Forum Archive Index - September 2000

["Mike Hudson" <mikehudson@clear.net.nz>]

Peter wrote

 

"Mike - been quiet re FLB lately.Really would appreciate what you make of the
years result.

 From what you posted a few weeks ago I would say that you would be
pleased

With the result now out what are your latest views on sale of FLB?

Looking forward to your response

Peter"

 

Well, I would hate to disappoint my avid readers so here is my update on FLB for what it’s worth.

The result for the June year was pretty much was pretty much as expected although the $30m adjustment for the Fletcher Challenge Employee Fund was a bit of a surprise and I can’t quite get my head around it. I was not best pleased with the $20m write off on the Fijian and Chinese operations either.  It was pleasing to see that the Steel division had a better result as it is the division that would give a potential purchaser the biggest concern.

One area that makes me very uncomfortable is the concrete operation in South America. The results were described as disappointing which could be Fletcher speak for disastrous. The EBIT was a loss of $11m and I see we have assets over there of $153m which is serious money. I would not be surprised if the company soon announced that this is not part of the core business and is to be sold at a huge loss (a la Steel adventure in China) Fletchers have done this so often in the past it is almost inevitable.

I agree with management that outlook for the current year is mixed. Positives are

• Strong domestic commercial and infrastructure market.
• Weaker NZ dollar which benefits the exporting companies, particularly FWP and to a lesser extent WWB
• Weaker dollar also assists those companies which have to compete against imported product.

Negatives are

• Slow down in the domestic residential construction market
• Falling confidence levels which impact on the buying decisions of both individuals and businesses
• Net emigration, reducing the demand for construction materials across the board
• Inflationary pressure. This could also be seen as a positive as nothing stimulates the housing market more than a bit of inflation.

As far as the divestment process is concerned my pick is a float. As I understand it there is only one potential buyer doing due diligence, a UK Investment Company (not GPG) This potential buyer would almost certainly be looking at flogging off the assets piecemeal.

The next Board meeting is in September and I would expect that any bid would be accepted or rejected at that time. Don’t forget that it is in the interests of the FLB top management for a float, they would rather be running an NZ listed company than being divisional managers of an overseas multinational or worse down at the Labour Exchange.

Given that a float for FLB would be fairly easy, that there is very little external interest and there is bound to be considerable pressure from management my pick is a separate listing. The Board could argue that this will allow the market to establish the true value of FLB. After listing the management of FLB would need to the share price up quickly or there will be an opportunity for a corporate raider like GPG to make a killing.

As far as FFS is concerned a recapitalisation and a separate listing seems to be increasingly likely. I believe that this would require about $400m in additional equity which would have to come from a new equity partner, an institutional placement or a rights issue which may not go down too well with some.

It would seem that the December deadline for the completion of the breakup will not be met; the end ofJanuary is now considered more likley

The above is my opinion only. I have no insider knowledge, only the scuttlebutt that runs round any company.

Cheers

Mike H