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Tax-savvy Fletcher deal murky on asset transfer

By Nicholas Bryant

Friday 7th April 2000

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$5 Billion and no assets - yet
This week's $5 billion sale of Fletcher Challenge Paper to Norway's Norske Skog does not include the company's assets, such as the Kawerau mill, and when and how those assets are to be transferred is unclear.

Market sources say the complex transaction is "vintage Fletchers," referring to the conglomerate's reputation for spurning pure plays in favour of labyrinthine deals with sophisticated tax treatments.

The Norske Skog deal is for purchase of Fletcher Challenge Paper shares only, which gives Norske Skog control of the assets in Fletcher Paper without having to value or buy them.

Ownership of the assets will be transferred to Norske Skog when Fletcher Paper is unbundled from the unified Fletcher Challenge balance sheet some time after July.

The structure of the deal appears to allow Fletcher Challenge and its shareholders to escape a significant tax liability.

For years Fletcher has defended its much-criticised letter stock structure, telling angry shareholders a split into four separate entities would mean they would pay more tax. That was on the basis a transfer of assets from FCL to a Fletcher Paper suitor would be deemed a dividend by Inland Revenue.

That meant shareholders would be liable to pay the tax on the difference between the depreciated book value of Fletcher Paper's assets and the realised value of a sale.

But this "all-share no assets" deal has got around that problem - for now at least - so small shareholders will not pay any tax on Norske Skog's $2.50-a-share offer.

Fletcher Challenge is not releasing details of how the assets will be transferred or any tax that might result from their transfer.

"The process of how the assets will be transferred is to be sanctioned by the High Court and at this stage there's nothing more we can say about it," Fletcher Challenge's new PR man, Clive Litt, said.

"In terms of the agreement we have, and the court process we're going to go through, it should ensure no tax issues arise out of this transaction."

There are differing views on whether the shares-now-and-assets-later scheme will attract taxation for recovered depreciation and capital gain.

Warburg Dillon Read analyst Stuart Graham said a shares-only deal meant the company probably avoided any potential tax issues. "By buying shares I don't know there'd be such capital gains on the sale of assets or issues of depreciation recovered."

It seems universally agreed the sale, at an 83% premium to the year-average share price, was well brokered by the FCL board.

The change in fortune, in part due to an upturn in log and pulp prices, is a big relief for the board after the inability to broker a merger with Fletcher Challenge Canada last year.

After that failure it was feared bits and pieces of the company would have to be sold off, which would have attracted taxes on the dividends to small shareholders.

Norske Skog will pay $2.50 a share for the 637 million Paper shares on issue - $1.6 billion cash, of which 43% will end up in the hands of local investors.

The balance will cancel Paper's debt as well as cover the cost of separation from the Fletcher Challenge group.

Ironically Fletcher Canada shareholders refused an offer of $1.79 a share.

Since the announcement of the sale on Monday all the Fletcher Challenge stocks have surged upward.

Paper has settled between $2.25 and $2.30, about a 10% discount to the cash offer price, with shareholders being advised to accept Norske's offer.

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