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Timber! Tenon tumbles to Rubicon

By Fiona Rotherham

Thursday 1st July 2004

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Who would have dreamt Rubicon chief executive Luke Moriarty would end up sharing a celebratory toast of red wine with one-time adversary, Guinness Peat Group director Tony Gibbs?

The pair didn't know for sure until the next day that Rubicon's 50.1% takeover bid for Tenon had succeeded, but the bulging mailbags still waiting to be counted gave them confidence the last minute decisions of small shareholders would go their way.

The incongruity of the scene is not that Gibbs and Moriarty were proved right, but that the successful raiders wound up working together.

Not so very long ago Moriarty was at war with GPG on several fronts: for stymieing the CITIC deal that would have seen Rubicon lucratively quit its 20% Tenon stake; over its failed attempt to take over Rubicon; and its criticism of Rubicon's management incentive schemes. He was also acting as a reluctant go-between in the internecine conflict between his two major shareholders - GPG and American hedge fund Perry Corporation (holding 20% each).

But within 18 months there's been a complete turnaround. The adversaries are now allies. "That's business - you do what is in the best interests of shareholders," Moriarty says. Gibbs, a corporate raider well-used to a bit of argy-bargy, is equally pragmatic: "I find it entirely normal that there has been a bit of acrimony on the way and we can move past that." He adds, a trifle disingenuously, "Nobody got into name calling and that sort of thing."

What was the point of it all? Moriarty and Gibbs both say the end game has always been control of Tenon (formerly Fletcher Forests). It was a twisted, tortured route to get there. To give a potted history: Rubicon emerged from the 2001 break-up of Fletcher Challenge with a ragbag of energy and biotech assets no one else in the group wanted.

In helping recapitalise the debt-ridden Fletcher Forests, it gained a 17.6% stake (later raised to 20%). Thus Rubicon - whose board includes Fletcher Challenge old boys Hugh Fletcher and, until the Tenon takeover, Mike Andrews - had an immediate beach-head on its sibling's share registry.

Moriarty, a former Fletcher Challenge senior executive, had been brought back from the US to drive the breakup. "Luke not only knows where the bodies are buried (in Tenon), he was probably the man who put them there," Gibbs says.

Moriarty was then appointed to rationalise Rubicon's assets. From day one, he says, the Rubicon board thought there was value in Tenon that was not being recognised by the market. It didn't have the money to grab a controlling stake, so it got on with selling its energy assets and returning $60 million of capital to shareholders. Rubicon also looked at more than 200 potential investments, found it too hard, and invested in only one small medical company, the value of which it has since written down to nil.

Then war broke out.

GPG bought a 20% stake in Rubicon in 2002, thinking it was a cheap and easy way to gain control of Tenon. Unknown to GPG, US-based Perry Corporation had a significant stake in Rubicon. GPG was furious it had lost its dominance. To cut a long story short, GPG took Perry to court on the issue of non-disclosure of the stake and lost in the Court of Appeal. GPG also made an aborted 75c a share partial takeover attempt for Rubicon.

Meanwhile, in mid-2002 Tenon announced a $US650 million deal to purchase the Central North Island Forest Partnership (CNIFP) forestry assets from its receivers. Although Rubicon's preferred option was for Tenon to sell its forests to concentrate on value-added processing, the so-called CITIC deal was too good to pass up. But it was not to be. GPG claimed not to see the same value in the deal, and lobbied successfully to have it rejected by Tenon's shareholders.

Gibb's original vision had been for a similar kind of glorious forestry roll-up, with the forest assets of Tenon - and possibly others - split off into a separate company. After shareholders rejected the CITIC deal, the Tenon board abandoned the forestry growth strategy and went the other way, selling its forests for $725 million this year.

Although it supported the forestry sell-off, Rubicon was unhappy the trees were sold at the bottom of the cycle and that the sales process was screwed by the $16 million break fee Tenon was forced to pay failed bidder the Campbell Group during negotiations on its Tarawera Forest right. Moriarty bluntly says the Tenon team's implementation of the sell-off was "not as good as it could have been."

Forced into the position of marriage counsellor between two warring shareholders, Moriarty hit on the idea of a Rubicon takeover bid of Tenon - although he says it was a board decision rather than his own. "I don't want to take the credit or the blame for it," he quips.

