Forum Archive Index - October 2000

[Mike Hudson <MHudson@placemakers.co.nz>]

This is the full text of the Fletchers News Release. It is very long but you
may find it interesting, especially the FFS pro forma balance sheet.

Fletcher Challenge sets course for its three Divisions


October 10, 2000 

A programme to complete the Fletcher Challenge Group restructuring and
separation of the remaining three targeted share Divisions was announced
today by Dr Roderick Deane, Chairman of Fletcher Challenge Limited.

In announcing the outcome, Dr Deane said "We indicated when we announced the
sale of the Paper Division in April that the Board would continue to
evaluate all potential outcomes for the Building, Energy and Forests
Divisions, and this has now been completed. The Directors, together with the
senior management and external advisors, have been involved in a
comprehensive review and evaluation process to determine the announcements
we are making today.  Our over-riding goal in the process has been to
maximise value over time for shareholders whilst adhering to a tight
timeframe.  I can say unequivocally that the Board is unanimous in
recommending these restructuring outcomes, as the best value for
shareholders, and a good outcome for New Zealand." 

Recommendations to Shareholders:

Building Division
*       Will be separated as a stand-alone publicly listed entity named
Fletcher Building

Forests Division
*       Will be a stand-alone publicly listed entity named Fletcher
Challenge Forests

Energy Division
*             Will be sold to Shell and Apache Corporation for total
transaction value of $4.6 billion (US$1.84 billion)

And a new New Zealand-based company, Rubicon 
*            Will be established to commercialise selected emerging
technologies 
*            Will play a key role in facilitating the Group restructuring
process



To:     BUSINESS EDITOR                 From:   GINNY RADFORD
                        TRANSITION COMMUNICATIONS MANAGER
Fax:    AUTO    Telephone:      64-9-571 9812 - Office
                Mobile: 021 968 935
                Fax:    64-9-571 9871
Please Note: If you do not receive  page(s) including this page, or if any
page is not readable, please call the sender immediately on telephone
64-9-525 9000. Further information on Fletcher Challenge Limited can be
viewed at the Fletcher Challenge World Wide Web site, at
http://www.fcl.co.nz
It is intended that full information and disclosures on each of the
recommendations will be provided to shareholders in December in preparation
for the shareholder approvals in late January, 2001.

Impacts:

For Building Division shareholders

*       A stand-alone listed company, with a clear focus on the New Zealand
building arena

*       Realignment of the portfolio towards core activities, including 'new
growth' opportunities refocused on New Zealand

*       A final dividend of eight cents per share is declared to
shareholders of record on 27 October, payable on 9 November, 2000

        For Forests Division shareholders

*       A stand-alone listed company, targeted to the marketing, processing
and management of  New Zealand-grown Radiata plantation forestry

*       A re-capitalisation of the company, through a fully underwritten
pro-rata 2:1 rights issue of Forests preference shares at $0.25 per share,
raising $427 million of new equity, with cash to be paid in full in December
2000.

*       Rubicon will also subscribe for a placement of $90 million of
Forests ordinary and preference shares 

*       Forests' biotechnology and South American assets will be sold to
Rubicon for $80 million

For Energy Division shareholders

*       Receipt of 
                NZ$ value       
-       US$3.34 per share (NZ$8.30 at Monday's foreign exchange rate of
0.4025) in cash         8.30    
-       An entitlement to receive 1 Capstone share for every 70 Fletcher
Challenge Energy shares held (equating to $1.72 per Fletcher Challenge
Energy share at a foreign exchange rate of 0.4025 and Friday's Capstone
share price of US$48.50)                1.72    
-       1 share in the new entity - Rubicon - for every Fletcher Challenge
Energy share held (valued at approximately $1.20 each)          1.20    
        
        Total value     
        11.22   

The total value of the transaction represents a premium of 43% over
yesterday's Fletcher Challenge Energy closing share price.

*       There will be no final Fletcher Challenge Energy dividend

*       The acquisition by Shell and Apache is subject to regulatory
consents in New Zealand (including the Overseas Investment Commission and
Commerce Commission), Australia, Canada, the United States, and Brunei.
The new company, Rubicon 

*       Will be established, on separation, as an active business with a
defined strategy to commercialise emerging new technologies that have
high-growth, high-margin potential.

*       Will play an important role in the restructuring process, by
supporting the recapitalisation of the Forests Division, and acquiring some
Energy assets.

