Yesterday’s news that the locally listed Paperlinx had finally hived off its struggling Australian Paper unit to Nippon Paper Group came as a massive relief to the company’s management team, who had been bunkered down in negotiations for the past few weeks stitching up a deal.

The $700 million sale, a substantial discount to the book value of $1.1 billion, allows PaperlinX to focus on its core merchanting business, based mainly in Europe, without the distraction of the capital intensive and foreign currency-exposed local manufacturing arm. PaperlinX also revealed that its bankers will waive covenant breaches from December and renegotiate debt on new terms. For PaperlinX shareholders and management, it’s good news indeed — the sale of Australian Paper will reduce PaperlinX’s overall debt to about $340 million and cut gearing to around 20 per cent.

But the deal appears to have overshadowed an incident that occurred on the trading floor yesterday morning.

When news of the Nippon deal leaked in the early hours of Monday, via a Nikkei report, Paperlinx’s prospects firmed. Bloomberg then produced this report, claiming Nippon was set to buy the Australian Paper unit for $600 million, a figure close to the final sale price.

As the news spread, Paperlinx correctly suspended trade in its headstock PPX, as required under continuous disclosure laws (see the announcement here). But for 17 minutes from the market open at 10am, trading in PaperlinX SPS Trust (PXUPA), a separately listed special purpose vehicle, continued with the price rising from $17 to $28 as those in the know piled on.

About 30 trades and 10,000 PXUPA notes were involved (around $234,000 worth), annoying shareholders that had placed sell orders on the stock as the price slumped to $13 last Friday. The stock jumped a massive 104% in the time the trades were live. Trades may have also influence by this HotCopper post, alerting the online forum’s readers to PXUPA’s live status. Trade was suspended three minutes later.

The ASX, responding to the anomaly, pulled the plug on PXUPA at 1017, before an announcement finally appeared on the ASX at 1131. Interestingly, the PaperlinX announcement mirrors that of the headstock, requesting a trading halt before the commencement of trade. The question is when the ASX received the request, or whether PaperlinX was tardy in its request to the regulator.

The hybrid notes had previously been trading well below the issue price of $100 until the news of the Nippon Paper deal broke. Its trading range over 52 weeks varied between a low of $11 and high of $83.

Crikey contacted the ASX, who said Monday morning’s PXUPA trades have yet been cancelled and are currently the subject of a review. It claims PaperlinX failed to inform the ASX of the link with the headstock, as is normally the practice when materially-affected firms have two listings. A spokesman said each listed entity has the obligation to keep the market informed, including hybrid securities related to a headstock. According to reports this morning the ASX are also investigating the proximity of last week’s profit warning to the Nippon sale.

Shareholders that placed sell orders in PXUPA on Friday have told Crikey that there was no indication the Nippon deal would proceed, citing last week’s statement warning of a 40% profit drop. PPX has lost around 70% of its value over the last year as concerns mounted over a heavy debt load.

Crikey understands PXUPA shareholders have also contacted the ASX, seeking to have their stock returned or the trades cancelled before the settlement date. They claim the subsidiary stock is arguably more material than the headstock as the deal increases the chance of a full $100 per-unit debt redemption.

In an informed market, PXUPA was back trading at $38 this morning.

Crikey contacted PaperlinX, but the firm didn’t return calls before deadline.

Peter Fray

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