Great Southern Group
Great Southern Group was a group of Australian companies that was notable as the country's largest agribusiness managed investment scheme business.
The company was founded in 1987 and became a public company in 1999. It expanded its MIS business rapidly in the 2000s, supported by favourable tax regulations for these types of investments. Most of the Group's business was in plantation forestry to supply woodchips for the pulp and paper industry, but in the 2000s it diversified into high-value timbers, beef cattle, olives, viticulture, and almond production. The company's after-tax profit peaked at $132 million in 2006, but by 2008 had deteriorated to a $63 million loss.
The Great Southern companies attracted debate and criticism associated with the operation of managed investment schemes generally, and the environmental performance of their Tiwi Islands operation in particular. On 16 May 2009, as a result of worsening economic conditions and regulatory issues, the GSL, GSMAL, GSF and other subsidiaries of GSL entered into voluntary administration. Ferrier Hodgson was assigned as liquidator of Great Southern Group. The collapse of Great Southern Group, in conjunction with the failure of another high-profile agribusiness company, Timbercorp, led to three separate Australian parliamentary committee inquiries into the MIS industry.
Business activities
The Great Southern Group in 2008 formed Australia's largest managed agribusiness investment scheme operation. The company comprised a parent entity, Great Southern Plantations Limited, and over forty subsidiaries, almost all wholly owned. Those subsidiaries held or operated Great Southern's businesses, including providing management services.At the centre of Great Southern's operations were management investment schemes. MIS schemes are a mechanism by which investors' funds are pooled to invest in a common business enterprise. A "responsible entity" controls the routine administration of the investments. In primary production schemes such as those managed by Great Southern, investors are the growers of products, with an agreement with the company to manage the investment "to plant, establish and maintain the trees until they are harvested at maturity". Investors in Great Southern generally purchased lots on land owned or leased by Great Southern. Thus investors owned the plantations, but the land assets belonged to the company. While investors owned individual woodlots, risks and returns were distributed across all investors in individual projects, with growers sharing "the average yield at harvest for the entire Project...rather than the return from their individual woodlot". These were not high rates of return for the length of investment involved. Some of the schemes relied upon the rationale that investors would retire and therefore receive income from the scheme when their marginal tax rate was lower than at the time of initial investment. Based on this premise some schemes were claiming a rate of return after tax of eight to nine percent. Others suggested the schemes were a poor investment likely to achieve only six percent return.
Returns to investors comprised a tax deduction in the year in which they bought the products, and returns from the sale of produce over the life of the project, which was typically at the point of harvest 10–12 years later for plantations, "and up to 23 years for horticultural projects such as almonds". Great Southern would deduct management fees from the final sale value. A typical forestry investment in the early 2000s involved an initial payment of $3,000 for one-third of a hectare woodlot, yielding a $2,900 tax deduction at that time. Returns on harvesting depended on many variables; Great Southern forecast that investors would recoup their original investment and a further return of between $1923 and $4569 per woodlot, however early schemes did not achieve these figures on the basis of the timber sales, with some resulting in woodchip sales of only around $1,500, half the value of what was originally invested. Investors received their returns when the product was harvested and sold.
While the majority of Great Southern's activity was in the sale of managed investment schemes, in 2007 it diversified into funds management through the purchase of Rural Funds Management Ltd, retaining its diversified agricultural assets fund and offering a new share fund and a blended property fund. In addition to retailing MIS products to investors, Great Southern also provided loans to investors wanting to borrow to invest. By 2009 its loan book comprised 14,500 loans with an average value of approximately $50,000.
Rise
The Great Southern Group began as the company Great Southern, co-founded in 1987 by accountant John Carlton Young, and microbiologist Helen Sewell. It began by managing South-east Australian plantations of Pinus radiata, but in 1992 shifted to Eucalyptus plantations for woodchip production, dealing in blue gum woodlot investments. Through the 1990s it developed its plantation business in south western Western Australia including the Great Southern region, leasing woodlots to investors on land owned by Great Southern. A related entity, Templegate Finance Pty Ltd, would also lend finance to investors.Young was Great Southern's Executive chairman when it listed on the Australian Securities Exchange in 1999, and co-founder Sewell remained in a full-time role until her retirement in February 2001. When the ASX200, a new stock exchange index comprising the top 200 Australian companies by market capitalisation and liquidity, was instituted in March 2000, Great Southern was one of the stocks included.
By 2001, the Group had 66 000 hectares of forestry plantations in New South Wales, Queensland, Victoria and Western Australia. Its performance on the share market was strong enough that it was Shares magazine's number one ranked stock in its table of top 50 stocks by yield in January 2002. However the business faced some turbulent times, with profits in 2001 and 2002 down on the levels of 2000. The company was delisted from the ASX200 for a period, although it was relisted and remained in the index until December 2008.
In 2004, the Group diversified into viticulture, planting vines in Western Australia. The company reported that it had been the ASX200's fourth-best performer in 2004, and second-best performer over the preceding two years. In November 2004, Young indicated to the company's annual meeting that harvesting of the first plantations had now commenced, and forecast further MIS sales growth. The shares in Great Southern peaked at $4.76 at this time, and Young sold a significant proportion of his shareholding, netting him $32.6 million.
In 2005 Great Southern expanded into organic olives, acquired some existing beef cattle MIS businesses, and bought forest products company Sylvatech, including its $700 million of assets. The purchase of Sylvatech meant the company now also had forestry plantations in the Northern Territory, on the Tiwi Islands.
