Jarvis Cocker

ANZ will force Gunns to restructure the business, and some of the company’s larger shareholders will push for a serious management shakeup. And the pulp mill? The financial community has long doubted Gunns’ ability to pursue the project without outside help. At the moment, Gunns’ credit is so stretched they couldn’t buy an iPod from Harvey Norman. Let alone borrow $2 billion plus capitalised costs. Instead, Gunns will announce a partnership with an overseas pulp and paper manufacturer, possibly from China, to build the mill. Integral to the deal will be the wood supply agreement with Forestry Tasmania, which could give an overseas company the right to strip Tasmania’s native forests, at the expense of local sawmillers, for the next 25 years.

IT’S BEEN a bleak few days for the Cocker family. Wine stocks are running low. The weather is miserable. And the share portfolio, which needs to continue some form of upwards trajectory to enable Jarvis to maintain his idle lifestyle, has plummeted.

Leading the charge towards oblivion is a holding in Gunns, which fortunately, doesn’t play a major role in any early retirement plans.

The share price touched $1.60 earlier today – a level not seen since the 2002 Commonwealth Games when Australia managed to overcome the might of Lesotho, Fiji and Cyprus to win 82 gold medals.

Some of our media outlets have had a crack at explaining the collapsing share price – with one newspaper even interviewing a financial planner who suggested short selling by hedge funds was to blame.

Hedge funds have nothing to do with retirement investments for the horticultural industry. According to their promotional blurb, they are financial managers who use alternative investment strategies to generate positive returns in both rising and falling markets.

Hedge funds have been blamed for everything from the US sub-prime mortgage crisis to the near bankruptcy of former milkman Eddy Groves’ ABC Learning Centres empire. Except Gunns’ woes have nothing to do with hedge funds.

Instead, it seems that some of Gunns’ largest backers have taken a dim view of last Friday’s statement that after-tax profit would approximate $67 million. Four years ago, the figure was above $100 million. Last year, $88 million. That’s before someone checked the figures, and suggested $74 million was closer to the mark.

In short, Gunns is on the nose in the financial community. Management credibility is shot to pieces, and questions are being asked as to why the ASX wasn’t told of the latest profit slump weeks ago.

And that’s not all. What the media hasn’t asked is why things are so grim at Lindsay Street.

As a student of history, as well as being a long-suffering Gunns shareholder, Jarvis has looked back at the company’s financial records of the last few years.

Gunns does two things very well. Make no mistake, this has been, and could be again, an enormously profitable company. Most of that success has been derived from the processing and sale of woodchips. Gunns’ primary talent has been the ability to buy cheap native forest resources from Forestry Tasmania, and flog the taxpayer-subsidised product to Asian customers at a massive gain.

Their second, and less admirable quality, is their ability to borrow funds at an alarming rate, and spend them on sub-standard assets. Auspine springs immediately to mind – Gunns hasn’t made a cent on Auspine, instead inheriting a debt-ridden, public relations nightmare.

Debt, rather than anything else, explains why Gunns is struggling. And those debt levels are scary. We’ll find out just how bad the position is next week, when Gunns release their preliminary final report.

But back to the share price. As part of its “broader review of its capital structure’’ (the first anyone has heard about it), Gunns is considering selling $170 million worth of plantation forest. Presumably that’s good news, although clearly investors focused instead on the $67 million profit figure.

Most of the analysts who cover Gunns talk about the underlying value of the company’s freehold land. Some even suggest the company is undervalued, saying if the land and plantations were sold, shareholders would be in clover.

But John Gay hasn’t sold anything in years, let alone any of his beloved plantation forests. One suspects ANZ has its fingerprints all over the transaction.

Despite shunning the pulp mill project, the fortunes of Gunns and ANZ are inexorably linked. The bank has a hold on all Gunns’ assets, which isn’t surprising given the amount of money they are owed. And with the share price going down the toilet, I suspect ANZ want their money back.

Make no mistake, Gunns is a deeply distressed company. I wouldn’t be surprised if, within days, John Gay will be forced to hand the reins over to someone new (Greg LeStrange springs to mind), ANZ will force Gunns to restructure the business, and some of the company’s larger shareholders will push for a serious management shakeup.

And the pulp mill? The financial community has long doubted Gunns’ ability to pursue the project without outside help. At the moment, Gunns’ credit is so stretched they couldn’t buy an iPod from Harvey Norman. Let alone borrow $2 billion plus capitalised costs.

Instead, Gunns will announce a partnership with an overseas pulp and paper manufacturer, possibly from China, to build the mill. Integral to the deal will be the wood supply agreement with Forestry Tasmania, which could give an overseas company the right to strip Tasmania’s native forests, at the expense of local sawmillers, for the next 25 years.

Let’s see David Bartlett explain that one.