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Opinion: Hart surgery for Carter Holt may be a chainsaw massacre

By Simon Louisson of NZPA

Friday 19th August 2005

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Mayors, unions and a good number of Carter Holt Harvey's 10,500 workers are worried about the future.

They have every reason given the track record of Graeme Hart, who gobsmacked share analysts this week by snatching control of New Zealand's fourth largest listed company.

The former tow truck driver, who left school as a teen and is now the country's richest man, end-played all the smart American and Australian money tipped to buy CHH, offering International Paper (IP) $1.65 billion for its 50.5% stake, without bothering to even check the books.

He shut the door on competitors via a "lock-in" with IP.

Under takeover rules, Hart's Rank Group, must make a full takeover, which at $3.3 billion, will be the largest in New Zealand history.

Just last week Hart pulled off a stunning deal to sell Fonterra part of his NZ Dairy Foods for $754 million - a company he bought in its entirety three years earlier for just $310m.

The man who considers himself Australasia's leverage king, will need the $338m cash from that deal plus other borrowings to finance his latest purchase. His need to borrow heavily has encouraged speculation he will break up CHH, selling assets to cut debt.

Hart has uttered not one word to the media on this, or last week's deal, but the 50-year-old's actions may speak louder than words.

His record shows he jettisons underperforming assets and CHH has plenty of those. When asked which CHH assets have under-performed, one analyst commented: "All of them."

Analysts estimate CHH's break-up value at between $2.70 and $3.20 per share against the $2.50 Hart will bid.

The spin from CHH is `thank god the company has returned to New Zealand ownership'. But such sentiment will not prevent the axe being wielded.

Within weeks of his 54% owned Burns Philp taking over Australian food giant Goodman Fielder two years ago, 500 head office staff were put down the road. Dozens of plants were shut or sold shortly after.

Hart's long-standing hatchet man, Burns managing director Tom Degnan, believes companies can't survive unless they are at the very bottom of the cost scale.

In a rare interview after the Goodman Fielder takeover, Degnan rejected a journalist's comparison with Al "the Chainsaw" Dunlap who infamously hacked Sunbeam up. But he then went on to say employees should worry for their jobs if no restructuring is done.

Sackings are "unfortunate and regrettable".

When he noted Goodman had sold, or closed, 50 plants in the three years before Burns Philp took over, his comment was: "We're going to do more and faster."

Hart was helped to the big time in 1990 by a bungled Government privatisation that allowed him to buy Government Print for a fraction of its real value.

In 1993, he folded the company into stationer and bookseller Whitcoulls, which he bought from Brierley Investments, and three years later sold it for $320m.

Then, in 1997, he pounced on Australian food ingredients company Burns Philp. Initially, it was a disaster that saw the share price collapse from the $A2.45/share he paid for a 19% stake to 3.4c a year later. Lots of Australians and not a few New Zealanders rubbed their hands in anticipation of blood on the floor.

But Hart pulled it around to the extent that in 2002 Burns Philp bought Goodman Fielder for $2.5 billion in an audacious play.

Goodman had many similarities to CHH. It had been restructured and re-engineered virtually continuously but earnings and its shares remained stubbornly lethargic. Once absorbed into Burns Philp, Degnan set about Goodman Fielder.

The consequences may be dire for CHH workers and mill towns, but it may be good for CHH's shares. They have jumped above Rank's bid price as investors bet on Hart's previous form.

Independent analyst Brian Gaynor believes Hart will be good for CHH for several reasons.

Firstly, Hart is a New Zealander who beat off a number of overseas private equity funds that may have shaken CHH similarly but would have given little thought to local interests. Whether Hart proves better remains to be seen.

Secondly, he believes Rank does not want total control, so CHH will remain a listed entity, something NZX boss Mark Weldon is extremely happy about given the rapid disappearance of major companies from the exchange this year.

"It (IP) was shopping its share in CHH all around the globe and to have a New Zealander compete via the New Zealand capital market and to be successful in pretty short order is a pretty good story for our local infrastructure and for our competitiveness," he said.

Gaynor said most kiwis had welcomed IP when it bought CHH in 1991 because it was expected the world's biggest forest products company would give CHH entry to markets. The view that American companies would prove to be mean, lean and entrepreneurial proved a myth though.

In fact, he said IP peaked as a company in the 1960 and has recently been run more like a huge Government department riddled with bureaucracy.

"The existing board and management just haven't been able to do the kind of things that needed to be done."

Managers such as John Faraci, the current IP chairman and chief executive, used CHH to climb the corporate ladder, more interested in not rocking the boat than taking risks.

Gaynor said the while CHH would have occupied 10% of the IP board time at best, for Hart it will be paramount.

"Is someone like that going to initiate change more than someone than someone from a huge, big, established, conservative company?"

CHH chairman John Maasland tried to give reassurance on the mills' futures noting that IP had poured huge money into Kinleith and Tasman on the basis that they had a long term future. Maasland said CHH's mills "have been restructured down to be very efficient in terms of world standards".

However, the dearth of new investment to process New Zealand's so-called "wall of wood" coming on stream implies processing plants may be cheaper to operate in China or elsewhere.

"The problem always has been of course, the exchange rate, which has made things very difficult, and the low pulp prices."

His comment that "as long as we see some change in the dollar, we'd see them continuing to operate here," suggests that if there is no change in the exchange rate, shutdowns will occur.

Forsyth Barr head of research Rob Mercer believes Hart will have his work cut out to extract value from CHH. The world's biggest pulp and paper company, with all its market muscle, failed to provide that despite many restructurings.

"Extracting a premium value to $2.50 is going to be problematic. You have someone who has owned it for more than a decade not wanting to break it up as a means of extracting value. The process is not going to be easier because Graeme Hart's on board. Perhaps he may bring a clearer focus," he said.

"You have an insider selling and an outsider buying and a break-up of Carter Holt's assets is by no means a simple task."

He believes Hart will have to address financial performance as well as trying to extract value on a break-up basis.

Head of ASB Securities, Tim Preston, said Hart may take a longer-term view of the assets than most kiwis and hold the assets.

"That's the problem with the forestry assets in New Zealand, we just don't to have the capacity to hold assets long-term - we don't have the patience.

"That's why we are seeing a lot of our forestry assets, and these sorts of assets being bought by offshore buyers."

Preston expects Hart to focus on the crown jewels - the Northland and Kinleith forests and even he doubts the pulp and paper mills - Kinleith, Kawerau, Whakatane and Penrose in Auckland - will be held.

"I think they would probably be up for sale."

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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