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Red face time again as Fletcher jumps the gun

By Shoeshine

Friday 19th September 2003

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What is it about the Fletcher Challenge Forests board that makes it charge into things as if pursued by the hordes of hell?

On Friday Fletcher revalues its forests from $1.03 billion to $582 million, a 44% drop on a pre-tax basis.

On Monday it announces it has agreed conditionally to sell those forests, and land assets, to the Campbell Group for $685 million, $43 million less than the board agreed they were "worth" one business day before. One of the conditions, subject to a break fee of $17 million, is that Fletcher won't talk to anyone else.

On Tuesday Kiwi Forests Group reveals it has also been talking to Fletcher and is prepared to pay $750 million, $65 million more than Campbell.

One bizarre aspect of the affair is that the devaluation was far larger than the market was expecting but still left the carrying value significantly ahead of the offer made by Campbell (major differentiator, "an opportunistic approach to investing," according to its website).

Analysts had expected a chop of around $245 million or 24%. That would have been less than Carter Holt Harvey's cut of 31% but more than Evergreen Forests' 18%.

Those with suspicious minds will suspect the actual 44% cut was the closest Fletcher thought it could get to the Campbell offer without triggering accusations it was exaggerating the value fall to accommodate a cheap offer.

The reason chairman Sir Dryden Spring gave for agreeing to a sale at below the just-established value was that the difference "reflects the price for the early realisation of value for shareholders, compared with an ongoing 'in use' value to be realised over time."

In other words, in Fletcher ownership the forests weren't returning the cost of the capital invested in them. Shareholders would be better off with their money in the bank.

That argument would have been fine if Campbell had been the only buyer in town.

But the board knew Kiwi Forests Group, a well-resourced bidder, was also interested. Yet it rushed to cut an exclusive deal with Campbell.

The board is now left looking somewhat silly. Shareholders are likely to want Kiwi's $750 million, not Campbell's $685 million, even if it means less cash upfront.

Their board has ensured it will cost them the break fee to take it.

This rush to sell at the bottom of the market compounds last year's embarrassment when the board unveiled a bid to buy back the Central North Island Forests before it had tested the waters of shareholder approval. Where's the fire, chaps?

Meanwhile calculators are clicking in sharebroking offices as the moneymen try to put a figure on the sudden flow of cash headed for local investors' bank accounts.

Shareholders have already pocketed a $1.2 billion cheque from John Fairfax Holdings for Independent Newspapers' publishing assets. Next up, if shareholders ignore the advice of the independent directors, is the $443 million cash component of INL's offer for Sky Network Television.

Toll Holdings' bid for Tranz Rail will add a further $185 million. Some time before Christmas, if the Campbell deal goes through, Fletcher Forests will pay out $558 million after selling its trees.

Of that, $111 million will go to Rubicon. It's a fair bet that too will be paid out to shareholders.

Mainfreight's offer for Owens Group adds $50 million.

All up, that's just north of $2.4 billion in the second half of the year ­ and that doesn't count the $475 million capital return from NGC Holdings, which is by way of share cancellation, not cash.

That's a healthy thing for a market that has soaked up its share of the $2.1 billion Promina float and is digesting Freightways' $141 million offering, together with an array of retail debt issues.

Other possible or probable corporate manoeuvres ­ for example, a full takeover bid for Tower or News Corp cleaning up the INL minorities after the Sky acquisition ­ could add to the pot.

All this activity is chomping steadily into the NZX's stock of equity listings.

Apart from NZX itself, the only replacements this year have been Promina, Freightways and Postie Plus.

A few smaller stocks ­ 42 Below, Feltex and Stirling Sports ­ have confirmed plans to issues shares and list, while the pipeline of on-again, off-again floats includes Jade Software, Tru-Test and Turners & Growers.

Working out how much of the capital released or about to be released will go to New Zealanders is more an art than a science.

And working out what the money New Zealanders get will be spent on is closer to necromancy. At a historically-guided guess, consumption, debt reduction, property and overseas investments will take a heavy toll, leaving very little for investment in local productive enterprises.

The Fletcher Forests sale brings closer to an end the epic tale of the breakup of the Fletcher empire.

In May 2000, just before the break-up began, the combined market capitalisation of the four Fletcher letter stocks ­ Energy, Paper, Building, and Forests ­ was about $4.44 billion.

Paper was sold a few weeks later, bringing in $1.6 billion for its shareholders. Holders of Energy shares got $3.3 billion later that year.

Building's market capitalisation earlier this week stood at $1.8 billion and Rubicon's at $200 million. A surge in the value of Forests shares after the sale announcement lifted its market capitalisation to $700 million.

Adding that lot up comes to $8.6 billion, almost twice Fletcher Challenge's May 2000 worth.

Sure, big mistakes were made both before the breakup and afterward.

But those who decided on and implemented the breakup should be given due credit for the massive amount of value that was realised from an ailing empire.

What was done with all that wealth is a matter for the individuals who got the cheques.

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