The Shoeshine Column: No Early Upside For: Fletcher's Frankenstein creation

Friday 16th February 2001

Shoeshine suspects the shares will initially trade at a sharp discount to NTA as investors who want income bail out. After that they will likely trade in line with NTA, although still probably at a discount. Even for investors who don't need income Rubicon looks like a pretty long bet.

Like Fletcher Challenge's shareholders, Shoeshine this week retrieved his breakup pack from the hole it had made in the floorboards beneath the mail slot in his front door, took a deep breath and began to plough through the 570-odd pages of gripping prose.

First (well, second because one of the documents was entitled "please read first"), he dived into the prospectus for Rubicon.

This is because we're all pretty familiar with the Building and Forests divisions, which have been around for years. There was also a Capstone document but we've heard rather too much about that lately.

On the other hand, Rubicon is, according to last year's advertising blitz, "an exciting new entity." Having ploughed his way through the prospectus Shoeshine was able to contain his excitement.

In a way the creation of Rubicon is the ultimate irony for FCL. After all, the company was rubbished in the early 1990s for being a conglomerate and then slagged off for its decision to adopt the halfway house letter stocks structure.

Investors, the argument went, want "pure play" companies focused on a specific industry sector. But they don't like overarching corporate structures that perpetuate cross-divisional risk.

Rubicon will be a Frankenstein creation - part cashbox, part listed investment holding company, part petrol station chain and part blue-sky biotechnology developer, with a sawmill, a plywood mill and some forests thrown in.

The questions for Energy division holders, who will get one Rubicon share for each Energy share, is how long this situation will last and what happens after that.

The pro forma balance sheet shows cash and reserves of $312 million and $23 million owed to trade creditors. There's no debt, so total assets will be $335 million.

As there are 353.2 million shares on issue, net tangible asset backing (NTA) a share will be 88c.

The actual amount of cash it will have is variable. It will have a $20 million payment from Royal Dutch/ Shell, $34 million from the sale of a stake in New Zealand Refining, and $58.1 million from Capstone Turbine shares sold last year.

A further $124.6 million will come from further Capstone sales which have been fixed at $US50 a share and an exchange rate of 40.57USc. As Capstone hasn't traded at that level for months, directors deserve a round of applause for that deal.

A further 1.18 million Capstones have been included at an assumed $US28 a share and 44.05USc, making $74.7 million, although both rates have since moved in Rubicon's favour.

Once Rubicon is up and running it will pay $20 million for the Challenge petrol station chain, $80 million for biotech intellectual property and forest assets and $154 million for Forests division shares, assuming it gets its full sub-underwriting entitlement from broker Credit Suisse First Boston.

This will leave it with around $51 million in cash, Forests division shares worth $157 at a share price of 32c, Challenge and $75 million, provisionally accounted for as "term assets," for the biotech and forests interests.

Of these, Challenge, the Capstone shares, the Forests shares and the Argentinian forests and mills have been earmarked for "performance improvement and strategic reassessment." That is, they'll be tarted up and flogged off.

How soon? The prospectus is necessarily vague but there are hints it will be sooner rather than later.

Rubicon says it will "actively re-engineer the business portfolio during 2001."

The Capstone shares should not present any problem: there are plenty of prospective buyers and an active market.

The Forests shares are more problematic as persistent on-market selling will depress the share price. Chief executive Michael Andrews said this week it would be better to sell them in one lot rather than "dribble them out."

Challenge, Andrews said, could take 18 months at least. It can be sold in one go or piecemeal to the Big Four petrol retailers or to Gull or Australia's Liberty.

Rubicon has identified the cost of buying in petrol as its main problem and says it will look for a fix.

When the Argentinian operation, Forestadora Tapebicua, will go is anyone's guess. FCL invested $US22.5 million in 1995 for a 50% stake but it has since pumped in more money and is likely to get control.

Its joint venture partner, Aldanor, didn't match its cash injections and so may be somewhat impecunious.

Once the "non-core" stuff has been sold, Rubicon's balance sheet will consist entirely of cash and the biotech "term assets," valued, perhaps, at $30 million - FCL isn't saying what value it puts on them.

It won't be in a hurry to invest - the prospectus lists four tightly defined criteria for forestry and horticulture biotech, energy efficiency and environmental services prospects.

So what are shareholders to make of the biotech bits? Shoeshine is no scientist but some of it looks pretty useful.

By engineering trees with less lignin, for example, ArborGen hopes to make pulp and papermaking cheaper and less polluting. By doing the opposite it hopes to make building products stronger. ArborGen has its first products in the pipeline.

Even so no revenue is no revenue and investors have not been too keen on this sort of stuff lately. And as the prospectus notes the regulatory outlook for genetically engineered products is unclear.

Comments from our readers

No comments yet