Rumour Mill

Feedback received at SuX is that small private advisory firms are running the ‘value’ ruler over PXUPA at these prices.

If you have any juicy tips, anonymity is guaranteed – see my contact details here.

3 What did Mr Market say last week?

PXUPA and PPX both underperformed the ASX200 in shortened Australia Day week with low volumes overall.

Weekly Price Change		Comment
PXUPA	-6.45%	Down, but the chart looks better than PPX.
PPX	-2.86%	Again, second lowest all-time weekly close.  Looking weak.
XJO	+1.15%

4 Alternative valuations of PXUPA

On Wednesday we’ll release a detailed analysis of alternative valuations of PXUPA. You may be surprised by our findings.

5 World and Australian Equities

Last week, Federal Reserve Chairman Ben Bernanke signalled that the US Fed would keep interest rates low at least through 2014.

Why is this relevant to PaperlinX? If there is to be a PE acquisition, lower interest rates make the financing easier for the PE firm.

The normal negativity about Dec 2011 interim figures is now appearing in the financial press. PaperlinX will be in the firing line due to:

1.      The Company’s alert on financing covenants issued Dec 23, 2011 –   see here;

2.      Strong AUD; and

3.      On-going problems in Europe.

6 Woolworths beefs up board with three new non-executive directors

Read on to see why this is relevant to PaperlinX; given WOW’s apparent lack of traction at present and its having a new MD, Grant O’Brien appointed 1 October 2010.

Here is an extract from The Australian today.

“The retailer said today that Christine Cross, David Mackay and Michael Ullmer would join its board.

Ms Cross retired from Tesco, the British supermarket giant, in 2003 after a career in which she was responsible for Own Brand development, global sourcing and business development. Ms Cross, a food scientist by background, now runs a retail advisory consultancy.

Mr Mackay retired as president and chief executive of Kellogg in 2010, having worked for the cereal-maker in the Australia, the UK and the US. He also ran Sarah Lee Bakery in Australia and is currently chairman of Beam, the US maker of Jim Beam and other spirits.

Mr Ullmer retired as deputy group chief executive of National Australia Bank in August last year. Prior to that, he was chief financial officer of the Commonwealth Bank of Australia. Mr Ullmer is currently a director of Lend Lease.”

Full story here. and an update here.

These new directors all hold skills relevant to the businesses of Woolworths and at the highest levels.

I wonder whether board changes at PaperlinX are being considered by Simon Marais in his calls for management changes.

7 What’s ahead in the diary?

Updated weekly.
The next few weeks will be testing times for PaperlinX and ordinary shareholders. Some key events on the agenda:

PaperlinX will release its half-year figures by late February

1.    What will be the write-downs this time;

2.    Will it breach bank covenants and what will this trigger;

3.    What will be PaperlinX’s NTA as at Dec 31, 2011; and

4.    Who’ll win the quiz for the nearest correct entry for item #3? See quiz entry details here. 

Orbis foreshadows meeting with PaperlinX following its interim results

That will be interesting for two reasons:

1.    It appears that Orbis wants Marchant’s head to roll; and

2.    Orbis has been sending mixed messages to PaperlinX.

Antalis will release its full year accounts in February too

This will be an excellent guide to the European and UK markets for PaperlinX watchers.

Watch the RE

1.    Will the RE revise its valuation of PXUPA as at Dec 31 in light of the PaperlinX half year accounts; and

2.    If so, will it offer a ‘lay person’ explanation of any revised directors’ valuation?

Watch the PPX holders too

1.    How will ordinary shareholders respond to the current and any future proposals – i.e. what will Mr Market say this week;

2.    Will ordinary shareholders leave Orbis to be their sole spokesperson; and

3.    Will Maple-Brown Abbott continue its sell down of PPX from 9.15%?

Remarketing of PXUPA by June 2012

Another headache for PaperlinX, when it least needs one.

And this excludes any new moves by PE. Stay tuned.


This blog is the personal opinion of the author and not investment advice.

