Capstone key to unlocking the Fletcher empire

By Nick Stride

Friday 13th October 2000

Directors of Fletcher Challenge and shareholders of Fletcher Energy will be keeping their fingers tightly crossed over the next five months.

The success of FCL's break-up plan in its present form is heavily reliant on the value of its fabulously well-spotted investment in Nasdaq-listed Capstone Turbine Corporation. Its 8.1 million Capstone shares cannot be sold until late March at the earliest.

At the present price of $US43 ($107) each they are worth $US348 million, or $870 million at the current exchange rate. But they have been as high as $US82.

FCL will shunt three million of these shares into new vehicle Rubicon, which will sell sufficient of them to meet its obligations to participate in the recapitalisation of the Forests division.

Those obligations amount to $340 million. As it has only $20 million in cash it will need Capstone shares to have at least their present market value in mid-March when it can sell them. Otherwise it will have to take on debt.

That would affect the value of the Rubicon shares to be issued to Fletcher Energy shareholders on a one-for-one basis.

They will also receive the rump of FCL's Capstone shareholding on a one-for-70 basis so any fall in the share price will reduce the value they will receive from the division's sale to Royal Dutch/Shell and Apache Corporation, at present worth $11.22 per share.

Energy division shares finished trading on Wednesday at $9.30, a 17% discount to the offer's value at the current exchange rate and Capstone share price, in an apparent acknowledgment of the risk factor.

FCL, irked its plans had leaked to the news media, announced them hastily on Tuesday morning.

The simplest part of the plan is to separate the Fletcher Building division and let it stand alone as a listed company. The market, which had fed on rumours one party had put in a $3-plus trade sale offer, was disappointed and the shares have fallen back sharply, to $1.95 on Wednesday.

Fletcher Energy shareholders will get $US3.34 cash a share, currently worth $8.30, and will therefore be protected from any further fall in the value of the New Zealand dollar. The downside is the New Zealand dollar could rise strongly between now and then, an unlikely prospect.

They will surrender to new vehicle Rubicon their entitlement to three million Capstone shares and will receive in compensation one Rubicon share worth, by FCL's calculations, $1.20. Their allocation of Capstone shares is presently worth $1.72 a share.

The deal was seen as highly beneficial to Fletcher Energy shareholders and the shares rose 18.5% above the $7.85 at the Monday close.

Worst off by far were Fletcher Forests shareholders, who give up their rights to the division's biotech intellectual property to Rubicon and are being asked to dip into their pockets to fund a $427 million two-for-one rights issue at 25c a share.

The plan faces a further threat today when the Commerce Commission rules on Shell-Apache's application for clearance to buy Fletcher Energy. Both FCL and the partners have said they are confident the sale will be approved. If not, the partners are expected to go back to the commission with an amended application.

If all else fails, FCL chairman Roderick Deane said, there was a Plan B that could be put in place. Various other options were available, although none was as attractive for FCL shareholders as the present proposal.

Nor has FCL ruled out acceptance of a higher bid for any of the three divisions. The "point of no return" implied by Rubicon's name won't actually be reached until late January when shareholders vote on Fletcher Building and Fletcher Energy's separation from the FCL group.

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