Sino-Forest May Go Private as Martin Seeks Way Out of ‘Morass’

Sino-Forest May Go Private
A DHL Worldwide Express missed package slip sits on the door of Sino-Forest Corp.'s office in Mississauga, Ontario, Canada. Photographer: Norm Betts/Bloomberg

Sino-Forest Corp., the Chinese timber company that plunged 74 percent this year after fraud allegations, said going private is among the options under consideration as it attempts to restore its finances and reputation.

The company may also raise additional funds, bring in a strategic investor or seek a merger, Chief Executive Officer Judson Martin said in an interview.

“It is going to be real tough to get back to where we were,” he said in Hong Kong. “We are up for the challenge, but we are also up for looking for all options for our stakeholders.”

Sino-Forest tumbled in June after Carson Block, a short seller, said the company exaggerated its timber holdings. The shares were suspended from the Toronto Stock Exchange in August as Canada’s main securities regulator began an investigation. Canadian police also started a probe.

A committee of independent directors set up to investigate the allegations said Nov. 15 in an interim report that they rejected the claim by Block’s Muddy Waters LLC research firm that Sino-Forest is a “Ponzi scheme.” The committee said it confirmed the company’s timber assets, book value and cash balance. Still, the interim report also disclosed missing records, a lack of cooperation by some executives and an absence of an internal audit. The committee’s final report is due by the year-end.

Commission Meeting

Martin, 55, a former chief financial officer of Canadian entertainment company Alliance Atlantis Communications Inc., took over as CEO from Sino-Forest founder Allen Chan in August. Martin’s priority after emerging from what he describes as “this morass” is to seek approval for Sino-Forest’s shares to resume trading when the Ontario Securities Commission meets Jan. 25, he said in a Nov. 23 interview.

“I am very much a free-market individual and I believe that once information is in the market place, be it good or bad, whatever the circumstance, it should be up to the market to decide,” he said.

The next clue to Sino-Forest’s prospects may come Dec. 15 when the Hong Kong- and Mississauga, Ontario-based company is due to publish its third-quarter results. Sino-Forest delayed announcing the earnings last month while it verified information about the company’s relationships with its so-called authorized intermediaries, who sell its timber into the Chinese market.

12 Rounds

“There’s still a persistent gray cloud over Sino-Forest,” said John Goldsmith, a Toronto-based vice president of Canadian equities at Montrusco Bolton Investments Inc., which oversees C$5 billion ($4.9 billion).

“You can only come up with a viable solution once you have all the facts, which I’d argue we don’t have,” said Goldsmith, who sold his Sino-Forest holdings for a loss on June 9, seven days after Muddy Waters published its report on the company.

Sino-Forest’s 6.25 percent bonds, which mature in 2017, dropped 1 cent on the dollar to 35 cents on Dec. 6, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Simon Murray, a Sino-Forest director who’s also chairman of Glencore International Plc, the world’s biggest commodity trader, compared Sino-Forest’s task with a boxer rising from the canvas.

“It is like doing 12 rounds and being knocked flat on your back in round 10,” Murray, 71, said in a separate interview in Hong Kong. “You have got a lot of work to do in the last two rounds. But I think we will get there.”

Chandler Stake

The slump in Sino-Forest’s shares has cost investors about C$3.3 billion, according to data compiled by Bloomberg. The stock, which closed at C$18.21 the day before the Muddy Waters report, fell to C$4.81 on its last day of trading on Aug. 25.

The biggest loser to date has been New York-based hedge-fund firm Paulson & Co., formerly Sino-Forest’s biggest shareholder, which sold its entire 12.5 percent stake in June, booking a C$462 million loss.

Other investors have bet Muddy Waters is wrong. Billionaire Richard Chandler, who’s based in Singapore, has become the biggest shareholder via his Richard Chandler Corp. with a 19.5 percent stake, while Boston-based Wellington Management Co. raised its holding to 11.5 percent. Davis Selected Advisers LP, which is based in Tucson, Arizona, owns 12.6 percent, according to data compiled by Bloomberg.

‘Well Respected’

Chandler said last month, following the independent committee’s interim report, that Sino-Forest “represents an excellent deep-value investment opportunity.” Chandler had nothing further to say, said Richard Barton, a spokesman.

Sara Sherman, a Boston-based spokeswoman for Wellington, Laura Berger, a spokeswoman for Davis, and Armel Leslie, a spokesman for Paulson, all declined to comment.

Martin said the timber company’s other big investors are also supportive.

“They are some of the most well-respected investors in the world who do the best work and have the most knowledge and perhaps that’s why they stayed,” he said.

Greenheart Group Ltd., a Hong Kong-listed timber company with forests in Suriname and New Zealand that’s almost two-thirds owned by Sino-Forest, has jumped 52 percent since the independent committee’s interim report was released, although it remains 69 percent below its June 2 price.

“I think it is a good proxy,” Martin said.

‘Pretty Perilous’

Still, the specter of Muddy Waters haunts Sino-Forest. Block said he stood by his allegations, after the release of the independent report. While the investigations continue, Sino-Forest’s cash position is weakening, according to Annisa Lee, a credit analyst at Nomura Holdings Inc. in Hong Kong.

Its cash balance fell to $571.1 million on Nov. 4 from $835.8 million on June 30, according to data released by the company on Nov. 15. Of that balance, only $205.8 million was in unrestricted offshore accounts, Lee said in a Nov. 16 report.

“The cash flow looks pretty perilous into the next couple of quarters,” Owen Gallimore, Singapore-based head of credit strategy in Asia for Australia & New Zealand Banking Group Ltd., said Dec. 1.

“We have got strong liquidity -- almost $600 million in the bank -- and we have got no major obligations coming up till August 2013,” Martin said, referring to $345 million of convertible bonds which mature on that date. “That’s really our first big issue. We have a long runway and a lot can happen between now and then.”

‘We Need Allen’

Martin said he hopes Chan is soon reinstated in a senior role in the company. Chan, 59, a Hong Kong-born sociologist turned entrepreneur, resigned as chairman and CEO and three other executives stood down after the OSC began its probe.

“Going forward, we need Allen,” Martin said. “We need his relationships, his mind, we need his strategy. It has been his company.”

Martin said the internal investigation has shown Sino-Forest needs to change its systems and improve its staffing.

“We were relying on too few people for a company that has 800,000 hectares of forest estate and $2 billion of revenue,” he said.

Chief Financial Officer Dave Horsley may be on the move from the company’s Canadian base in Mississauga, Ontario, to its other main office in Hong Kong, he said.

“Finance structures are too far away from China,” Martin said. “The senior financial officer has to be sitting beside the senior operating officer and the senior executive officer here in Hong Kong.”

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