Rubicon launched its bid at $1.85 per share bid, later lifting it to $1.95 - well short of the $2.01 to $2.22 a share independent advisor Grant Samuel said Tenon's shares were worth. Things got acrimonious when Tenon's directors advised shareholders to reject the bid because it wasn't fair. The Tenon board accused Rubicon of having no alternative strategy for the company, and pointed out that directors Mike Andrews and Moriarty had supported the wood processor's strategies.

In the end, sufficient institutional and small shareholders decided the offer was good enough for them, and ceded control of Tenon on the very last day of the bid. AMP Capital Investors hedged its bets by selling less than half of its 6.8% shareholding. It crystallised value on shares it had paid around $1.30 for, while retaining a stake in order to gain from Tenon's next capital repayment, due in September, and to see what value Rubicon will add.

No one had seen the Rubicon bid coming. Speculation was centred on other forestry players such as Weyerhauser or Carter Holt Harvey. And the greatest irony of the deal is that Rubicon has gained control of Tenon using Tenon's own money. Rubicon received just under $70 million in Tenon's first capital repayment and could reap up to $160 million in the next, easily covering the $163.2 million cost for control.

The spoils of victory include a boardroom purge, with Tenon chair Sir Dryden Spring replaced by Gibbs, and Warren Larsen also resigning. The Securities Commission, meanwhile, is investigating share trading by Spring and others in the lead-up to Tenon revising on 8 April its June-year profit forecast from $21 million to $32 million.

Having failed to fend off Rubicon's takeover, Spring was defiant in defence of Tenon's recent performance. He says the previous board and management had put in the hard yards to transform the company from a poorly-performing tree grower to a refocused value-add marketer, which is why Rubicon made its move now. "It's now a very tasty and digestible morsel." He says Rubicon's criticism of Tenon's implementation of the new strategy was simply a ploy to get shareholders to sell.

Tenon chief executive John Dell, who spoke out strongly against the takeover, has said he and his management team will stay. He says in the context of takeovers, the criticism of management was "fairly mild".

The Rubicon board has also had a shake out, with four of its nine directors going. Andrews has been replaced as chair by Stephen Kasnet, with Rubicon sensitive to market resistance to having a Fletcher old boy in charge. Further down the track it is likely Rubicon and Tenon will merge to reduce high head office costs.

Further rationalisation of Tenon's assets will come, Moriarty says, though he isn't revealing Rubicon's game plan just yet. It's no secret CHH, for instance, is interested in Tenon's sawmills.

Spring says Tenon's board used to comprise people who build things, "now it is people who are investors, wheelers and dealers, who buy and sell over a period of time. That's where their strength is and none have demonstrated strength in running businesses."

Gibbs retorts: "That's utter nonsense. My track record speaks for itself." He insists with Rubicon in charge Tenon will be a catalyst for change in the timber processing industry. Tenon's focus is likely to be on pushing its North American distribution assets harder. "It is about moving radiata up the value curve," Moriarty says. "Tenon does a lot of that now but we will be doing more of that. At the moment it would still be weighted towards lumber more than added value."

Also still unclear is whether Rubicon will seek to go to 100% control of Tenon or whether GPG will grab a bigger stake in Rubicon. 'We got there in the end, but this is not the end of it," Gibbs says, smiling. No wonder Moriarty took the chance to celebrate wildly with other Rubicon staffers when the takeover succeeded. He's going to be busy from here on proving to his newly aligned shareholders the $1.95 Rubicon paid is really worth more.

RUBICON'S assets:

  • 50.1 stake in Tenon

  • 50% stake in Horizon 2, a NZ tree cloning company half-owned by CHH

  • 32% stake in Aborgen, a US-based tree biotechnology consortium

  • 50% stake in Forestadora Tapebicua, an Argentinian eucalypt forest and timber processing business

  • 2.8% stake in listed genomics company Genesis Research and Development
  • TENON'S assets:
    Manufacturing facilities:

  • three North Island sawmills

  • Mt Manganui plywood mill

  • Taupo mouldings plant and boards plant

  • Kawerau remanufacturing plant

  • Ramsay Roundwood supplying post, piles, poles and other landscaping products
  • Distribution ownership:

  • 50% stake in American Wood Moulding, a US moulding and millwork distributor, whose major customer is The Home Depot

  • 67% stake in The Empire Company, a US moulding and millwork distributor whose major customer is Lowe's

  • 20% stake in Zenia House, a Danish solid wood furniture, manufacturer and distributor


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