Forum Archive Index - August 2002

["Ben Dutton" <bendutton@sharechat.co.nz>]

Hi everyone,

Bruce Sheppard from the NZ Shareholders Association has posted a message to
the FIG discussion group re: Fletcher Forests.  He asked me to also send it
in to the Forum so everyone else could have a read...here it is:


The NZ Shareholders Association strongly opposes the proposed FFS plan.

In a first for the Association we are actively seeking proxies to vote this
transaction down.

We have launched an advertising programme a first for us.

The reasons are these:

1. A wall of wood is being bettered by a mountain of debt. Company debt
increases by 453% debt per share by 356%, debt per hectare of tress by 190%
interest cover deteriorates by 43% and all of this risk for an increase in
free cash flows of 22%, projected to reduce.

2. The IRR on the acquisition is less than the return that the company could
get from putting its cash in the bank and certainly less that the cost of
borrowing.

3. The banking covenants resemble a receivership. There is a six monthly
cash sweep of all free cash flows.$75m US must be repaid within 2 years and
there appears on forecasts to be sufficient cash flow to do this. Look at
the info memo and its comments on forward looking statements. total
disclaimer. A 10% reduction in log prices blows the plan out of the water
and the bank covenants will be breached.

4. A reduction in the exchange rate to say .42 to the US dollar, will
increase income but it will also increase debt. The hit to the earnings
statement of the FX loss will wipe out the earnings increase plus some. In
short FFS is exposed to a falling NZ dollar not the other way as you might
at first expect.

5. The banks have got a sweetheart deal. They currently have 162000 hectares
as security and post the transaction they will have 262000 hectares of
security for the same debt. This is a bank derisking exercise and this risk
is being carried by shareholders.

6. The governance deed is robust unless there is a breach of the banking
covenants and then it is all bets off. Shareholders could be forgiven for
thinking that the deal has been set up to ensure a breach.

7. Seawi brings nothing to the table except cash. The team has no forestry
experience. They may or may not assist FFS in marketing logs into china, but
if they do so it will be at a cost you can be sure.

8. DOING NOTHING IS AN OPTION.

FFS is taking on board US$650m of debt to protect NZ$20m of synergies, do
the maths it doesn't make sense. These synergies can just as easily be
enjoyed by doing nothing. The receiver is getting his fees paid the bank is
getting its interest paid and the debt is being reduced. Running the asset
is receivership is a viable long term option. The receiver is on record as
agreeing with this proposition. Clearly the receiver will not wish to manage
the logging processing and marketing of the partnership assets, and FFS are
in control of these aspects of the partnership estate. There is no reason
for this to change. FFS holds a second debenture of $300m US over the
partnership so if there is any long term upside from the asset FFS gets the
first US$300m! This is about 20c per share and is not included in the
valuation of FFS as it has been written off by the company. so to recap the
status quo could continue and if asset values improve FFS gets the benefit.
FFS already has a free option over the upside so why pay for it again!

Bruce Sheppard
Chairman NZ shareholders Association


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