Orbis vs PaperlinX

Posted January 23, 2012                                                      Twitter: @PaperlinXsuX 
          This blog is the personal opinion of the author and not investment advice.
It was a busy Week #10 for SuX and PIGS, culminating in the much publicised meeting between representatives of PIGS and the Responsible Entity (RE). 

If you’re on our mailing list you’d have received PIGS Bulletin #2 by now, otherwise it’s available here soon.

This morning’s press revealed fighting words by Orbis. See here.

The AFR headline reads "Orbis seeks sale of PaperlinX assets”, but hang on, that’s exactly what Simon Marais didn’t want back on Jan 5, just 18 days ago. At that time he was reported in the AFR as saying:

Mr Marais said a break up does not make sense for equity holders.

“The moment you break the company up, you realise the value,” he said. “This doesn’t make sense for equity holders to do that because they can’t get back any money since bond holders get paid first.”
See full details here.

On reading today’s article, the headline could easily have been: Orbis wants Marchant sacked i.e. no Europe logically means no Marchant; or simply Orbis attacks PaperlinX. 

Orbis does seem conflicted.

At a glance, here’s how PaperlinX-suX saw Week #10.

1.            Orbis exposed

2.            Key takeouts from PIGS Bulletin #2

3.            What did Mr Market say last week?

4.            Good news for PXUPA holders

5.            Where to from here – onward and upward

6.            Where do we sit at the negotiating table?

7.            PaperlinX stumbles yet again, oh dear

8.            More debunking of Marchant’s vision

9.            RE vs PXUPA Holders vs Auditor and PaperlinX

10.       Private Equity – is it an ‘Offer’ or a ‘Proposal’?

11.       What’s ahead short term?

1 Orbis exposed

This week started on Saturday with The Australian exposing double standards by the management and staff at Orbis.

Management at Orbis bags PXUPA yet three of its analysts invest in them. Go figure.

This conflict was originally posted here,

2 Key takeouts from PIGS Bulletin #2

There is one overriding message; PaperlinX can run but it cannot hide.

Thanks to agitations by PaperlinX-SuX and PIGS, keen interest by the financial press and independent financial advisors; everything is now coming out into the open.

It beggars belief that PaperlinX could have condoned a PE proposal of $0.09/$21.85 that circumvented Change of Control triggers in the PDS. Shame, shame and more shame on PaperlinX.

Maybe this proposal wasn’t an ambit claim but simply testing to check the alertness of PXUPA holders, and the resources of SuX and PIGS. Cynical yes, but an easy way to potentially save $75-100M.

Anyway, the RE’s ASX Release on Thursday clarified matters for everyone.

3 What did Mr Market say last week?

The hybrids enjoyed an outstanding week to 20 Jan 2012, clearly outperforming ordinary shares PPX.

Weekly Price Change		Comment
PXUPA	+14.48%	Highest weekly close since Fri Nov 18, 2011 (9 weeks). Looking strong.
PPX	+7.69%	Second lowest all-time weekly close. Lowest ever was last week. Looking weak.
XJO	+1.04%

4 Good news for PXUPA holders

More press commentary means more supporters for PIGS.

Some of our supporters may feel anxious with all the press commentary; however it creates an underlying positive for PXUPA holders. There is a direct correlation between press coverage, good or bad, and voluntary registration of supporters.

5 Where to from here – onward and upward

PIGS is within sight of the crucial 25% blocking figure, principally from voluntary investor registrations. This is before approaching institutional or custodial holders; or centres of influence such as brokers and financial planners with large numbers of identified clients holding PXUPA.

PIGS continues to gain voluntary support from private investors of all sizes, and from virtually everywhere around the globe.

This isn’t surprising because since inception in November 2011, the audience of www.PaperlinX-suX.com, as measured by pageviews per region, has been:

OZ & NZ	52.86%
North America	23.36%
UK & Europe	21.65%
ROW	2.13%
	100.00%

The audience is larger than my wildest expectations. Who are they? We don’t know but it certainly reflects the PaperlinX global footprint; so it looks like clients, competitors and employees are interested too.

