Stafford vs Phaunos: The battle for a $244m timber fund

A hostile bid for a listed vehicle? Is this the beginning of another campaign, like the 2016 battle between SVG, HarbourVest and others for the former’s £806.6 million ($1.08 billion; €914.1 million) portfolio?

Stafford Capital Partners has confirmed its ambition to acquire all of Phaunos Timber Fund through a hostile bid that values the UK-listed vehicle at $244.2 million.

The all-cash offer would be funded by the firm’s SIT VIII secondaries fund, which closed on $612 million in May. It comes as Phaunos is being wound up after shareholders decided against continuing it in June last year, when Stafford was still the fund’s manager.

The Phaunos board, which initiated a formal sales process in August and received initial expressions of interest at the end of last month, does not seem particularly impressed. Reporting “pleasing” progress on the process to date, it responded to Stafford’s announcement by urging shareholders “to take no action at this time”.

But Stephen Addicott, a timber partner at Stafford, told sister publication Agri Investor that the firm had met 75 percent of Phaunos’s total shareholding before the formal offer was released. He declined to provide specific information on shareholders’ reactions since the bid was announced but noted that “we wouldn’t have gone forward with a formal offer unless we felt there was a good chance of success”.

Phaunos’s chairman Richard Boléat, who Agri Investor also contacted, declined to comment beyond the statement.

Rules of engagement

Stafford now has to file formal offer documents between 18 July and 27 July, after which Phaunos’s board has 14 days to post a response stating its view on the secondaries firm’s proposal.

Addicott appeared frustrated that it would take that long to get a feedback, or at least an indication whether Stafford’s bid is the only offer for the whole of the assets and how it compares with other proposals.

“The board have indicated that they’re running a sale process, that they would like some level of price discovery. We understood that they were expecting expressions of interest to come in by the 28 June. So we were hoping that they would now be in a position to have some level of price discovery, so that they can talk to us about our offer,” he said.

“We met with the board prior to our initial announcement of our intention to put forward an offer, but we have not met with the board since. And we would be willing to. Frankly we were quite surprised that the board aren’t considering our offer seriously enough to ask for a meeting with us.”

With expressions of interests now received as part of its official process, Phaunos looks set to select parties to go forward with due diligence, a phase Addicott says typically lasts around 12 weeks. He did not think the extra days the board gave itself to ponder over Stafford’s bid would change its position much – “with the exception that they might still be looking to drum up support for the overall sale process that hasn’t come in today”.

Stafford was appointed to turn around Phaunos’s distressed portfolio four years ago. It was making progress – having rebalanced the portfolio away from risky assets and reduced costs – when the vote to determine the company’s future happened.

“We knew it would be a close call,” says Addicott. “We had a number of investors who were interested in continuing on and in holding this in the longer term. And we recognise that there are number of investors who wanted to have an exit option within the shorter time frame than the five-years extension that we were looking for.”

The stakes were made higher by Stafford’s inability to bring large new investors into the vehicle – which Addicott mostly puts down to the uncertainty created by the upcoming continuation vote. “It’s difficult to bring new investors into a listed fund on the premise that it might be wound up within the near future.”

He also thinks the manager did not have quite enough time to build the fund’s track record as a revenue generator, which would have helped convince more investors to stay on. “We were pleased that by the end of the process, we got to a place where it started to look like Phaunos was providing a regular yield. And the other thing there to help with consistent yield was the reduction in the net debt. But those things take time.”

Time is money

Time is now central to the case Stafford is presenting to Phaunos’s shareholders. At $0.49 a share, the price offered represents an 11 percent premium to closing on June 4 (the last day before the start of the offer period). But the main argument Stafford is making is that a swift takeover by the firm will accelerate shareholders’ exit.

The manager even puts a value on the time saved: assuming a timetable of 3-4 months to completion for Stafford, compared to 14-20 months for the official sales process, the firm estimates potential gains at 3-4 cents a share. It also points out its offer is fully funded, and that it covers assets not included in the formal process.

Stafford thinks it would be right for its fund to own the asset, given its knowledge of the portfolio. “We recognise that the New Zealand assets have benefited from increased demand in the Asia-Pacific market, and we still see that continuing in the longer term,” says Addicott. “In regard to the other assets, each of those has their own particular problems. In our time as manager we became familiar with those problems.”

Would buying out Phaunos make the SIT VIII too concentrated on a single position, given the portfolio’s heft? Addicott thinks not. “If it proceeds, it will be a large transaction for the fund. But because the portfolio has diversification across the different assets then we’re comfortable with that sort of transaction size.”