Forum Archive Index - October 2000

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

I agree with Malcolm when he said

" There is some ridiculous assertions being made on this forum regarding the Fletcher deal………….."

and "I would hope to see less accusing of the Fletcher Board and more analyzing why some feel they have been screwed form reviewing their own decisions…………"

I don’t know why some are getting their knickers in a knot as what was announced today was what most were expecting to be the most likely result

• The sale of FEG
• The recapitalistion and float of FFS
• The float of FLB.

The Rubicon (I wonder who coined that name) float is a neat way of packaging the assets that Shell can’t take due to Commerce Commission considerations and FFS can’t afford to take.

Some initial thoughts

Despite the conspiracy theorists the board have done as well as they could to get the company out of the mess that they and their predecessors had got it in. The whole process has been unbelievably complex (the final documents that the shareholders will receive will be as big as the Auckland telephone book) and it is somewhat of an achievement to get close to the original timetable.

Fletcher Building:

Personally I would have liked to gave seen a sale at around $2.50 but obviously but at the end of the day there was only one buyer interested but obviously they did not make a serious bid. The timing was bad as the currency situation probably worked against a deal; whilst theoretically the assets became cheaper in sterling terms (the potential bidder was from the UK) overseas investors would rather see a strong stable currency than one that is likely to go into free fall at any moment.

Given that the company is going to be a separate listed entity I am happy to hold my investment.

• The company has some excellent business units and although the residential housing market is weak there is strength in the commercial and infrastructure sectors.

• Cash flows are strong
• The extra scrutiny that being a stand alone company will bring more focus on management to perform
• The company could become a take over target for someone like Sir Brierly who could break it up and sell off the bits

On the down side

• The individual business units have some very good executives but there is a lot of dead wood at the senior management level, many of them have been doing very little on fat salaries for years. The worry is also that some of the refugees from FCL will finish up warming chairs at Fletcher Building. I don’t know anything about the new CEO, Alexander Todte but I hope he takes a chainsaw to the corporate office.
• The operations in Peru (and to a lesser extent India) really worry to me. I see that they are intending to sell these loss making operations which are on the books at over $150m which, if recent experience is anything to go by could result in a large write off.

• There is also a nasty little sting in the tail in the rider on the rights issue. " 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)" A contingent liability of $50m

Ironically the company is now just about back to where it was in the old Fletcher Holdings days when I started working for them 25 years ago.

Forests

The recapitalisation did not surprise me, it has been the most touted option for the last few weeks, but the extreme market reaction to it did. The balance sheet had to be strengthened by either a placement or a rights issue. At least a rights issue gives the existing shareholders the chance to participate.

The alleged asset backing of this company has always puzzled me. Most of the company’s debt is denominated US$. In the pro forma balance sheet an adjustment has been made to account for the currency fluctuations. The interest bearing debt has been increased from $NZ771 to$NZ892 but don’t panic as all other balance sheet items have been increased by the same percentage. How processing assets, presumably plant and equipment in NZ, which were worth $NZ202m can now be worth $NZ234m is beyond me. Plantation assets have been revalued from $NZ2,204m to $NZ2,550m! The net result of all this is that the NTA has gone up from $1.70 to $1.94!

Upsides

• Stronger balance sheet
• Lower dollar should have a net positive affect on returns

Downside

The CITIC problem. How this is going to be resolved is anybody’s guess. There must be considerable pressure coming on the CNI Partnership judging from this extract from the announcement "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." Nobody has mentioned a default before.

I still believe that based on analysts reports that FFS has a fair value of around 80c. Nothing has happened today which affects the value of the company so the shares are looking cheap. I nearly bought some more today but after yesterdays disaster I decided to hold off until the brokers’ reports are available in the morning, hopefully they will have been doing the calculations overnight.

Energy

To hold or sell? The closing price was $9.30 and as we are going to receive $8.30, subject to approvals and movements against the US$, the market is valuing the combined Rubicon/Capstone share at $1 at this stage (not quite, due to the two factors previously mentioned and the opportunity cost relating to the settlement not being until February, but near enough)

Rubicon is a real mish mash of orphan assets and could also finish up with up to $260m in FFS shares if the issue fails.

As I don’t fancy owning over 100 shares in Capstone which is a real punters stock I think the best option for me is to take the money and run.

Altogether an interesting saga which is far from over yet

Cheers

Mike H