*       Will initially consist of: 
*       The biotechnology assets and South American forestry assets acquired
from the Forests Division for a combined price of $80 million
*       The Challenge! service station network of strong New Zealand small
businesses, and the Brisbane, Timaru and New Plymouth terminals which
support them, acquired for $20 million
*       14% of New Zealand Refining Company shares 
*       $20 million in cash
*       An alliance with Genesis Research and Development in relation to
bioremediation
*       Commitments to subscribe for a placement of $90 million of Forests
shares and also to sub-underwrite $170 million of the Forests rights issue

Timetable:

The indicative timetable, which may change as regulatory and Court processes
require, is shown below.  Shareholders will be kept informed of any changes.

Mid-October     Commerce Commission decision on the Shell application in
relation to Energy

2 November      Annual Shareholders' Meeting, which will also consider
Forests rights issue

Mid-November    Rights trading commences

Early December  Rights offer closes 

Late December   Documentation mailed out for Separation meeting

Late January    Shareholder separation meeting and vote on recommendations 

Early February  Separations completed

The entire separation programme, which is subject to shareholder approvals,
will be undertaken by way of a Court-approved plan of arrangement, as was
the case with the sale of the Paper Division to Norske Skog.


"The Board and management are pleased and satisfied about the outcomes
announced today," said Dr Deane.  "We believe they will provide the best
value to shareholders, will retain some key New Zealand activities, and will
establish successful and effective New Zealand-based businesses in building,
forestry and the new economy.  It will also establish our energy business in
a position of scale for the future.  Importantly, this outcome will retain a
New Zealand focus for activities which have been a part of the New Zealand
economy for many years, and also provide the catalyst for commercialisation
of exciting new technologies from a New Zealand base. You have had a glimpse
of the future. And it is bright"





Details follow



Fletcher Challenge Forests Limited

A full range of Forests ("FFS") alternatives was canvassed with leading
international forestry players - both industry and financial. The value
implicit in those alternatives was compared with the value that could
reasonably be expected to be achieved through a stand-alone Fletcher
Challenge Forests.

"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, " Dr Deane said today.
"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."

These issues are:
*       Excessive financial leverage 
*       The need to narrow the business focus
*       Concerns as to the future of the Central North Island Forest
Partnership (CNIFP)
*       An improved cost / operational improvement focus
*       A key management appointment outstanding

In terms of management appointments, Terry McFadgen will take up the
position of Chief Executive of Fletcher Challenge Forests, filling the role
that has been vacant since July of this year. Mr McFadgen has been Chief
Executive of the Building Division for the past five years, and will bring
to Forests a track record of successful leadership in a closely related and
aligned industry.  Mr McFadgen's skills and experience are particularly
suited to the issues Fletcher Challenge Forests is addressing, and he will
take up his new role immediately. 

In relation to the financial leverage of the Division, the Board's
recommendation is that Fletcher Challenge Forests be re-capitalised by way
of a fully-underwritten pro-rata 2:1 rights issue of preference shares at
$0.25 each, raising approximately $427 million.  In addition, Rubicon will
subscribe for $90 million of Forests ordinary and preference shares at an
ex-issue price of $0.40 per share which is equivalent to $0.70 per share cum
issue (see rider).  These new capital raisings will have a positive impact
on the financial position of the Division, improving the debt to total
capitalisation from 34.7% to 13.5%.  (Refer attached proforma balance
sheet).

Fletcher Challenge Forests may consider using part of the proceeds arising
from the recapitalisation to reduce the senior bank debt of the CNIF
Partnership, provided that CITIC makes the same reduction.  Receipt by the
banks of these payments should allow them to grant a waiver of the event of
default in respect of an earnings/interest ratio covenant which is otherwise
expected to occur in December 2000.

"Having completed a comprehensive evaluation process, the Board strongly
believes that more value will accrue to shareholders by re-capitalising
Fletcher Challenge Forests in this manner, rather than by selling the entire
Division to an industry buyer or, alternatively, by selling part or all of
the forest estate to effect the re-capitalisation. 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,
" Dr Deane said.

In terms of narrowing the business focus, Dr Deane explained: "Moving
forward, Fletcher Challenge Forests will focus on its core operations and
strategies surrounding:
*       expansion of its existing marketing and distribution activities in
New Zealand, Australia, North America, Japan and Asia
*       its value-added processing operations
*       New Zealand forest management activities
*       its New Zealand Radiata resource
Current strategies and assets that fall outside these activities, including
our biotechnology assets and our activities in South America, are deemed to
be non-core and are being sold to Rubicon."

However, the recently-achieved certification by the Forest Stewardship
Council is a globally-recognised benchmark for the sustainable management of
forests.  This will provide a significant marketing opportunity in those
markets which demand environmental responsibility. 

