The Financial Review produced a cracking story this morning detailing the demise of investment company Timbercorp and questioning the spate of related party transactions which may have played a part on the collapse. Timbercorp’s failure places in jeopardy the entire MIS sector with the AFR noting that the company “has left 18,000 product investors exposed to potential losses and renewed resentment towards managed investment schemes, which have received $4.7 billion in tax breaks over the past decade.”

Timbercorp’s downfall was swift indeed. In its last published full year accounts, the company told investors that it had net assets of $595 million. The company’s 2008 Annual Report (which was sent to shareholders in January) did however state that operating cash flow in 2007 was negative $44 million, while operating cash flow in 2008 was minus $30 million. Given the company only had around $30 million in the bank at the time, things were not looking too positive.

Angus Grigg and Scott Elliott in the AFR cast the spotlight on Timbercorp’s chairman, Rod Fitzroy. The former commercial real estate agent was involved in several transactions with Timbercorp. In September 2005, Timbercorp paid Fitzroy “$11.44 million in cash and [issued him with] 3 million share for his 12.5 percent stake in private company Almonds Australia.” The AFR then noted:

Straight after this transaction, Fitzroy joined the Timbercorp board and received a five-year $2 million consulting agreement. [Two years later] the board terminated Fitzroy’s consulting contract and awarded him a lump sum payment of $744,000, combined with his usual $400,000 fee.

Despite being paid handsomely for his non-executive efforts, the AFR noted that “Fitzroy [acknowledges] that in late October 2008, when the sale of $280 million in Timbercorp forestry assets fell through and the stock price plunged he was busy with his VRC commitments around the Spring Racing carnival”. In Fitzroy’s defense, he was not the only Timbercorp director who wasn’t paying too much attention. For the year ending 31 December 2008, despite the company’s share price slumping from $1.20 to around $0.10, the board saw fit to conduct a mere twelve board meetings. (By contrast, the Allco board last year held 48 meetings).

The payments to former chairman Fitzroy were in addition to the related party transactions between Timbercorp, its founder Robert Hance and Timbercorp’s investment bank, Austock.

Crikey pointed out the numerous links way back in November 2007, shortly before Timbercorp announced its then highest annual revenue result (of $453.7 million) and second largest profit of $65.7 million. In 2006/07, Timbercorp paid Austock $1.46 million for professional services (largely relating to a notes issue) — at the time, Austock was chaired by Bill Bessemer, who was also a director of Timbercorp. The following year, Timbercorp paid Austock a further $615,000.

In addition to advisory fees, a company called Timbercorp (WA) Pty Ltd (which is jointly owned by Timbercorp founder, Hance) was a significant unit-holder in the Future Capital Development Fund. The fund was run by former Austock boss, John Wheeler. (Another holder of units in the Fund was none other than Eddy Groves. Groves’ ABC Learning Centres paid more than $30 million in fees to Austock back when it was solvent).

That is not the end of the links between Austock and Timbercorp. Another Austock managed fund, called the Api Fund, happened to be an investor in the Timbercorp Primary Infrastructure Fund. Former CEO of the Api Fund was departed Austock banker, Vin Harink.

As the AFR noted today, “investors will often put money into an agribusiness scheme solely for the lucrative tax breaks, rather than for the investment itself.” Between the questionable business plan (any business which relies almost solely on government largesse for its survival is fraught with risk) and spate of related party transactions, it should surprise no one that Timbercorp was placed in voluntary administration.

The biggest loser out of the Timbercorp mess was founder, Robert Hance. At its peak, Hance’s stake in the company was worth more than $200 million. It is now worthless. Hance’s only consolation was that he managed to sell 718,379 in the past year before Timbercorp was suspended from the ASX.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey