Gunns raised $333 million from institutional investors in September 2008 before other MIS companies hit the wall. But it only raised $1.3 million from retail investors when the aim was $130 million; the shortfall necessitated the sale of recently acquired softwood plantations. Debt fell to about $650 million where it remained until the end.
A year later Gunns raised another $145 million from shareholders. The ink was barely dry on the new share certificates in October 2009 when Gay received an internal report outlining Gunns’ trading difficulties. He later disposed of 3.4 million Gunns shares. Two months later, the half-yearly report confirmed the slippery slope with a 98% reduction in profits. Institutional investors and bankers, Gay’s long-time loyal backers, were concerned. Gay’s days were numbered. A new CEO was installed but it was like lipstick on a pig. Pretending that it was searching for a social license to build a pulp mill, the reality was exiting native forests and selling assets to reduce debt was the only way to avoid insolvent trading.
Gunns was like an old log truck with bald tyres, laden with debt, careering out of control, trying the cut corners, seemingly oblivious to a nearby cliff. Gay ought to have been aware that trouble lay ahead.
Along the way Gunns managed to outsource the financing of plantations to MIS investors, and harvesting and freight operations to contractors, shifting risks to others whilst maintaining control. This meant Gunns had plenty of cash flow during the good times to take over and hollow out the Tasmanian forest industry. Outsourcing reflects an extension of moral hazard where governments are expected to contribute when things go wrong. Contractors have been assisted. Funds are also needed by FT, now a corporate cripple needing a permanent government lifeline.
Many blame the Greens for Gunns’ failure. Apart from exogenous factors, I argue much of the blame should lie with Gay. Vanishing MIS revenue was not caused by the Greens. MIS legacy costs (and the thousands of leases to MIS growers which prevented Gunns from obtaining value for its plantation land) pushed Gunns over the edge.
Initially a saviour, MIS became a strangler. The decline in native forest woodchipping had been occurring since 2004. All the king’s horses and all the king’s men couldn’t put the forest industry back together again. Gay had a role to play in that legacy.
Some are surprised that, given the facts of Gay’s case, he has not received some kind of a jail term (the maximum sentence is five years). A monetary penalty is just another cost to do business.
Gay’s mentor, former Gunns’ chairman Edmund Rouse, spent time in the minimum-security facility Hayes Prison Farm for attempting to bribe an ALP member to cross the floor in 1989, following an election that produced a hung parliament when Robin Gray was Liberal leader.
Gay’s sentencing today means little will change. It will signify the end of a chapter, not the end of an era. The saddest thing about the whole Gay saga is there have been very few mea culpas and scant evidence that attitudes and processes have changed much.
This piece was first published on Crikey.
Myriam Robin is a reporter for SmartCompany and its sister site LeadingCompany. She has degrees in economics, international studies and journalism. She likes writing about businesses taking risks and doing new things.