The Directors have agreed that Fletcher Challenge Forests will sell its
biotechnology and South American forestry assets to Rubicon for $80 million.
"We believe this reflects excellent value for the intellectual property that
the Division has developed to date.  In addition to achieving value in the
sale, Fletcher Challenge Forests will be relieved of an existing and
on-going financial commitment of some $40 million necessary to fund our
share of ArborGen's cash requirements over the next 4 years.  As part of the
sale, Rubicon will agree to continue to make available to Fletcher Challenge
Forests, at market value, the superior clonal resource developed out of the
Te Teko laboratory in the Bay of Plenty.  Overall this is an excellent value
outcome for Forests Division shareholders, and also brings with it an
important first step in the recapitalisation of the company," Dr Deane
confirmed. 

In relation to continued partner issues in the CNIFP, Dr Deane said:
"Despite best endeavours, to date we have been unable to reach agreement
with CITIC on outstanding issues. These issues are complex and difficult to
resolve, particularly with the overhang of the Group restructuring process.
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," Dr Deane
continued.  

In relation to operational improvement, as the Forests Division is narrowed
down to the core operations identified, there will continue to be
opportunity for both cost reduction and operational improvement, building on
the successful record of the past few years.  " We are targeting a further
reduction in annual non-forest operations costs of $15 million to be
achieved over an 18 month period.  These reductions will align the company
closely with best-practice international benchmarks in this area as well as
in its forest operational areas.  In addition, a sustainable reduction in
working capital will be targeted over the next six months, and a capital
productivity program introduced." Dr Deane confirmed.
Rider:  Rights issue
Approval for the rights issue (which will require an affirmative vote from
more than 50% of all Fletcher Challenge shareholders voting together) will
be sought at the Annual Shareholders' Meeting on 2 November 2000.  As part
of that rights issue, Rubicon has agreed with the underwriter to acquire a
portion of any rights issue shortfall up to a maximum of $170 million.
Normal conditions apply to the underwriting agreement.  Included is a
"market out" condition if there is a decline of 10% or more in the NZSE40
Gross Index over five consecutive days.   In addition, upon the separation
of the Energy Division, Rubicon will subscribe for $90 million of Forests'
shares by way of a placement.  If separation does not proceed and Rubicon is
not established, FCIL has agreed to compensate the underwriters for losses
incurred arising from the underwrite and share placement up to a maximum of
$200 million (such liability to be shared by the Energy Division as to ¾ and
by the Building Division as to ¼)



Fletcher Building Limited

The Building Division ("FCB") will stand alone as a separate publicly listed
entity.  The Board is convinced that Fletcher Building has the potential to
be a high performing company.  After full analysis, the Board's clear view
is that the value which can be achieved by operating Fletcher Building as a
stand-alone company, with the implementation of a new performance focus and
strategic direction, far exceeds that offered by interested industry and
financial buyers.

The new direction of Fletcher Building will focus on earning the right to
growth through three key themes:

*       Portfolio re-alignment, and the exit over time of under-performing
and non-core assets. In particular, it is intended that the Division's
current activities in both India and South America will be exited at the
appropriate time, and the focus will move back to New Zealand-based
businesses

*       An aggressive cost/operational programme, with an emphasis on
achieving international best practice in all operations in terms of cost,
efficiency and working capital usage

*       A increased involvement in "new-growth" opportunities within the
building industry template in New Zealand

                                Examples of this growth will include greater
participation in e-commerce initiatives and extending Fletcher Building's
existing research and development activities into composite building
materials. 

These changes will be initiated with the appointment of a new Chief
Executive Officer for Fletcher Building - Alexander Töldte, who brings a
broad experience in implementing performance improvement and growth
strategies to this role.  Mr Töldte was previously Chief Executive of the
Paper Division.

"Expressions of interest were received for the whole of the Building
Division from financial buyers", said Dr Deane.  "However their view of
value reflected the fact that they were unable to bring any significant
industry synergies to a potential acquisition.  While the restructuring
process had generated significant trade buyer interest in the Building
Division assets, it was clear that the narrow single-focus operations of the
major global building industry players did not fit well with the portfolio
nature of Building's current operations."  

Fletcher Building will also play a supporting role in the Group
restructuring process, by sub-underwriting to Rubicon up to $50 million of
the Forests' rights issue.

The Board has also declared a final dividend of eight cents per share, to be
paid on 9 November to shareholders of record on 27 October 2000.



