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D-Day for Fletcher Challenge - market slams Building & Forests

By Ben Dutton

Tuesday 10th October 2000

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After months of market speculation, Fletcher Challenge today announced the results of its restructuring program. Energy is to be sold to Shell and Apache Corporation, while Building and Forests will be separated as stand-alone listed entities with Forests also being re-capitalised.

The announcement followed a halt this morning in all trading of the Fletcher Challenge letter stocks. Speculation quickly centred on a rumoured Forests rights issue which has dragged the share price down over the past week. However, few were expecting an announcement like the one that was given.

The market reacted swiftly to the news with Forests and Building both dropping like stones. As to be expected, Energy was up.

Here are the recommendations that Fletcher Challenge have made to shareholders:

Building Division:
- Will be separated as a stand-alone publicly listed entity named Fletcher Building.

Forests Division:
- Will be a stand-alone publicly listed entity named Fletcher Challenge Forests.

Energy Division:
- Will be sold to Shell and Apache Corporation for total transaction value of $4.6 billion (US$1.84 billion).

A new company called Rubicon will also be established to "to commercialise selected emerging technologies" and "play a key role in facilitating the Group restructuring process."

Here are the impacts for shareholders according to Fletcher Challenge:

For Building Division shareholders:
- A stand-alone listed company, with a clear focus on the New Zealand building arena.
- Realignment of the portfolio towards core activities, including 'new growth' opportunities refocused on New Zealand.
- A final dividend of eight cents per share is declared to shareholders of record on 27 October, payable on 9 November, 2000.

For Forests Division shareholders:
- A stand-alone listed company, targeted to the marketing, processing and management of New Zealand-grown Radiata plantation forestry.
- A re-capitalisation of the company, through a fully underwritten pro-rata 2:1 rights issue of Forests preference shares at $0.25 per share, raising $427 million of new equity, with cash to be paid in full in December 2000.
- Rubicon will also subscribe for a placement of $90 million of Forests ordinary and preference shares.
- Forests' biotechnology and South American assets will be sold to Rubicon for $80 million.

For Energy Division shareholders:
- Receipt of NZ$ value $8.30
- US$3.34 per share (NZ$8.30 at Monday's foreign exchange rate of 0.4025) in cash.
- An entitlement to receive 1 Capstone share for every 70 Fletcher Challenge Energy shares held (equating to $1.72 per Fletcher Challenge Energy share at a foreign exchange rate of 0.4025 and Friday's Capstone share price of US$48.50).
- 1 share in the new entity - Rubicon - for every Fletcher Challenge Energy share held (valued at approximately $1.20 each).

Total value $11.22

There will be no final Energy dividend declared and the acquisition is subject to regulatory consents in New Zealand (including the Overseas Investment Commission and Commerce Commission), Australia, Canada, the United States, and Brunei.

Fletcher Challenge says that the new company being formed, Rubicon, will initially consist of the following:

- The biotechnology assets and South American forestry assets acquired from the Forests Division for a combined price of $80 million.
- The Challenge! service station network of strong New Zealand small businesses, and the Brisbane, Timaru and New Plymouth terminals which support them, acquired for $20 million.
- 14% of New Zealand Refining Company shares.
- $20 million in cash.
- An alliance with Genesis Research and Development in relation to bioremediation.
- Commitments to subscribe for a placement of $90 million of Forests shares and also to sub-underwrite $170 million of the Forests rights issue.

Fletcher Challenge Chairman, Dr Roderick Deane, had this to say on the proposed restructuring plan: "The Board and management are pleased and satisfied about the outcomes announced today."

"We believe they will provide the best value to shareholders, will retain some key New Zealand activities, and will establish successful and effective New Zealand-based businesses in building, forestry and the new economy. It will also establish our energy business in a position of scale for the future."

"Importantly, this outcome will retain a New Zealand focus for activities which have been a part of the New Zealand economy for many years, and also provide the catalyst for commercialisation of exciting new technologies from a New Zealand base. You have had a glimpse of the future. And it is bright."

As investors digested the news, Forests was slammed down to a low of 50 cents. Just yesterday Fletcher Challenge CEO, Michael Andrews, advised the NZSE that "as previously indicated, intensive and comprehensive work on the separation process of the company's targeted stock structure is continuing" when queried on Forests share price fall.

Building was also hit hard, scrapping $1.98 before buyers pushed the price up again.

Initial reaction to the news has been mixed with many FFS investors being disappointed with the Forests decision.

ShareChat will be looking more closely at the restructuring plan in another story later today.

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