Fletcher Forests sells cutting rights, announces 25cps return

By NZPA

Wednesday 15th January 2003

Fletcher Forests, whose share price rose 9 percent yesterday, today announced a $US65 million ($NZ122 million) sale of forest cutting rights and a capital return of $140 million, equating to 25cps.

Fletcher Challenge Forests (FCF) shares, which closed 7 cents higher at 108 yesterday, jumped another 5 cents to $1.13 while the preference shares yesterday were up 5 cents to $1.06 and were up another 6 cents to $1.12 today immediately after the announcement.

FCF said it had agreed to sell the cutting rights over a combined 8940ha of mature trees to entities managed by the global timberlands investment manager UBS Timber Investors (UBS).

The sale involves two separate transactions, for $US45 million ($NZ84.55 million) and $US20 million, covering 6400ha in FCF's Tahorakuri forest and 2540ha in the company's adjacent Tauhara estate.

By area, the 8940ha represent 8.2 percent of FCF's 108,500ha of planted forest estate.

Each sale is conditional upon the required regulatory approvals being obtained by February 28, obtaining the consent of its secured lenders, and UBS completing due diligence by March 12.

The cutting rights will entitle UBS to harvest designated trees, at maturity, over the next 13 years. FCF will retain ownership of the underlying land. FCF will manage the trees which are subject to the cutting rights, on behalf of UBS, and provide ancillary infrastructure services such as roading.

FCF and the purchasers have entered into agreements that give FCF the option to purchase 50 percent of the crop when harvested at then prevailing market prices.

The balance of the crop will be offered for sale by UBS through an open market tender process in which FCF can participate with other bidders.

Chief executive Terry McFadgen said: "these transactions are consistent with the strategic direction we outlined to shareholders at our annual shareholders' meeting in November".

Mr McFadgen said the cutting rights price reflected values for FCF's trees broadly in line with the $1.85 per share placement price agreed with China's Citic last year, a deal that fell through.

He said the price was "substantially in excess of the value implied by our current share price of $1.07 per share".

He said there would be no fragmentation of New Zealand's underlying forest estate as FCF would retain the land and intended to replant the designated areas after harvest.

The wood supply arrangements would provide FCF with access to the harvest volumes required for FCF's processing plants.

"This transaction fully preserves the integrity of our forest and processing operations, and at the same time provides the market with tangible evidence of underlying value well above the company's current share price," he said in a statement.

Mr McFadgen noted the selling price was consistent with a valuation adopting the company's standard valuation methodology adjusted to current prices and a discount rate of approximately 8.25 percent.

The deal will result in an accounting loss of approximately $15.8 million (after tax) which will be recognised in the December half year.

It primarily reflected the recent declines in New Zealand dollar log prices as a result of the appreciation of the kiwi dollar relative to the US dollar with the final accounting outcome depending upon the exchange rate on settlement of the transaction.

The loss will be partially offset by an $8.1 million gain reflecting the benefits of the recent New Zealand appreciation on the company's US dollar debt and other currency hedging instruments.

Transaction costs including foreign exchange hedging costs are estimated at $1.1 million (after tax).

Mr McFadgen also noted that, subsequent to the proposed sale, FCF would still retain an increasing harvest, earnings and cashflow profile, assuming constant real prices.

The $140 million pro rata capital reduction would replace the previously proposed $50 million on market share buy-back.

A shareholder meeting would be held to approve the deal including the capital reduction.

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