6 Where do we sit at the negotiating table?

While we have no reserved seat, our position is stronger than most people think, which probably accounts for the sensational claims made by Orbis in the AFR on January 23, 2012.

If this gets down to a battle between PPX and PXUPA holders, we believe we currently hold the stronger hand. PPX holders appear to be solely represented by Orbis, being one holder with 18.29% voting power. We beat that on both counts.

7 PaperlinX stumbles yet again, oh dear

Has Jarrod Poole, Manager Corporate Affairs, has caught the No New News affliction? If No New News means nothing to you, please read PaperlinX in Denial here published Nov 19, 2011.

Here is Jarrod’s written response to an investor’s question, which subsequently came to our attention.

“The suggested transaction [the December 23 announcement] would be structured such that there would be no Change of Control Event.  It would be as you suggest an off market offer at a given value which each class of holders could accept or not.  If rejected by either class the transaction would not proceed.”

Question 1: How does Jarrod Poole know about “would be structured”; is there more to know than is being made available to the market?

Question 2: It is inconceivable this response would have been made without peer review. Apparently PaperlinX is of the view that the hybrid holders could take or leave it, and fend for themselves.

Yes Dorothy; we would have been dudded, in direct contradiction to the plain English representations made in the Hybrid PDS.

These guys make David Tweed look respectable. Offshore readers may care to Google search {“David Tweed” + share + shark}.

Note: The RE advised us at the meeting it would not lend support to such a transaction.

8 More debunking of Marchant’s vision of accelerated diversification

Regular readers may recall Toby Marchant’s quote in The Australian on Sep 7, 2011 – see here for an excellent interview.

“The new strategy will include accelerating diversification away from simple paper merchandising to create a company capable of investing in a sustainably profitable future.”

It was justified on the basis of higher margins, economies of scale etc. Problem is that everyone is paper merchanting is doing it.

"The growth of Antalis’ businesses on high value-added markets (Packaging, Visual Communications) and in fastgrowing regions (South America, South Africa, Asia) should also help lift the Group’s operating performance."

See more details here.

News: It came to our attention this week that Antalis continues to be aggressive in this area with its acquisition of Ambassador Packaging in the UK. It’s not a large acquisition but confirms the industry trend. Ref here.

Diversification is pure spin by Marchant. The board was dumb to buy this line. It recruits as MD a man with 30 years experience in fine paper, so he goes off diversifying out of paper. In the end this too will be a low margin business.

Some may rebut this with the ‘common client’ argument; however it failed dismally with Fosters’ diversification into wine. Perhaps Lyndsey Cattermole missed this after 10 years as a director of Fosters and now a director of Treasury Wines Estates Ltd.

What will be Toby Marchant’s next trick?

9 Responsible Entity vs PXUPA Holders vs Auditor and PaperlinX

This is an extensive piece and will be dealt with in detail soon.

10 Private Equity – is it an ‘Offer’ or a ‘Proposal’?

And does it matter? Yes.

An offer imposes obligations on the offeror. Proposals are just talk.

The financial press has typically referred to “it” as an “offer”, but this isn’t the case according to James Orr at PaperlinX and he should know. The following is an extract from print industry journal ProPrint on Jan 20, 2012:

Paperlinx executive general manager corporate affairs James Orr told ProPrint it would be wrong to describe the private equity firm's approach as a takeover bid.

"It's not an offer – it's a proposal that's been put that we advised the market of."

Orr said there was no deadline for the private equity firm to finalise any bid.

The 23 December announcement also revealed Paperlinx had received "separate proposals to acquire parts of its business".

Orr said he couldn't reveal how many companies had made proposals.

So what you ask?

What James Orr said is totally correct and is consistent with his previous, and only, public comment. He certainly hasn’t been at pains to correct the popular misinterpretations, except to ProPrint.

Again I smell a rat. Perhaps it suited PaperlinX to permit popular misconceptions to flourish.

James Orr is economical with words. As one who has had numerous written and oral exchanges with him, I advise all to read his comments forensically. I’m sure he doesn’t tell untruths; it’s just difficult to ask him the right question.