Energy Division 

The Board of Directors are unanimously recommending to shareholders the
acceptance of an offer from Shell and Apache for the acquisition of Energy
Division ("FCE").  

The transaction, which is conditional on regulatory and shareholder
approvals, will involve Shell and Apache acquiring the Energy Division. As
part of this transaction, Fletcher Challenge Energy shareholders  will
receive: 

*       Cash of US$ 3.34 (NZ$8.30 at Friday's foreign exchange rate of
0.4025) per Fletcher Challenge Energy share
*       An entitlement to receive 1 Capstone share for every 70 FCE shares
held
*       1 share in Rubicon (the new company to be formed) for every FCE
share held

In addition, Shell will make a payment to Fletcher Challenge Limited, which
will be used to repay all outstanding indebtedness of FCE at closing, and
also cover the Energy Division's share of the total Group restructuring and
separation costs. 

"At Friday's Capstone share price of US$48.50 per share, and using the book
value of Rubicon's assets, the joint Shell/Apache offer is equivalent to
NZ$11.22 per FCE share. This is a 43% premium to yesterday's FCE closing
share price on the NZSE of $7.85, and an even higher premium to the
prevailing share price of around $6.75 per share in July  - that is, the FCE
share price prior to Shell's application to the NZ Commerce Commission being
made public and any resultant take-over speculation being imputed into the
FCE share price," Dr Deane said. 

"We recognise that a significant part of the value shareholders will receive
will ultimately depend on the price attributed to the Capstone shares.
While we cannot influence that in any way, a very positive aspect of the
Shell and Apache offer is that it will ensure shareholders receive Capstone
entitlements as soon as possible, so that they can make their own investment
decision as to those shares.  We hope that shareholders will be able to
convert their Capstone entitlements into Capstone shares in just over a
month from the settlement of the Shell and Apache transaction in mid
February." 

Commenting on the US dollar nature of Shell's offer, Dr Deane confirmed that
as FCE is a US dollar functional currency business, over time its share
price has tracked, and will continue to track, movements in the NZ$ to US$
cross rates. "Because of this, we have moved to protect the offer price to
shareholders from movements in the New Zealand FX rate against the US
dollar, by agreeing that Shell and Apache bid in US dollars," he said.

The Shell and Apache offer is subject to regulatory consents in New Zealand,
Australia, Canada, the United States and Brunei. The New Zealand Commerce
Commission is expected to rule on any competition issues resulting from the
acquisition shortly.

Speaking to the wider review process adopted, Dr Deane said: "There was
extensive third party interest in the Energy Division, and all major
industry players with an interest in our particular mix of geographies, oil
& gas assets and maturity profiles were contacted as part of the
restructuring process."

"Given that, we strongly believe that the price offered by Shell and Apache
today represents the best value that can be obtained for shareholders in an
outright sale of Fletcher Challenge Energy.  Further, having reviewed the
stand-alone alternative, the Board is confident the Shell and Apache
proposal offers better value today, with certainty, than could reasonably be
expected to be achieved over time, were the Division to trade as a
separately-listed public entity." 

Dr Deane went on to say "While we may have liked to have seen an
independently-listed Fletcher Challenge Energy, the Shell and Apache offer
is an excellent one, and it is quite clear that it is in the best interests
of Energy shareholders.  In addition to the full cash component of the offer
price - which represents a figure in excess of Friday's closing Fletcher
Challenge Energy share price inclusive of the Capstone shares - the
availability of the Capstone entitlement and the Rubicon shares as an
additional component of the consideration is a significant plus for
shareholders.  With Capstone, they will be able to receive freely tradeable
stock in a company that has shown very strong equity market performance
since its initial public offering in June of this year."  

"The outcome would not have been possible without the restructuring that
Greig Gailey and his team have carried out over the past 18 months, and the
tight focus on operational performance that all employees have been
responsible for," Dr Deane confirmed. "For our valued employees, customers
and stakeholders in FCE, we are satisfied that we have been able to turn the
business over to two leading players in the global E&P business.  It is also
very pleasing that both Apache and Shell have acknowledged the capabilities
of many of our people."



Rubicon 

Commenting on the formation of Rubicon, Dr Deane said: "The Board is excited
about the establishment of a new company as part of the separation process.
Rubicon will be an on-going, active business, with a defined strategy to
commercialise new technologies that have the potential to capture
high-growth, high-margin opportunities in emerging industries.  Rubicon will
be a New Zealand-based publicly-listed entity, and will form alliances with
New Zealand's universities, Crown research institutes and other research
groups to work with them to develop and commercialise the intellectual
property and knowledge that exists in selected industries."

