TFS hit by a mateship dispute

THE most famous thing about TFS Corporation is the presence of cricket legend Adam Gilchrist on the board. Gilchrist and fellow directors in this West Australian sandalwood company face a challenge, as if the thumping protest votes at the annual meeting last month were not enough.

Now, they are in possession of their third requisition from rebel shareholders, who are trying to roll the board and may call the next shareholder meeting as early as January.

The concern is that TFS management has been trying to privatise the company on the cheap - in league with some New York private equiteers - and they have to move as soon as possible.

There is no suggestion that the board is in breach of its directors' duties. Directors may be carrying out their duties to the letter. This is about perception. The close ties don't enhance investor confidence.

At the heart of the dispute is mateship, a little too much mateship around the board table.

Executive chairman Frank Wilson says the board is independent. And on a purely technical appraisal of the ASX corporate governance rules, he may be correct.

In a real sense, though, TFS is the classic case of a company

whose share price is laid low by things that could have been avoided if there were a truly independent board. Trust in the board and management is low, and the TFS stock price is shot.

This is a company that stands at the verge of harvesting one of the most precious woods on earth from its 1350 hectares of sandalwood plantations under management in the Ord Valley. The wood can fetch $100,000 a tonne.

Despite the promise of annuity-style revenues so near, there were 12 changes to the board in 10 months last financial year. Among them were the little-explained departures of the respected Jim Craig and former Howard minister Richard Alston.

The latest requisition of meeting from the rebels aims to roll Mr Wilson, Mr Gilchrist, Julius Matthys and Steve Atkinson - every director except Ron Eacott.

Independence is the sticking point.

Mr Wilson attended university with Mr Matthys and Mr Atkinson. Nothing wrong with that, though the ties are far closer. Mr Matthys was best man at Mr Wilson's wedding. Mr Atkinson and Mr Wilson are former business partners, and Mr Atkinson was Mr Gilchrist's manager and a close friend. Nothing wrong with that either, in pure governance terms. But marry the clear and close mateships with opaque management and a bombed-out share price and you have a problem of perception.

Where things do veer close to the line is in Mr Gilchrist receiving a $220,000 package in 2011 and 2012 for being an ''ambassador'' to TFS, and then bobbing up on the board. Though the ambassador arrangement is said to have ended.

Institutions and investors disenchanted with the performance over the past two years led a revolt against the board at the annual meeting. That saw a 26 per cent vote against the re-election of Mr Wilson, 33.5 per cent against Mr Atkinson and 24.3 per cent against Mr Matthys. Mr Gilchrist was not up for re-election.

Mr Wilson preferred a ''glass-half-full'' assessment by arguing that a substantial majority vote in favour of the incumbents amounted to a robust endorsement.

One quarter of your shareholders calling for your head is hardly an endorsement though. And it was the questions Mr Wilson did not answer directly at the AGM that hold the key to the unfolding drama. He had batted off criticism of TFS by saying it was the ''sole survivor of the management investment scheme [MIS] industry''. Leaving to one side the fact that TFS is not the ''sole survivor'', the failure of so many MIS companies such as Gunns, Timbercorp, Great Southern, Rewards Group and Willmott Forests is considered to be a result of structural debt issues as much as flawed business models.

And TFS now has debt that is about 150 per cent of its market capitalisation. Most of this was racked up via a $150 million bond issue in the US that delivered an 11 per cent yield and security over the company's assets.

Prior to this debt issue in May last year, TFS had advised the market it was considering a $75 million debt facility, but this doubled without any adequate explanation. In March 2009, the company forecast ''no net debt by June 30, 2009''. Actual net debt was $26.7 million. In February 2010, it forecast ''significant positive operating cash flow and no net debt for end of financial year''.

In fact, operating cash flow was negative $25 million and net debt rose to $47 million at June 30, 2010.

By February 2011, management forecast ''net operating cash flow to rise 23 per cent'' for $70 million in operating cash flow on a full-year basis. It missed by $30 million. In August 2012, TFS conceded a cash flow deficit of $60.5 million. Dividend was cancelled and there were no new institutional sales.

According to information provided to BusinessDay, TFS had been examining proposals to take the company private since 2010. Sources claim the structure of the proposed deal was for management to participate in the deal.

After the bond issue last year, the share price began to bleed. The debt was costly, attracting commissions of $8 million plus.

The rebels claim management has focused on a private equity deal and not on plantation sales to bring in the cash. As rumours swirled, Mr Wilson disclosed in May this year to one shareholder that a private equity takeover offer had been made. The only formal announcement of any bid came later, in August.

The small print in the bond issue says that if a takeover of TFS were to occur, the bidder, once reaching 51 per cent of the issued capital, is obliged to ask the chief executive and chairman to join the bidding syndicate. It is understood the bid was made by the New York private equity firm Lindsay Goldberg.

In light of the private equity negotiations, having such close ties on the board is a liability for TFS as it heads into another showdown next month.