Sino-Forest investor tests limits of activism

December 29, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Billionaire investor Richard Chandler made a fortune from buying into distressed companies cheaply. He may find Sino-Forest, the Canadian-listed Chinese timber firm hit by accounting-related allegations, a tougher target. Chandler wants the board to go, after it defaulted on some interest payments. Making his bet pay off will require both brain and brawn.

Chandler is little known, despite being worth $4 billion according to Forbes. He has popped up in tricky cases in emerging markets such as Russia and Korea. So far, the returns may owe more to timing than successful activism. An investment in Korea’s SK Corp quadrupled over two years, but Chandler failed in his quest to oust SK’s chairman, who had been convicted of fraud.

Sino-Forest’s default on some of its bonds puts his latest investment at risk. It is too late for him to exit, since the shares have been halted by the Toronto exchange until the company brings its filings up to date. Chandler’s call for the resignation of the board may not gather support. Bond holders might prefer to see shareholders wiped out, or diluted almost out of existence, than help them in their cause.

Sino-Forest’s troubles go deeper than the board. The size of its assets – down to the number of trees it owns – is still unknown. Powerful insiders may yet retreat into China, leaving offshore investors in the Canadian listed company with an empty shell. Investors like Chandler have only indirect control over the company’s operations, so they can’t force changes if insiders aren’t cooperating.

Chandler has invested around $200 million in Sino-Forest. If the company goes bankrupt, he might get nothing back. The bonds trade at about 20 cents on the dollar, amounting to less than the cash on balance sheet. The precedents aren’t great either. Investors in Asian Aluminium Holdings lost almost everything after the almost-bust Chinese firm was sold back to its management team in 2009.

Chandler has said in the past that he avoided Chinese stocks because of legal uncertainty and poor corporate governance. If he hopes to make such companies more transparent, he can hardly have picked a more challenging test case.

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