The initial mix of business will reflect not only the future direction of
Rubicon but also the need to facilitate the separation process through this
vehicle. The business mix will be refined rapidly and constantly to ensure a
focus on the core long-term strategies of Rubicon while looking to extract
shareholder value from the non-core assets.

On its establishment, Rubicon will consist of:

*       The forestry biotechnology assets (acquired from the Forests
Division) consisting of: -

*       An active investment in ArborGen  (the biotechnology joint venture
between the Forests Division, Westvaco, International Paper and Genesis
Research and Development Corporation, formed earlier this year to produce
and market tree seedlings that will improve forest health and productivity)

*       The tree technology operations at Te Teko in the Bay of Plenty

*       A 2.9% investment in Genesis Research & Development (Genesis)

*       The South American forestry assets of the Forests Division 

*       The Challenge! network of retail petrol operations, and related
terminals in Timaru and New Plymouth, plus the Brisbane terminal (acquired
in total for $20 million)

*       A 14% interest in NZ Refining Company

*       A strategic alliance with Genesis, to commercialise research and
development of bio-remediation

*       A commitment to the Forests Division's recapitalisation by providing
up to $170 million of any shortfall on the rights issue, and taking up a
placement of $90 million of new Forests ordinary and preference shares.

All the shares in Rubicon will be received by Energy shareholders as partial
consideration for the acquisition of the Energy Division by Shell and
Apache.

New Board and Management

Dr Deane also announced the appointment of Mr Luke Moriarty to the role of
Chief Executive Officer of Rubicon.  "Luke is an ideal candidate for this
position. He has lived, studied and worked internationally, in both
financial and strategic leadership roles.  He has been a member of the
Executive Office of Fletcher Challenge for several years with his current
responsibilities encompassing the direction of the Group's strategic growth
initiatives."  

Referring to Rubicon's mandate, Dr Deane continued:  "Clearly, we have been
extremely successful in this type of endeavour in the past.  For example, a
clearly defined vision of the future for distributed power generation,
combined with a minimal US$20 million investment in Capstone Turbine
Corporation, has generated some $900 million of value for shareholders
today.  We believe we can pursue  promising similar future opportunities,
including our current investment in ArborGen." 
 
To ensure Rubicon moves forward quickly, a Board and management team with
broad international experience will be appointed.  They will not only
provide the key strategic and commercial governance required, but they will
also enable the forging of relationships and alliances necessary to access
opportunities and move the company forward.  Key Board appointments will be
announced immediately following the establishment of Rubicon.


First alliances in place

Rubicon will also establish a strategic alliance with Genesis Research and
Development Corporation in relation to the commercialisation of research and
development into industrial biotechnology and bio-remediation (the clean up
of contaminated soil and groundwater through the use of microbes, fungal or
plant-based organisms). "Environmental management is a US$500
billion-industry internationally, and soil and water remediation represent a
large proportion of this figure", said Dr. Deane.  "Genesis and Rubicon will
jointly fund research into the discovery of organisms that not only assist
in the speed of natural remediation, but also increase the toxicity levels
that can be handled.  We see this as a natural extension of the type of work
we are carrying out in ArborGen," he said. 

Role in restructuring of Fletcher Challenge Limited

Dr Deane also explained that in addition to the value which will be derived
from the implementation of Rubicon's on-going strategy, the company will
play a critical but shorter-term role in the immediate dismantling of the
Group's targeted share structure announced today. 

"First, its presence will help to complete the re-capitalisation of Fletcher
Challenge Forests.  By acquiring Forests Division's biotechnology and South
American forestry assets at fair value and at the same time removing
Forests' $40 million R&D cash commitment to ArborGen over the next 4 years,
Fletcher Challenge Forest's focus is not only refined to its core business,
but future free cashflow projections are improved.  In addition, as Rubicon
will support the rights issue by providing up to $170 million of any
shortfall and also $90 million by way of new Forests share placement, it is
providing increased certainty to Forest Division shareholders, and also to
all Fletcher Challenge shareholders, that the overall Group separation will
be successful. 

"Secondly, Rubicon will act as the acquirer of those Fletcher Challenge
Energy assets which did not match with Shell's vision for the Division.
Challenge! retail petroleum operations and their related terminals in New
Zealand, and the Brisbane terminal in Australia and the New Zealand Refining
Company shares all fall into this category.  These will be non-core to
Rubicon's outlined strategy, and will be disposed of as and when value can
be achieved for shareholders.












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