Dead money complicates Forests sale

By Shoeshine

Friday 26th September 2003

It seems absurd that the Fletcher Challenge Forests board should be sitting comfortably after the irrational behaviour it displayed last week.

The haste in which it entered an exclusive arrangement to sell its forests to the US firm Campbell Group had opened up the prospect of yet another deal turning sour.

But a revised bid by Kiwi Forests Group has put the heat back on Campbell, leaving Fletcher with two cash offers to play with.

So the whole deal has been simplified  unless Campbell comes up with a higher offer, shareholders will accept Kiwi's $725 million. Unfortunately for them the Fletcher board has ensured it will cost them a break fee.

Exactly how much that might be is unclear in the absence of the precise terms of the fees and whether Fletcher can renegotiate a lower cost.

What is clear is Campbell has another 10 days to come back with a higher bid than its existing $685 million.

One of the conditions is that Fletcher won't talk to anyone other than Campbell or it will be forced to pay $17 million.

In addition it will pay $8.5 million if its shareholders reject the American offer and/or $4.25 million if the board fails to turn its agreement into a sale.

Kiwi's late bid raises questions about how the sale process was carried out.

Those watching the sale are wondering why Kiwi's cash offer wasn't pushed through before the cutoff date  before Fletcher signed its letter of intent to sell to Campbell.

Why didn't the investment banks handling the process properly sound out the interested parties?

It was obvious the major shareholders would want a cash offer ahead of the cash and shares Kiwi initially came up with. Had Kiwi put in a full cash offer on day one it might have got away with $700 million, with all the tension played out behind closed doors rather than out in the open as it is now.

Kiwi's advisor, First NZ Capital, denies any blame on its behalf.

"We are where we are," director Scott St John says. "I can't comment on decisions that others have taken."

Investment bank Macquarie handled the process, leading to a letter of intent for Fletcher to sell to Campbell for $685 million plus the break fees. It has described the break fee conditions and letter of intent as appropriate under the circumstances and consistent with international practice.

Whichever way the deal goes there will be a certain amount of dead money within the sale.

As it stands, shareholders will have to decide whether to pay $17 million or lose $40 million, as this is the difference between the two bids. Hardly a tough choice but one made needlessly complicated by a combination of bad judgment on behalf of the Fletcher board and slack work from the brokers involved in the deal.

The onus is on Campbell to trump the revised Kiwi offer and it has been given a good head start.

Kiwi spokesman Ross Green says the $17 million break fee is a waste of money and an obstruction to a fair sale but he believes Kiwi's bid is good enough.

Green also says his group, which also includes high-profile businessmen Trevor Farmer, Adrian Burr and Mark Wyborn, is in it for the long haul.

Speculation that the group might be looking to carve up the assets into dairy conversions or real estate is rubbish, according to Green.

If Kiwi succeeds in its bid, the management of the forestry estate will fall on global forest investment manager Prudential Timber Investments and listed forestry company Evergreen Forests.

In theory Campbell could up its bid to $709 million and still be in the running, given the $17 million break fee.

But it might also get away with less than that if the Fletcher board decrees its offer to be a better quality deal.

Campbell, which is reputedly backed by Boston-based Harvard University, could be seen to have better processing arrangements for ongoing supply contracts.

Kiwi Forests' offer is subject only to agreement on sale and purchase documentation, confirming due diligence and Overseas Investment Commission approval.

Fletcher's rush to sell at the bottom of the market compounds last year's embarrassment when the board unveiled a bid to buy back the Central North Island Forests before it had tested the waters of shareholder approval.

The Shareholders' Association and Guinness Peat Group scuppered the deal.

The picture for forestry, once hailed as one of New Zealand's economic saviours, could hardly be gloomier. With the fabled "wall of wood" of maturing trees building up fast, at least 16% of the country's forests are up for sale.

Asian pulp prices have fallen $US60 a tonne in less than five weeks and there's no sign of recovery in the US or Europe, although ABN Amro expects pulp prices will recover eventually.

Wood products markets aren't looking flash either. Australian and New Zealand housebuilding is slowing and the US dollar price of moulding and better grade lumber has fallen 31% in six months.

If the Fletcher sale goes through at $725 million, Kiwi estimates a cash distribution to shareholders of close to $600 million, equivalent to $1.07 a share.

But rest assured, there is plenty more water under this bridge.

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