Patience pays dividends

AIM LISTED JERSEY COMPANY OPERATING AS A REGULATED COLLECTIVE INVESTMENT FUND INVESTING IN GLOBAL FORESTRY ASSETS

My involvement

A closed ended, AIM listed, Jersey regulated, alternative investment company with a pre-2008 vintage, suffering high fees and annual costs to the promoter/investment adviser and, in a collapsed market, failing to produce gains for its investors. Shareholders had in 2013 voted to change from a policy of active investment to one of asset sales in a timely manner. I was appointed, following a selection process, as non-executive Chairman at the insistence of shareholders wanting to see change. My mandate as part of the board was to see through the implementation of the divestment policy. When my role began the company had already sold its forestry assets in Georgia (USA) and in Australia, leaving the hard-to-sell assets in Hawaii (leases, about to expire, of two forestry plantations) and in Brazil (four freehold forestry plantations).

My initial role as Chairman was to take stock, meet the main investors, establish my working relationship with the UK based operations manager, and plan strategy for board approval. Following a costs review, I achieved demonstrable and sustainable cost reductions, and then set about monetising the assets in a collapsed market in line with the shareholder mandate.

In the course of protracted negotiations with third parties my board adopted my recommendation, formulated with my operations manager, to risk the rental burden of renewing the Hawaii plantation leases, in the expectation we would eventually succeed in assigning these leases. We did that, then we overcame protracted challenges from the Hawaii landlords. Contracts to assign the leases were signed, and then the assignee wanted to negotiate a time extension to the long-stop closing date and I extracted an immediate one-off payment for that in excess of US$150,000. The transaction finally closed, generating a gain exceeding book value. The company thereby exited Hawaii.

In the meantime, an activist investor appeared on our share register, having acquired just under 30%. My immediate task was to make contact and establish a relationship. The investor lent funds enabling the company to avoid using its own cashflow to close a transaction with a Brazilian bank for the release of mortgages over one of the plantations in Brazil, thereby overcoming a barrier to sale of the asset created by the original terms of purchase (and thereby enabling the “unlocking” loan to be repaid).

I subsequently renegotiated the operations manager’s remuneration package to align his interests with shareholders’. The company pursued a share buyback programme using surplus cash, to provide share liquidity for investors wishing to exit as soon as possible at around market price (a substantial discount to NAV) rather than holding on to “follow the fortunes” of the company for an ultimate return correlating more closely with NAV, but at the cost of timing and transaction risk. Implementation needed Takeover Panel dispensation from Rule 9 of the City Code. That enabled the activist investor’s proportionate holding to be dragged over 30% and up as far as 49.9% as the result of the cancellation of shares bought back, without causing to be invoked the Rule 9 requirement that would otherwise have obliged him to make an offer for all the shares not already owned by him.

Outcome

As of March 2024, the role is in its final stage. Successes have been achieved along the way. First, the sustainable reductions in operating costs. Secondly, exiting Hawaii on terms better than expected. Thirdly, developing the relationship with the activist investor. Fourthly, with one of the properties in Brazil, overcoming the barrier to sale by securing the release of the mortgage at a cost far below the contingent liability carried on the balance sheet. Fifthly, achieving revenue from wood sales in both States in Brazil in which the company was invested (each of which had a distinct market for wood-sale opportunities). Sixthly, through the generation of surplus cash, enabling the return of capital to investors by way of the share buyback programme. Seventhly, completing the sales of all the forestry and land assets and thereby exiting Brazil, the company’s final location, and achieving the goal subject to collection of deferred payments due under the terms of contracts for asset sales, terminating supplier contracts, and settling local wood taxes and other liabilities. Eighthly, at the appropriate time achieving further costs reductions for the final leg by securing shareholder support to take the company into a solvent liquidation in the hands of its directors (permissible under Jersey law) and cancel the admission to trading of the company’s shares on AIM. The end is in sight but not quite there yet. In the course of the liquidation the company has so far made two capital returns to shareholders. There is the possibility of a third. The stakes are now lower, but the unexpected can happen in the last furlong as easily as in any other part of the race. Nevertheless, the end gets closer by the week.