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Fletcher Forests not basket case despite woes

Friday 15th December 2000

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By Peter V O'Brien

The $166 million shortfall in Fletcher Forests' $427 million rights issue preference shares came into perspective when it was seen as the equivalent of the 30th company by market capitalisation on the Stock Exchange, excluding overseas-based groups with a local listing.

It was also just 27.3% less than the market capitalisation of Fletcher Forests' ordinary share on Monday when both classes of securities traded at 27c.

Although the shortfall was the biggest in New Zealand corporate history, that had to be balanced against the issue being at the top end of historical rights issues, as opposed to new initial offerings from established companies such as Telecom and the demutualised insurance groups.

The company gets its money in full because the issue was underwritten. The underwriters and sub-underwriters may not be too fazed at the size of the shortfall, given the widespread view that institutions were interested in increasing their stakes.

Some evidence of that was seen on Monday, the first trading day for the preference shares, when the security topped the exchange's turnover list in terms of volume and was fifth in dollar value.

The volume of 9.83 million shares and value of $2.57 million was a small proportion of the 1.71 billion preferences shares offered and the $427 million but they showed there was initial demand for the stock listing.

Small shareholders probably saw little merit in paying 25c for preference shares when the head shares were selling at roughly the same price but institutions take a different and longer-term view.

Fletcher Forests' revenue for the rights issue will be used to retire US dollar-denominated debt that will restructure the finances and make the Fletcher Challenge division more attractive and viable as a standalone company.

Institutional investors had sufficient nous to know Fletcher Forests had poor profitability but a solid asset base.

The division earned only $81 million in the year ended June 30 on total equity, including minority equity, of $1.45 billion and total assets worth $2.56 billion.

Net asset backing a share was $1.70, so Monday's share price of 27c, before taking account of the new capital structure, was 15.9% of nta.

Assets included the investment with China-based Citic in the Central North Island Forestry Partnership, an operation that ran into problems, both structural and a result of apparent name-calling on both sides.

Failure to resolve those problems would mean the partnership could be in default of its banking covenants, with the possibility of receivership.

Fletcher Forests would be better-placed than Citic in the situation in terms of final receipts of the joint venture's assets were sold.

The accounts at June 30 for Fletcher Forests included, under equity earnings, an amount of $62 million as permanent impairment relating to writedown in the carrying value of the partnership.

Total equity "earnings" were a loss of $100 million, compared with a loss of $99 million in the previous year.

Fletcher Forests is not a basket case, despite difficulties with the partnership and general current profitability.

It has real assets with a value well above the price of the shares and will come again or be taken over.

In either case institutions sitting on ordinary or preference shares bought in the 25-27c range would do well, after allowance for holding time before benefits and/or opportunity cost of alternative investments.

Private investors' agendas are different but they could eventually see the merits of that outlined scenario.

The market had other matters to absorb this week, apart from Fletcher Forests.

National Mail's decision to get out of mail distribution next week was surprising only in the sense that the company's report for the six months ended March 31 said continued growth in the second half of the year, combined with tight control of costs, would see the year-end financial result "in line with the forecasts in the National Mail prospectus."

The result for the year ended September 30 was awaited at the time of writing but it was said to be modified to include the shutdown of the mail business.

National Mail's experience, based on an inability to convince big volume mailers to change from New Zealand Post, was an example of what can happen when the little guy takes on the big guy.

That was seen in the battles between Telecom and alternative telecommunications companies, although the latter had bigger backup from overseas-based operators than local companies.

It also showed the caution with which people treat newcomers in an established market with a dominant player.

New Zealand Post gets periodic gripes about foulups but they are minimal compared with the millions of postal items that get delivered on time and at the right place.

In passing, it is weird but inevitable that people who rely on traditional mail services, rather than e-mail, faxes and so on, are eventually reliant on individuals toting fancy bags and walking from house to house or putting the right stuff in the right postal centre boxes.

Telecommunications group Newcall said it would miss its forecast break-even point on a monthly basis by the end of the year.

A battle is under way at mining investor Cue Energy Resources, with powerful shareholders calling a special meeting to remove some current directors and appoint others. That was interesting news as The National Business Review's year ended.

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