Well done to Nick Bendel at ProPrint. Original here.

11 What’s ahead short term?

The next few weeks will be testing times for PaperlinX and ordinary shareholders. Some key events on the agenda are:

PaperlinX will release its half-year figures by late February

1.    What will be the write-downs this time;

2.    Will it breach bank covenants and what will this trigger;

3.    What will be PaperlinX’s NTA as at Dec 31, 2011; and

4.    Who’ll win the quiz for the nearest correct entry for item #3? See quiz entry details here. 

Orbis foreshadows meeting with PaperlinX following its interim results

That will be interesting for two reasons:

1.    It appears that Orbis wants Marchant’s head to roll; and

2.    Orbis has been sending mixed messages to PaperlinX.

Antalis will release its full year accounts in February too

This will be an excellent guide to the European and UK markets for PaperlinX watchers.

Watch the RE

1.    Will the RE revise its valuation of PXUPA as at Dec 31 in light of the PaperlinX half year accounts; and

2.    If so, will it offer a ‘lay person’ explanation of any revised directors’ valuation?

Watch the PPX holders too

1.    How will ordinary shareholders respond to the current and any future proposals – i.e. what will Mr Market say this week;

2.    Will ordinary shareholders leave Orbis to be their sole spokesperson; and

3.    Will Maple-Brown Abbott continue its sell down of PPX from 9.15%?

Remarketing of PXUPA by June 2012

Another headache for PaperlinX, when it least needs one.

And this excludes any new moves by PE. Stay tuned.


This blog is the personal opinion of the author and not investment advice.

Orbis threatens PaperlinX

Posted 23 January 2012                                                      Twitter: @PaperlinXsuX


See today's AFR here.
The headline is mild compared with the content. 

How to profit from PaperlinX

Posted January 16, 2012                                         Twitter: @ PaperlinXsuX

Well known Australian ‘event-driven’ hedge fund manager, and occasional columnist, Tom Elliott ^ describes a sure fire way to make money out of PaperlinX. It was published in the Eureka Report today - see here.

If you hold PPX shares, first take a stiff drink before you read the article.

According to Elliott, it’s an arbitrage play:

·        Go short PPX; and

·        Go long an equal dollar value of PXUPA.

His aim is to win regardless of the outcome.

1.    If PaperlinX is taken over; he reasons there is more upside in PXUPA, because of its blocking capability, than downside risk in being short PPX.

2.    If PaperlinX goes bust, you profit on PPX and may profit on PXUPA.

What if nothing happens?

Here we must rely on Tom Elliott’s record in these matters. His hedge fund is ‘event-driven’. Implicit in his commentary is that when companies like PaperlinX are in play, something happens; either:

·        A successful takeover occurs which will profit PXUPA more than PPX; or

·        Any proposed takeover is thwarted. Historically, failed takeovers usually result the price of the shares falling.

In my opinion, the latter is the most likely scenario with PaperlinX. This is because the PPX holders, led by Orbis, are being foolishly optimistic about the underlying business of PaperlinX and hence the value of their equity.

What will be the NTA of PPX at 31 Dec? 

Enter QUIZ here Nice prize.

Pxupa Investors Group Supporters - Join PIGS here

This blog is the personal opinion of the author and not investment advice.

^ Tom Elliott is both Managing Director and a co-founder of MM&E Capital Limited, a Melbourne based hedge fund.

Before founding MM&E in 2001, Tom was an Executive Director of investment bank Flinders Capital Limited. He has also worked with stockbroker McIntosh Securities Limited, Canadian investment bank Wood Gundy Inc. and retailer Country Road.

He is a commentator on Melbourne radio stations 3AW and 3RRR, and appears both regularly on the ABC's Inside Business program and irregularly on the evening news bulletins and current affairs programs of Channels 7, 9 and 10.

Tom holds a Bachelor of Commerce from the University of Melbourne and a Bachelor of Arts (Philosophy, Politics and Economics) from Oxford University (UK).