Great Southern's cattle properties included the 660,000-hectare Moola Bulla property in WA's East Kimberley region, the similar sized Wrotham Park, 300 kilometres west of Cairns, and the 196,000-hectare blue-ribbon station of Chudleigh Park near Townsville", as well as a further 2.4 million hectares of pastoral leasehold. In 2007, the company also diversified its MIS offerings to high value timbers, such as mahogany, the uses for which included furniture and flooring. The following table outlines the expansion of the Great Southern Group's operations.
Fall
In the mid-2000s, Great Southern's business was growing rapidly, with sales and market capitalisation increasing at more than 100 per cent per annum. However, in its 2005 Annual Report, the company disclosed that it was subsidising the returns to its 1994 forestry scheme by approximately $3 million, and that it expected to have to similarly subsidise the 1995 and 1996 schemes by up to $12 million in future years. Board chairman Peter Patrikeos and non-executive director Jeffry Mews both expressed concern about the way in which Great Southern was funding shortfalls on the sales of timber products, with the issue leading directly to Mews' resignation. Although the company continued to sell over $800 million of MIS products in the two financial years after incurring losses on its early offerings, it was not meeting sales targets, and its share price was falling.Underpinning Great Southern's decision to subsidise returns to its early investors was a looming problem: its forestry plantations were not performing to expectations. Timber yields were poorer than had been projected. Great Southern's baseline projection had been 250 tonnes of woodchips per hectare, but an assessment in 2003 suggested that in most plantations yield would be reduced: in some cases to less than half the planned figure. The company itself considered that yields were proving to be "disappointing", with actual yields for the woodlots planted in the period between 1994 and 1997 being between 120 and 200 tonnes per hectare. Plantation growth had been limited by drought conditions and issues with the site and seedling quality of early plantings.
The company's sales of MIS schemes, and its profits, both peaked in 2006, with over $450 million in sales, and a net profit after tax of $133 million. However, the 2006 harvest yielded a return of only $1,500 and $1,750 for the woodlots that investors had bought for $3,000. These plantations had not been productive enough to yield a profit for investors, so Great Southern inflated the returns to $4,100 using its own funds.
In December 2007 Young announced he would step down as managing director, remaining as both non-executive director and major shareholder. Saying that he wanted someone younger to implement the company's five-year business plans, he handed over to Cameron Rhodes, one of Great Southern's existing senior management team.
In 2008, Great Southern had over 430 employees managing investment schemes on behalf of over 47 000 investors. Industry sectors in which investment occurred included beef cattle, forestry, wine grapes, almonds, and poultry production. Its plantation estate had grown to 179 000 hectares, the vast majority of which was for wood pulp production.
As MIS sales declined from their 2006 peak, the Group's debt levels rose. By October 2008, business analysts Austock Securities were describing the company as "excessively geared". The Group developed a proposal, known as Project Transform, to restructure the business, in particular through seeking the agreement of investors to swap their MIS investments for shares in Great Southern Limited. The intention was to free up capital to reduce debt, and make the business more attractive to investors. Analysts such as Austock Securities and Macquarie Research Equities supported the strategy.
The company reported a $64 million loss in its 2008 financial year. By 2009, the global economic downturn, and regulatory uncertainty associated with MIS schemes, was putting the company under financial pressure, and it was seeking to improve its situation both through asset sales and refinancing of debt. Its debt levels had risen significantly: it had extended its debt financing with its banks from $245 million to $350 million in 2007. By September 2008 its total debt had ballooned to $820 million, of which $376 million was owed to its lead bankers, ANZ, Commonwealth Bank, Bankwest and Mizuho. Great Southern had also been hoping to see a rise in the price obtained for its woodchips, but was unsuccessful in its 2009 negotiations with Japanese customers.
By early 2009, business analysts Lonsec Agribusiness Research considered Great Southern to be financially stressed, and that it was "hard to envisage a rapid turnaround in the outlook" for the company. They gave Great Southern as managers the second-lowest rating on their assessment scale, just short of stating that the investment would be "detrimental to an investor's...portfolio". Great Southern's banks refused a request in 2009 for a further $35 million loan. Great Southern's attempts to extract itself from financial trouble were unsuccessful and by May 2009, when a trading halt was called, the company's shares were worth just 12 cents. On 16 May 2009 administrators were appointed under the Corporations Act 2001, with the companies' assets passing into control of receivers McGrathNicol on 18 May 2009. The assets of the group were primarily its land holdings. By the time it went into administration, they were valued at $1.8 billion, however, despite company expansion plans, its net assets had not grown for four years.
In July 2009 the receivers determined that the company was insolvent. With a complex business structure to unravel, some commentators expect it may take years for the company's collapse to be fully resolved. By April 2010, timber company Gunns had taken over as the responsible entity running most of Great Southern's pulpwood schemes, but the land on which they were being grown was yet to be sold.
Following its collapse, there was some speculation about whether Great Southern had disclosed to the market issues with the rate of return it was going to achieve on some of its timber investments. During parliamentary committee inquiries, these allegations were extended to the possibility that the auditors had been misled. It was also noted that, at the time that difficulties were emerging for Great Southern, its CEO sold some of his shares at the top of the companies' fortunes for $32.6 million.
One of Australia's other leading managed investment scheme companies, Timbercorp, had also gone into administration the previous month. The two corporate collapses prompted examination by three separate Parliamentary committee inquiries: the first by the Parliamentary Joint Committee on Corporations and Financial Services, into Agribusiness Managed Investment Schemes, which reported in September 2009; the second by the Senate Select Committee on Agricultural and Related Industries; and the third by the Senate Economics References Committee, " Agribusiness managed investment schemes – Bitter harvest"; published on 11 March 2016.
In 2012, over 22,000 of Great Southern's investors commenced civil action suing for damages, claiming they had been misled by the company.