Forum Archive Index - April 2001

[ceejaynz@xtra.co.nz]

The following story has been sent to you by ceejaynz@xtra.co.nz who feels it 
may be of interest.


Senders email: ceejaynz@xtra.co.nzMessage: Saturday morning  "Herald" A useful 
piece to add to the discussion
Cheers
Ceejay

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        07/04/01 - Murky waters beyond the Rubicon By BRIAN GAYNOR

Rubicon: A small Italian river (Rubicone) that flows into the Adriatic Sea 
north of Rimini. The movement of Julius Caesar's troops over the Rubicon in 
49BC, which violated a law forbidding a general to lead an army out of his 
assigned province, initiated Caesar's successful three-year civil war against 
the Roman nobility.

"Crossing the Rubicon" now symbolises a determined course of action or a point 
of no return.

fxdrop,4,100 R rrubicon is a strange entity. The directors describe it as a 
business developer - a company providing the industry knowledge, management 
skills and financial capital to develop ideas and intellectual capital into 
commercial enterprises.

But investors have a totally different perspective. They see it as an 
attractive asset play or a cheap entry into Fletcher Forests (every 1c increase 
in Fletcher Forests' share price raises Rubicon's net tangible assets by 1.4c).

The company's shareholding base is also inconsistent with the directors' 
longterm objectives. Large overseas arbitrage funds, which are not interested 
in a company with a venture capital strategy, seem to dominate the share 
registry.

The unstable shareholding structure has created considerable uncertainty. 

Rubicon is the runt of the former Fletcher Challenge family. When Shell made an 
offer for Fletcher Energy, several assets not required by Shell or Fletcher 
Forests were dumped into the new company.

Rubicon also played an important role in the recapitalisation of Forests.

As part of the Shell offer, Energy shareholders received one Rubicon share and 
$US3.55 ($8.78) for every Energy share. They also received one Capstone share 
for every 70 Energy shares.

The new listing has a mixed bag of assets. Challenge Petroleum, which was 
bought by Rubicon for $20 million, is the country's fifth-largest petrol 
station operator with a 5 per cent market share. 

It has 111 branded retail petrol stations, 17 owned and run by Challenge and 94 
independently owned. 

It also has fuel terminals in New Plymouth, Timaru and Brisbane.

Challenge's purchase price appears to be on the low side, but no historical 
financial figures or profit forecasts have been supplied for this operation.

Biotechnology is identified as Rubicon's core activity. The company's 
prospectus gives far more coverage to this area than any other, but once again 
no historical financial figures or profit forecasts have been provided.

Fletcher Forests' South American biotech and forest assets have been bought for 
$80 million. An Argentine sawmill and plywood mill acquired as part of this 
deal appears to be operating at a loss. 

Rubicon also has a 31.7 per cent shareholding in ArborGen, a tree 
bioengineering company in South Carolina. It is committed to contributing $US4 
million a year to this operation over the next four years.

New Zealand-listed Genesis Research and Development has a 5 per cent 
shareholding in ArborGen and Rubicon owns 3 per cent of Genesis. Rubicon has an 
unresolved dispute with Genesis over royalties that is subject to arbitration 
proceedings.

A 17.6 per cent shareholding in Fletcher Forests is Rubicon's largest 
investment. These shares were acquired through the recent Forests' rights issue 
(267 million preference shares at 25c) and a placement (75 million ordinary and 
150 million preference shares at 40c each).

Rubicon can require Fletcher Building to buy up to 117 million Forests 
preference shares at 25c each by May 9. This put option is unlikely to be 
exercised because Forests has a market value of more than the transaction 
price. 

An appropriate value for Forests is difficult to determine because Central 
North Island Forest Partnership (CNIFP), in which it has a half share, is in 
receivership and export markets are soft at present.

Rubicon believes Forests is significantly undervalued. The directors say the 
low share price is primarily the result of the overhang from the recent rights 
offering and the uncertainty over CNIFP. 

They believe the rights issue overhang will quickly disappear and the 
resolution of CNIFP's problems will enhance value.

Analysts take a more sober view. They are not expecting any immediate 
improvement in Forests' core earnings and a dividend payment is unlikely.

 Nasdaq-listed Capstone Turbine Corporation shares have traded between $US98.50 
and $US17.75 over the past nine months. At latest market value and exchange 
rates, Rubicon would realise $38 million from the sale of its remaining 594,000 
Capstone shares, giving the new company cash resources of $51 million and the 
ability to borrow against its existing assets.

At yesterday's closing price of 46c, Rubicon is trading at a 47 per cent 
discount to its estimated net asset backing of 86c a share. On this basis it is 
an attractive investment, but investors should consider a few important factors 
before buying. 

A huge number of Rubicon shares overhang the market. Before the Shell offer, 
the ANZ, Citibank, Westpac and National nominee companies, which normally hold 
shares on behalf of overseas investors, were the registered holders of 127 
million Fletcher Energy shares, or 37 per cent of the company.

Even though one Rubicon share was issued for every Energy share, these four 
nominee companies held 222 million shares, or 63 per cent of Rubicon, on 
Thursday morning.

These figures seem to confirm that a large number of Rubicon shares are in the 
hands of US arbitrage funds - not natural longterm holders of a New Zealand 
biotech group.

Just before Shell's offer, Energy had 45,700 shareholders but Rubicon now has 
only 24,700. Nearly half of the original shareholders sold out before the Shell 
offer was completed because they didn't want either Rubicon or Capstone shares.

As Rubicon is a totally different company to Energy, it is highly unlikely many 
of these sellers will buy back into Rubicon.

Share registry records show that in the first three days of this week the total 
number of Rubicon shares held by the ANZ, Citibank, Westpac and National 
nominee companies fell from 242 million to 222 million.

Although stock exchange records show that 147 million Rubicon shares, or 42 per 
cent of the company, have been traded in the 10 days since listing, share 
registry figures indicate the bulk of the arbitrage fund holdings have yet to 
be sold. It also appears that Rubicon's value will be determined by asset 
backing rather than earnings, price/earnings multiple and dividend yield (the 
company does not intend to pay a dividend).

This valuation method contains good and bad news for Rubicon shareholders. 

Genesis and eVentures trade in excess of their NTA but Brierley Investments and 
GPG have been consistently below asset backing per share. Direct Capital, with 
a fairly similar business model to Rubicon, traded at a large discount to NTA 
before it was taken over in 1998.

Finally, there is the issue of directors and management - the most important 
determinant of company success.

It is encouraging to see that Rubicon has three outside directors with biotech 
and business development backgrounds, but the board and management are still 
dominated by former Fletcher Challenge employees.

Until the mid-90s, Fletcher Challenge was an open and communicative company 
that embraced the views of its shareholders. 

But in recent years it has become increasingly unresponsive to the outside 
world, particularly concerning the appointment of directors and senior 
management. 

In this respect, Rubicon's association with Julius Caesar is somewhat 
unfortunate.

Caesar crossed the Rubicon and started a civil war that eventually overthrew 
the inept Roman nobility. Caesar became the dictator of the Greco-Roman world, 
but was murdered less than two years later because of his autocratic rule.

Investors must determine whether Rubicon's reign will be longer and more 
successful than Julius Caesar's. They should also ask whether Rubicon's 
directors will take a more democratic approach towards shareholders. 

* Disclosure of interest: Brian Gaynor is a Rubicon shareholder.

* <a href="mailto:bgaynor@xtra.co.nz";>bgaynor@xtra.co.nz</a>
                                                                                
        
 

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To view more stories please visit the NZ Herald Online at 
http://www.nzherald.co.nz



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