Shaun Fraser, partner at McGrathNicol found himself in an unprecedented position last Sunday when Australia’s leading paper supply companies decided to block supply to the troubled print company GEON.
Fraser had been appointed by KKR & Co and Allegro Funds Management to sell GEON or parts of it as a going concern. The initial strategy was to have GEON maintain operations and supply to many of its contracted corporate clients. It was a strategy that would of kept 1000 jobs across Australia and New Zealand keeping GEON in the ranking top three of sheet-fed printers in the trans Tasman region.
With paper suppliers now being owed a total of $7 million, the game plan of business as usual rapidly turned sour. After countless hours of negotiation between McGrathNicol and the paper suppliers PaperlinX, BJ Ball and KW Doggett, no supply was forthcoming. With no paper to print on, GEON had no prospective operation and Fraser’s team were forced into damage control – find a buyer or appoint a liquidator in coming weeks with no prospect of sale for the GEON business.
By Friday 7 March, GEON’s Eagle Farm Queensland production facility had been closed down and Industry competitor rival Blue Star had shrewdly acquired GEON’s Banksmeadow, Parramatta and Mount Waverley operations in VIC and NSW. Up to 450 jobs were gone within a week.
Questions are being pursued about how GEON, one of the top three printers in the ANZ region could possibly go belly up. The answer is clear – the local printing industry back-lashed against US private equity giant KKR & Co and its partner Allegro. The pair enjoyed joinder in participating in the Australian printing industry for a very short lived four months.
KKR & Co and Allegro, combined known as KKRM inherited GEON when it acquired Bank of Scotland International’s distressed Australian loans book in November.
How did KKRM’s top MBAs Jamie Weinstein and Brian Dillard misread the Australian print market in such a negligible way to leave themselves holding only proceeds from the sale of GEON’s fixed assets. How did they fail to identify the risk of Australia’s three prominent paper suppliers blocking supply as to see GEON go under?
One school of thought is that KKRM, being foreigners to a tight knit industry were merely at the wrong place at the wrong time. The perfect storm had been brewing for some time in the Australian and New Zealand printing industry. With the advent of globalisation, reducing margins, the uprising of digital media and the downturn in print media spend, the market could do with one less major print manufacturer.
Another thought is that KKRM never had any appetite or desire to own and operate a grind business with such low margins. Bidders through the sale process valued GEON at less than $5 million.
In January, KKRM were approached by GEON’s directors requiring a further $3 million to keep the company trading. These funds were not forthcoming and the director’s had no choice other than to escalate the concern about insolvency.
KKRM commenced negotiations with then co-owner private equity Gresham Partners to buy their stake in GEON for $1. This may have been KKRM’s downfall, there was nobody left for future negotiations now.
In a typical US loan book acquisition fashion, KKRM had no visibility of GEON’s affairs and no due diligence was extended through GEON’s directors or management. KKRM intended to apply an intensive consensual restructure, clear GEON’s debt book and commence with a fluid capital restructure.
Unfortunately GEON’s liquidity position was spiralling downwards day by day. GEON’s board appointed PPB Advisory as administrators on February 21. KKRM reacted by appointing McGrathNicol as receivers with specific instructions to sell GEON as a going concern if possible.
Surprisingly, KKRM submitted an offer to buy GEON out of receivership within hours of appointing McGrathNicol. This is an acquisition strategy KKR & Co use on many occasions in North America and Europe without any market resistance. Australian insolvency practitioners have not seen this strategy before.
The attempt of this strategic movement outraged GEON’s print suppliers, rivals and customers. In both trade journals ProPrint and Print21 respectively, commentators were quick to deem the process to be a “phoenix” deal. The fact of the matter was that it was in no way a ‘phoenix” deal but rather a non-binding offer. KKRM was accused of wanting to take advantage of GEON’s unsecured creditors including the all important triopoly, Australia’s paper merchants.
Supply to GEON was subsequently cut-off, even through Fraser guaranteed payment for any new stock delivered. GEON ran out of paper within days and the fire sale began.
With the events of last week, many commentators, ex staff of GEON and trade spectators are blaming KKRM, Graham Morgan ex- CEO of GEON, the GEON management team and suppliers alike. Who is to blame is a difficult task in itself.
One definitely positive outcome is Blue Star have preserved numerous jobs which otherwise would be redundancies with the demise of GEON.
Stephen Gea Gea – Consultant