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FFS investors promised value - but when?

By Phil Boeyen, ShareChat Business News Editor

Tuesday 10th October 2000

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Fletcher Challenge says recapitalising its Forests division via a rights issue will bring shareholders more value in the long run than by selling the entire division or selling forests assets to fund the recapitalisation.

The rights issue has been announced as part of a total restructure by Fletcher, which includes selling its Energy division and separately listing its Building division.

Fletcher Forests stock holders will no doubt feel left out in the cold by the latest restructuring of their company which not only doesn't bring any immediate returns but could see them forking out more money for the rights issue if it goes ahead.

Approval for the two-for-one rights issue will require an affirmative vote from more than 50% of all Fletcher Challenge shareholders voting together at the annual shareholders' meeting on November 2nd.

The market was quick to react to the proposed FFS recapitalisation plan, marking down the shares another 12 cents to close Tuesday at 50 cents.

Fletcher chairman Rod Deane says the company looked at a full range of Forests alternatives with leading international forestry players.

"The price environment for timber and other Fletcher Challenge Forests' products is currently at a relatively low level in historical terms, and this was reflected in the offers received from third parties. The Board is not prepared to recommend to Fletcher Challenge Forests' shareholders, asset sales at current prices."

"It is clear that several issues have been impacting Forests Division's value, both in terms of its current share price trading range and also the value ascribed to it by financial and trade buyers. However, as long as these issues are addressed quickly, we have no doubt that the stand-alone value of Fletcher Challenge Forests will be well in excess of all of the alternatives we have considered."

Mr Deane says the issues against FFS include excessive financial leverage, the need to narrow the business focus, concerns over the Central North Island Forestry Partnership, and an outstanding key management appointment.

The company has already addressed the latter by appointing current Fletcher Building CEO, Terry McFadgen, as FFS chief executive.

To improve its leverage, Mr Dean says the two-for-one rights issue of preference shares at 25 cents each will raise around $427 million for FFS, and Rubicon - a new company Fletchers is setting up - will subscribe for $90 million of Forests ordinary and preference shares at an ex-issue price of $0.40 per share.

The company says these new capital raisings will improve the debt to total capitalisation from 34.7% to 13.5%.

Forests will also sell its biotechnology and South American forestry assets to Rubicon for $80 million.

Mr Deane says the company will also consider splitting its Central North Island Forestry Partnership assets with its Chinese-owned partner, Citic, if the two cannot make progress in their current dispute.

"We are determined to resolve these issues with our partner, either by way of mutual understanding, binding arbitration or if necessary through court proceedings. If we are not able to achieve that, then clearly moving to split the assets in the partnership - again either by mutual agreement or by way of court proceedings - is another alternative open to us".

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