The O'Brien Column: Relief for investors as Fletcher Challenge cleans up shares

Friday 2nd February 2001

It will probably be a relief for everyone involved in investment, including people in the company, when Fletcher Challenge's self-titled "separation of the group's targeted share structure" is over.

The exercise has seen many lurches and company statements along the way, the latest being the resignation of Fletcher Building's chief executive designate, Alexander Toldte, before he took up the job and announcement of many unusual credits or debits to be taken up in the accounts for the six months ended December.

Mr Toldte's resignation was covered in The National Business Review last week when it was noted some institutional shareholders planned to question the company over the matter.

The unusual items, figures for which are in the table, were foreshadowed in the group report for the year ended June, repeating a similar statement in the interim report: "The consequences of the separation of the targeted share structure on the group and divisional financial statements may be significant. ... Financial impacts, which may include restructuring costs, direct costs associated with the transactions and the carrying value of assets and liabilities, in particular the value of the taxation benefits, will be recognised as each transaction occurs.

"The financial statements [as at June 30] do not reflect the assets and liabilities that will be controlled by the Fletcher Challenge group or its results of operations as it will be following the separation of the group's targeted share structure."

Last week's statement about the unusual items finally dealt to any possible confused idea in some people's minds that the four Fletcher Challenge "letter stocks" were standalone entities for the purposes of company and taxation law.

There is and has been only one Fletcher Challenge Ltd, a holding company for many subsidiaries.

That is seen in the table's entries for a $215 million taxation benefit attributed to Fletcher Paper and "transferred to Energy and Forests at fair value."

Last week's statement said the transfer resulted in "Energy and Forests recording unusual gains within taxation expense, totalling $215 million with a corresponding loss in Paper."

The $574 million of unusual items in Forests, related to the carrying value of the interest in the Central North Island Forest Partnership (CNIFP), was not unexpected, given the financial state of the partnership and the current market for logs.

Forests chief executive Terry McFadgen said log prices had not recovered significantly since the 1997 Asian crisis and, in US dollar terms, were 30-40% below those prevailing when the partnership acquired the forest.

A provision of $5 million for litigation costs for the dispute between Forests and its partner, Chinese company Citic New Zealand, was small in the context of the total group unusual items.

Mr McFadgen said Forests had "fully reviewed Citic's claims and confirmed they lack real substance" and would be vigorously defended.

The result of that full defence has yet to be decided but the terminology is common when companies face court action.

It can be presumed Fletcher Challenge made a realistic provision for the costs of the defence.

Costs would obviously be raised substantially if the action went against Fletcher Challenge and it had to pay damages.

The Forests division got its full $427 million from last year's rights issue of preference shares because the issue was underwritten, but the exercise was hardly a PR success, despite a subsequent lift in the share price.

As noted in NBR, on December 15, Fletcher Forests is not a "basket case" despite difficulties with the partnership and general current profitability.

Fletcher Challenge will send shareholders an information memorandum in the middle of this month about the separation process, including more detail on the unusual items released last week.

The interim profit announcement, scheduled for February 28, will follow the memorandum.

The company must provide the Stock Exchange, and through it the shareholders, with appropriate information as it becomes available.

Separating the targeted share structure has obviously been a tortuous process. There would be no intention on the company's part to drip-feed information but the restructuring was first announced in December 1999, a while ago.

Paper has gone, Energy is on the way, Forests and Building will be standalone companies and a new entity, Rubicon, is proposed.

The choice of the name "Rubicon" was interesting, irrespective of the company's proposed activities.

The term has come to mean, according to the dictionary, "the boundary by passing which one becomes committed to an enterprise," deriving from Julius Caesar's decision to cross the steam of that name and start a war with Pompey.

Pompey was defeated but Caesar got his later in a sticky end. Perhaps the 2001 version of the Rubicon and its promoters should watch out for a sometime corporate equivalent of the Ides of March.

Fletcher Challenge's table of unusual items

	Building ($m)	Energy ($m)	Forests ($m)	Paper ($m)	Group ($m)
Investment in CNIFP			(574)		(574)
Citic litigation			(5)		(5)
Sale of Capstone shares		50			50
Sale of NZRC shares		25			25
Kupe		(13)			(13)
Australian construction	(25)				(25)
Properties	(11)				(11)
Concrete restructuring	(8)				(8)
Sale of Fletcher Paper				440	440
Separation costs	(12)	(19)	(24)		(55)
Total net earnings before tax	(56)	43	(603)	440	(176)
Transfer of taxation benefits		161	54	(215)
Taxation benefit/(liability)	7	5	50	17	79
Est net earnings after tax	(49)	209	(499)	242	(97)

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