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The O'Brien Column: Sharemarket darlings lose their attraction as tech stocks shine

Friday 14th July 2000

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There was more evidence last week that long-standing sharemarket stars have waned while new objects, mainly in the technology sector, are developing a place in the investment firmament.

Telecom's share price dropped to a three-year low, before recovering at the end of the week and Fletcher Challenge took formal steps in its dismantling programme.

Companies in the rapidly growing technology sector announced more expansion proposals.

It could be an ironic coincidence that the chairman of both Telecom and Fletcher Challenge is Roderick Deane, given what happened last week.

Shareholders of Fletcher Challenge and of the paper division approved the sale of the division to Norwegian group Norske Skog at what was, from press reports, apparently a lively special meeting.

The company then announced it was offering to buy up to $1.1 billion worth of notes in the hands of US institutional investors as a start to its debt-repayment programme.

The offer was said to be part of the "separation process" and was conditional on completion of the sale of Fletcher Challenge Paper to Norske Skog at the end of the month.

Purchase would be conducted through FCL's wholly-owned subsidiary Fletcher Challenge Capital Canada.

The company said it would buy the outstanding notes tendered at or before the applicable "consent payment deadline" which was expected to be 5pm New York City time on July 18. The offer would expire on August 2.

FCL was also seeking consents to certain proposed amendments to the indenture under which the notes were issued.

The amendments would remove some restrictive covenants in the indenture "in order to, among other things, facilitate Fletcher Challenge's plan to dismantle its current operational and capital structure."

The "dismantling" was foreshadowed earlier in the year when FCL first announced the agreement to sell the paper division.

Investors showed little enthusiasm for the overall concept of the four letter stocks - Energy, Forests, Paper, and Building - although each had its moments on the market.

Fletcher Challenge Energy's price, for example, performed well this year, rising from a low of $4.01 to hit a high of $7.15 last week before easing back.

The total FCL group has forecast a solid increase in profit for the year ended but that did not do much for the share prices of the Forests and Building divisions.

As noted in The National Business Review on July 7, investment analysts have revised their profit predictions downward and investors have assessed the effects of competition on the company.

The draft report of the inquiry into the telecommunications industry was released two weeks ago and has implications for Telecom, in common with the rest of the industry.

A final report is still to be issued, after interested parties comment on the draft.

Overseas institutions were mainly responsible for the fall in Telecom's share price but it seemed local institutions were buying the stock last week, expecting it to come off its lows, a matter which would also have some elements of a self-fulfilling prophecy.

Apart from a general reweighting of holdings in institutional portfolio, the shares became attractive for individual investors at a gross dividend yield close to 10%, assuming the dividend this year remained at the same level as last year.

There is always a greater risk holding a share for dividend yield, rather than a fixed-interest security, because there could be a capital loss if the price fell and/or the payment was reduced, but Telecom's yield was high last week, irrespective of any potential company or industry problems.

Announcements came from companies in the technology industry, adding to the flood of activity in the sector this year.

Savoy Equities said it has rebranded its technology subsidiary, Savoy Technology to eSavoy, reflecting "the company's increased focus in the technology sector and its intention to demarcate its technology investment division from other property related activities."

The company said it was actively investigating a number of investment opportunities and recently registered as a bidder for the forthcoming radio spectrum auction.

That auction should be an interesting affair, with many companies apparently gearing up to make bids.

Spectrum Resources said its subsidiary, WEL Technology, had concluded a licensing agreement with US software company Lucent Technologies, an agreement mooted earlier.

The licence allowed Lucent to integrate WEL's customer-management software solutions had been used in the telecommunications area.

The listed technology stocks have a way to go before their share prices reflect benefits from the recent activity in the sector but their day could come.

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