Resolution 18 sparks Fletcher takeover talk

Friday 26th October 2001

In a former, less glo rious life Fletcher Challenge Forests chief executive Terry McFadgen was a lawyer, so you'd expect the company to keep its legal ducks in a straight row.

That could be, and probably is, the explanation for the appearance of Resolution 18 in FFS' notice of annual meeting.

The resolution, if passed by shareholders, will allow directors to press on with a bid for the Central North Island Forests Partnership even if somebody launches a takeover offer for FFS in the meantime.

Among the chattering classes the item's inclusion has sparked a fair bit of speculation. What makes FFS think anyone might be interested in a takeover offer? Why does the board need permission to carry on with its business? And if a bid is in the wings, ought share punters to be piling in?

Much though Shoeshine would like to detect an underlying conspiracy the notice is very probably nothing to get excited about. But it does have its interesting aspects.

Shareholder approval is needed to deal with the new Takeovers Code's rule 38, which says if a listed company has received a takeover notice, or has reason to believe a bona fide offer is imminent, its directors can't take or permit any action that will result in the offer being frustrated or in the shareholders being denied an opportunity to decide on the offer's merits.

The rule was drafted many years ago by the Takeovers Panel before the code was put in limbo by the National government of the time.

It was drawn up after examination of takeover regimes in a variety of other jurisdictions such as Australia and the UK, and took into account some of those countries' bans on "poison pill" or "shark repellent" takeover defences sometimes used to shield board and management jobs.

Under the code's rule 39 there are three exceptions: where shareholders' approval has been gained; where contractual obligations or board-approved proposals were in place before the takeover bid came to light; or if the action is approved by the Takeovers Panel.

As the Fletcher notice is explicit about the action directors want shareholders to approve - a bid for the CNI forests - you don't have to be Einstein to work out that its inclusion is aimed at heading off any fancy footwork from FFS' old sparring partner Citic, the Chinese state investment company which has been in acrimonious dispute with FFS over their CNI partnership.

"By way of example," the notice says, "it is possible that a takeover offer could be made for the equity securities of the company which was ... conditional upon the company ceasing negotiations in connection with the CNIFP.

"This might be done for strategic reasons by a prospective purchaser of the forestry assets in an attempt to prevent the company from entering into any agreement that could jeopardise that party's bid."

Whether FFS' directors have good reason to believe Citic might try that ploy, or whether resolution 18 is just good prophylactic lawyering, makes little difference as long as shareholders give their approval. And there seems no reason why they shouldn't.

That still leaves open the prospect Citic might bid for both FFS and the CNI forests.

Citic's interest in nobbling an FFS bid is obvious. Because the company has junior debt in CNI with a book value, at June 30, of $US145 million ($357 million), FFS has an advantage of up to that amount over the rival bidders - said to be Citic, Carter Holt Harvey, and the US' Hancock Timber Resource Group.

FFS also has a strategic interest in the forests that justifies bidding higher than Citic. It draws around a million cubic metres a year of wood from the acreage for its local processing operations.

Any damage to the security of that supply would hit those operations' value.

FFS, Carter and Hancock are said to have at least considered bidding jointly as a consortium. This would be an even more formidable rival to Citic than FFS alone as Carter could also use wood supply locally.

A Citic bid for FFS could be mounted at very low cost. After trading for eight months, post-rights issue, at around 31c the shares have fallen, since the US terrorist attacks, by around a quarter, to 23c.

Analysts say the drop reflects the fact that financing acquisitions, such as the CNI forests, has become harder in the post-attack climate. Confidence in markets generally has been dented by the global slowdown.

The US mouldings market in particular is looking sick. Carter Holt's $25 million second-quarter loss showed forest product markets still wallowing in depression.

A Citic bid at 31c, valuing FFS at $864 million, would be able to boast a 35% premium to recent share price levels. If successful, and combined with a successful bid for the CNI forests, it would furnish Citic with the biggest plantation forestry estate in the southern hemisphere, FFS' processing capacity, and substantial export markets both of the log and value-added variety, but not, since its migration to Rubicon, with Fletcher's biotech intellectual property.

Any Citic bid would put Rubicon, with a blocking 17.6% stake, in the driving seat.

FFS' annual meeting on November 14 should be well worth attending.

Other listed companies might like to give some consideration to Takeovers Code rule 38 lest they find themselves competing for an asset with an outfit capable of mounting a credible "sucker punch" takeover bid.

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