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As one empire declines ...

Sunday 1st July 2001

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Rubicon, one rump of the Fletcher Challenge empire, is shedding old assets to focus on an exciting biotech future. But how do investors judge what to pay?

Could Julius Caesar have known he would inspire (among other things) a surgical technique for removing live babies from the womb, and a New Zealand listed company? In 100BC he was born by Caesarean section. Fifty-one years later he "crossed the Rubicon" river, thereby declaring war on the Roman senate and, according to Webster's dictionary, making a "commitment to a hazardous enterprise from which there is no retreat".

Hence the phrase. The irony is not lost on investors looking to risk their money on Rubicon, the listed entity arising from the Fletcher Challenge break-up. Rubicon is touted as a commercialiser of innovation. It wants to be a technology incubator providing the management nous, industry knowledge, contacts and (crucially) the money to transform great New Zealand ideas into businesses. Sounds sexy. But before it can get hip to the new economy jive, it has to do the job it was primarily set up for: facilitate the Fletcher restructuring and on-sell Fletcher assets that don't have a home elsewhere - a 17.6% Fletcher Forest stake, the Challenge retail chain and associated fuel terminals, and Capstone Energy.

This means, until now, investors haven't bothered with the biotechnology side. And they've basically been getting it free. Rubicon paid $80 million for its biotechnology assets. Analysts rate these assets at around 23 cents per share. With the share price trading at a discounted 64 cents per share compared with its estimated value of around 90 cents per share, these assets are being given no value by the market. New investors have been attracted by the low entry price and are apparently punting on short-term gains from the sale of Fletcher's non-core assets rather than any upside from Rubicon's biotechnology assets. Take Richard Perry, for example. The New York-based private fund manager recently sold half of the 10% stake in Rubicon he bought in May. In just one month he made a reported $NZ1.6 million profit.

Rubicon recently announced a $40 million share buy-back (details were not out as we went to press) to try and strengthen its under-performing share price. It is partly using the proceeds from the recent $23 million sale of its Brisbane bulk fuels terminal - $3 million more than what Rubicon paid for it and the Challenge network combined. Analysts say the buy-back signals that Rubicon is prepared to return cash to shareholders, reducing any reinvestment risk. They have subsequently upgraded the net asset valuation by 5-6.5 cents per share, lifting it to as high as 95 cents.

Investor attitudes are unlikely to change until the Forest stake is sold, says Credit Suisse First Boston investment analyst Brian Stewart. He thinks the share price will settle at around 65 cents. And then it becomes an entirely different valuation game. As the sale of non-core assets is completed, or if the share price continues its steady rise, investors will be forced to give the biotechnology side more serious scrutiny.

How will they do that? One way is to simply rely on what analysts reckon the current assets are worth. The "jewel in the crown", according to Rubicon's Stanford-trained chief executive Luke Moriarty, is the company's 32% interest in ArborGen, the joint venture with International Paper, Westvaco and Genesis Research. AborGen is researching tree genetics to facilitate, among other things, faster growing trees. Moriarty is excited about the technology upside but also says ArborGen embodies the model for Rubicon's future investment philosophy - where an industry's leading science providers and science customers collaborate on research and development.

So, how much for ArborGen? It's difficult to gauge, partly because it is unlikely to be profitable for another six to eight years, and also because Rubicon hasn't released a breakdown of the $80 million it paid for its biotechnology assets. Forsyth Barr analyst Ian Graham is reluctant to give an overall value for ArborGen, but considers it unlikely the $40 million in research and development expenditure Rubicon is committed to over the next four years will be matched by market value. He estimates a value of $20 million.

Rubicon's other technology assets include joint rights to a comprehensive genetic database for commercial forestry species; Trees & Technology, a tree stock production and research operation at Te Teko in the Bay of Plenty; and a 50% share in Argentinian-based Forestadora Tapebicua, which is developing a super-tree, the eucalyptus grandis. Graham has down-rated Rubicon's South American assets by $10 million, to $30 million, because of the general forestry industry slump. At this stage he provides no estimates on the value of the company's other assets.

Rubicon holds a 3% shareholding in Genesis Research, whose own share price has halved since February, making Rubicon's stake now worth around $2.85 million. It also recently formed an alliance with HortResearch to commercialise the Crown Research Institute's intellectual capital. The initial focus is on fruit trees for diverse climates. How much money Rubicon needs to stump up will be announced in the July quarter. And this is just the start.

The way Graham sees it, Rubicon will have about $250 million in cash when it finishes selling its non-core assets, depending on realising the full value of Fletcher Forests. Moriarty won't estimate a figure. Even at a lower number, that gives Moriarty a good excuse to go shopping. And there is no shortage of opportunities. He's considered 35 investment proposals in the key areas Rubicon wants to be involved in: forestry, horticulture and agriculture. "The great risk in this business is spending money too quickly, before you've done the full arena analysis. We won't fall into that trap," he says.

Rubicon has ensured its board of directors and science and technology advisory board includes world-class leaders in their field. Moriarty himself is no slouch, with a BCA from Victoria University, an LLB (Hons) from Stanford University and a business background in New Zealand and North America that includes valuation, acquisition, joint venture analysis and structuring multi-billion dollar deals. "This model is all about business networking and communication," Moriarty says. It means Rubicon should hear about good ideas in New Zealand, and be able to invest in them, before others do. The key issue for investors is whether it chooses wisely. The venture capital rule of thumb is only one out of 10 investments will become a rip-roaring success. Caesar risked everything he had on his Rubicon and came out a winner. Maybe that's the symbolism Fletcher executives were seeking from theirs.


Fiona Rotherham
fiona@unlimited.net.nz

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