THE DISTILLERY: Smoking Gunns

Jotters explain why the long-running environmental debate that weighed heavily on Gunns was far from its only problem.

The collapse of Gunns will be inevitably remembered for the fierce environmental debate that its $2.3 billion Bell Bay Pulp Mill project stirred up. While Australia’s business commentators are in agreement that the green campaign hurt the timber company, a series of other management missteps, permit approval delays, falling woodchip prices and a high Australian dollar all helped fell it. And after all that, the controversial project isn’t necessarily dead.

But it’s best to start with The Australian Financial Review’s Chanticleer columnist Mike Smith, a native Tasmanian, who gives a wonderful first hand account of the polarising debate that a company like Gunns unleashed over the island state.

"It resulted in the state’s most divisive dispute since the campaign to save the Franklin River in the 1980s, and left a nasty stain on the island’s politics. For years I have witnessed the thumping of fists on tables and doors slamming as friends and relatives split over the morals and merits of native forest logging. I have seen the resurgence of the political car bumper stickers in Tasmania, big during the Franklin Dam dispute, opposing the pulp mill. The most popular one reading: ‘So Sue Me’ was a dig at Gunns’ threats to take legal action against anti-logging activists. Gunns was a dirty word in many households but a potential saviour for an economy in decline in others. The debate always came down to the same thing: jobs versus the environment. While many will be glad to see the back of Gunns and the pulp mill debate, the company’s demise may result in 600 job losses, something the local economy cannot afford.”

Smith goes on to say that it wasn’t the environmental debate alone that killed Gunns, a point picked up on by Fairfax’s Elizabeth Knight in her assessment.

"Certainly the green movement had a significant long-term impact on the company's financial future but then so did a long list of factors, including poor management decisions and more recently the high Australian dollar. The situation might have dragged on even longer but for a fall in woodchip prices that pushed the teetering company over the edge. Even if the Bell Bay Pulp Mill had found backers there was no clear path for the company to restore profitability.”

Indeed, The Australian Financial Review’s Matthew Stevens writes that Gunns only "deserved” the support of its banks and shareholders so long as Bell Bay remained a possibility.

"The mill was the right idea but in the wrong place and at the wrong time. Having become a plaything for the resentment of both Tasmanian and mainland Greens, the mill took years longer than it should have to secure the approvals it now boasts. This left Gunns seeking partners and project finance in a liquidity-constrained world at the same time as the Australian dollar surged through greenback parity and beyond, brutally undermining the company’s woodchip export business, and as demand for timber products began sliding with the fall in new home starts.”

Business Spectator’s Stephen Bartholomeusz also speaks of the "patience” of the timber company’s lenders breaking and gives a pretty compelling picture of the company’s financial collapse.

"Gunns’ directors, presiding over a company with a working capital deficiency of more than $500 million (most of its borrowings are classified as current liabilities) and with equity of only $24.25 million in a $903 million balance sheet after more than $900 million of write-downs last financial year, realistically had no option but to call in the administrators. The problem for Gunns, as it has been for some years, is that its past was dragging it down but it was unable to capitalise its future.”

And what of the future? The Australian’s Bryan Frith makes the important point that the collapse of Gunns doesn’t necessarily mean the death of the controversial project.

"The pulp mill project has all of the necessary federal and state approvals. While demand for pulp has fallen recently, the administration of Gunns represents the chance to pick up the project at a bargain price. Potential contenders could include Swedish group Sodra, Finnish Group UPM and China's Nine Dragon Paper Holdings. Time will tell whether there is a party with the stomach to pursue development of the mill.”

The other corporate story that Australia’s business commentators jumped on yesterday was the Leighton Holdings announcement that the high margin telecommunications assets could be up for sale. The announcement has to some extent pitted two of Australia’s best business commentators against each other.

Fairfax’s Adele Ferguson writes that the announcement "speaks volumes” about the shift in dynamics between Leighton and it’s major shareholder Hochtief, and it’s major shareholder Spain’s ACS.

"Such dramatic changes taking place at Leighton was further demonstrated by the way a $1.5 billion contract was won with Fortescue Metals Group yesterday. Unlike previous contract tenders, where up to three subsidiaries of Leighton bid aggressively for the job, Leighton Contractors is believed to be the only operating company at the expression of interest stage. ACS's game plan is to cut costs and sell ‘non-core assets’ in Leighton and Hochtief and use as much of the money as possible to pay dividends and special dividends, to help reduce ACS's massive debt pile. If all goes according to plan, Leighton's Nextgen Networks, Metronode and Infoplex businesses could fetch up to $1 billion, depending on the strength of the appetite of potential buyers including Telstra, super funds, private equity, TPG or iiNet. While this is good for Hochtief and ACS, the question is whether it is good for Leighton in the long term.”

While The Australian’s John Durie agrees that the telecommunications arm is a great unit of the Leighton business, he comes to a very different conclusion about the relationship between Leighton and its major shareholders.

"The Nextgen history is one of the great stories of the Wal King era at Leighton – from its bright start, collapse and now potential $1 billion profit on the sale of the company. A joint venture between Leighton and Macquarie in 2002 backed by National Australia Bank, UBS and others, the game was to join the global race to build fibre networks around the country. It was a decade too early but now should be part of the NBN. The firm rejects talk its Spanish parent company is pressuring the sale, arguing the fibre network was plainly not a core asset while the telecommunications construction divisions fell neatly within the rest of the company.”

Meanwhile, The Australian’s Barry Fitzgerald explains how small gold companies with production potential on the horizon have become the flavour of the month.

The Australian Financial Review’s Alan Mitchell has focussed on the crucial matter of who will replace Productivity Commission Gary Banks, who’s suddenly announced his retirement.

Someone just as immune from partiality should succeed the unmistakably independent Banks. If Labor supports anyone less, it will be to the nation’s detriment.

And finally, Fairfax’s Tim Colebatch writes a column today about Australian aid to Africa that demonstrates that the notation in yesterday’s edition of The Distillery that Colebatch had written his last piece before he goes on leave until February was somewhat premature.

The economics writer goes on leave next week.

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