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Posted 9 January 2012 Twitter: @ PaperlinXsuX
Orbis in vicious circle at PaperlinX #1
What started as a promising virtuous contrarian cycle for Orbis now seems to have become a vicious circle. What went wrong?
For a quick background, first review Table 1 of Key Shareholders showing movements in substantial shareholdings in PaperlinX over 2007-2011. It is sourced from Annual Reports 2007-11 and ASX Notices.
What is interesting is why Orbis moved from 12.96% to 18.46%? More about that soon in Orbis in vicious circle at PaperlinX #2
Orbis is a self-proclaimed “contrarian (deep-value) equity investor”. Unfortunately they got it wrong with PaperlinX. Maybe its time for Simon Marais to accept his mistake and move on. Here are some facts for consideration.
Fact 1 Graeme Shaw, an analyst at Orbis since September 1997, indirectly holds PXUPA
Fact 2 Simon Mawhinney, an analyst at Orbis since February 2006, directly holds PXUPA.
Fact 3 Brett Rock, an analyst at Orbis August 2005 - February 2011, established Jencay Australia Investment Fund launched in July 2011 – see here.
Jencay states: “This Fund will only buy securities listed on the Australian Securities Exchange (ASX) that Jencay considers to be bargains. If bargains are scarce it is usually a reliable indicator that the market is overpriced and the Fund will hold cash at those times, ready to pounce when the inevitable correction happens.”
In its latest, and only, quarterly report for September 2011 Jencay reports PXUPA as its largest investment at 8.1% of equity exposure - hence bought since July 1.
Jencay’s Summary Investment Case: “Perpetual preference share issued by the world’s second largest paper merchant with operations in Europe, North
and Australasia. Current price is 25% of face
value with a running yield approaching 30%. We believe that even in a
liquidation scenario (considered unlikely) investors would receive a multiple
of the current share price given the solid asset backing (consisting of paper
inventory and receivables) and ordinary equity buffer in place.”
Fact 4 Orbis launched its Orbis/SM Australia Opportunity Fund on 1 July 2011 also. Strange coincidence. Full details available here.
In its latest, and only, quarterly report for September 2011 the fund reports PXUPA as 6.7% of equity exposure - hence bought since July 1. Second strange coincidence.
Fact 5 On September 7, 2011, Simon Mawhinney was reported as saying about PaperlinX:
"The amount of value destroyed in this company is unimaginable," says Simon Mawhinney, an analyst at Orbis Investment Management.
Mawhinney says it’s too early to comment on Marchant.
"We are hoping that he is able to stem the losses and return the company to profitability," he says. "We will never get our money back on this investment but we would expect to do well from here."
But he adds a note of doom. "In this instance, it might just not be possible. I don't know what will win out, good management or terrible macro trends. But at this stage, I wouldn't be confident that management can do it," Mawhinney says.
Click to view his statements & those of Toby Marchant We can only assume Simon Mawhinney’s comments were made with his boss’s imprimatur.
But what did his boss say elsewhere?
August 29, 2011
“Buy back hybrids, PaperlinX told” reports the AFR, see here.
PaperlinX’s biggest shareholder has called on the troubled paper merchant to rid itself of its controversial hybrid debt instruments.
Simon Marais, managing director of Orbis Investment Management, said that by buying the instruments back over time, the company would help remove the overhang on its shares.
“Wind back the hybrid with a buyback, rather than pay a dividend,” Simon Marais said. “Then in three or four years’ time, reinstate dividends. PaperlinX would have the same expense as paying a dividend. This should be good for unit holders. This would be better for equity holders [longer term] and debt holders, as they would get some liquidity.”
1. All hybrid holders want is their income because PXUPA was sold as a fixed income investment.
2. If PaperlinX hadn’t sneakily stopped the Dec 2011 distribution, after a plethora of positive financial news preceding its AGM, then possibly none of this would have happened. I for one would be sipping Pina Coladas, blissfully ignorant of PaperlinX’s real problems, and not running this blog.
3. Because James Orr gave me the bum’s rush I dug deeper, see PaperlinX in Denial published November 19, 2011.
January 5, 2012
“PaperlinX deal looks dead at birth” reports the AFR, see here.
Simon Marais was reported to say “the way forward for the two parties [PPX and PXUPA] was very different”
1. Understatement to date, because the reasons for the issue of the two classes of security are totally different; as are the motives of their respective buyers. Investors buy equity (PPX) for growth and corporate debt (PXUPA) for income.
2. Like Shaw, Mawhinney and Rock, Orbis too could have bought PXUPA from the outset, just as it has now done at Orbis/SM Australia Opportunity Fund.
3. Everyone knows and respects Orbis for its contrarian deep-value style of investment – high risk with high rewards. Please don’t blame passive fixed income investors when your plans go wrong.
Simon Marais then went on to make more generally antagonist towards about hybrid holders. It’s a good read, especially near the end where he said:
“The way it will be settled is this management or new management will get the company back on the right footing and perhaps buy the hybrids bit by bit back over 10 years.”
1. Does Simon Marais know more than is on the public record? Perhaps PaperlinX should respond here?
2. Has Simon Marais become disillusioned with the Board and Toby Marchant?
3. If a 10 year moratorium on PXUPA distributions, and thus PPX dividends, is the best suggestion from one of
most astute investors, then best PaperlinX die with dignity now. This isn't a new
thought as it was raised early on Is PaperlinX Viable published
November 17, 2011. Australia
4. Suggesting a moratorium on distributions and dividends for a decade is pure spin. Depending on whether or not PaperlinX meets its banking covenants at 31 Dec, it could be game, set and match for PaperlinX sooner rather than a decade later. All that then remains is to thank the ball boys and girls, or the boys and girls with the balls to stand up and be counted.
Embittered investors in other failed businesses, including fixed income/hybrid investors, have learned to stand up for their rights as best demonstrated by certain actions funded by IMF (Australia) Limited – see here
Regardless of the views of Orbis, or the Board of PaperlinX, the motives for investing in PPX or PXUPA are different and by definition adversarial; because debt always ranks before equity. The ultimate means of exiting these respective investments will be determined by equity, not rhetoric.
For those naysayers who’ve delighted in telling me about the rights of PaperlinX to not pay distributions, I remind them that the “right” is temporary whereas the rights of debt versus equity are permanent.
I’m neither a past nor current client of Orbis but respect it as an astute investor. I don’t enjoy seeing any investor lose money.
The purpose of this post is to highlight the conflicting messages emanating from the Orbis camp.
Simon Marais no doubt speaks with authority, and probably some personal financial pain, as he holds 50% equity in Orbis Investment Management. For the professional backgrounds of Drs Marais and Shaw and Messrs Mawhinney and Rock, all mentioned above, see here.