Forests shareholders vent their anger after being denied a breakup vote

By Nicholas Bryant

Friday 13th October 2000

Fletcher Forests shareholders, saddled with the short end of the stick in the Fletcher Challenge Ltd group breakup, won't even get to vote on it.

Shareholders in the Building and Energy divisions will be able to vote on their companies' separation from FCL at special meetings in late January.

But Fletcher Forests isn't being separated from FCL. It will be kept under the group's wing as a "residual asset," so shareholders won't be required to approve the plans FCL has made for the division.

Had it been earmarked for separation, as Fletcher Building and Fletcher Energy are, FCL would most likely have been required to obtain approval from 75% of its shareholders. The High Court will decide what voting measures are necessary for the other two divisions but it is thought unlikely to depart from the 75% rule it adopted for Fletcher Paper.

Fletcher Forests shareholders will get to vote on the $427 million rights issue aimed at recapitalising the division. But they will do so along with the shareholders in the other divisions, who outnumber them two to one. And a majority of only 50.1% is needed.

Rumours of a recapitalisation of the debt-burdened division surfaced only about 10 days ago but before that all predictions were for a sale.

FCL chief executive Mike Andrews has confirmed the company did receive formal bids for Fletcher Forests.

But after choosing recapitalisation and plucking the intellectual property eyes out of Fletcher Forests for new company Rubicon, investors have dumped the stock and slammed management.

Fletcher Forests' share price had hovered around 80c since March on expectations of a sale but has since plunged 46% to a low of 43c.

A range of US buyers were touted and in August market buzz that a Japanese or Malaysian bidder was about to make an offer sent the stock up to $1.30.

Some brokers also had a part to play in raising investor expectations, with values of up to $1.50 a share being casually bandied about.

Angry Fletcher Forests investors have vented their anger on the Sharechat website with comments such as "I feel done," "screwed by Fletchers again" and "FCL leaks."

But one analyst said investors had only themselves to blame if they mistakenly expected a trade sale as being the only option for the Forests division.

He said it was understandable small investors should be attracted to Forests as it was considered the "cheapest" of the Fletcher Challenge stocks.

"With Forests' debt problem and ongoing legal battle with Citic it should have been apparent that selling off the division was going to be a difficult task," he said.

That investors are being asked to fund part of the recapitalisation of the division in a two-for-one rights issue worth $427 million is rubbing salt into the wound.

The new shares will significantly dilute Fletcher Forests' value, with a fully diluted, asset-backed value of 70c a share being close to most analysts' predictions.

The total recapitalisation will be worth $557 million, with offshoot company Rubicon stumping up $90 million via a share placement.

Fletcher Forests debt to capitalisation ratio will then fall to 13.5% from 34.7%.

FCL management had said for some time that innovative assets within Fletcher Forests weren't being factored in by the market when valuing its shares.

It has assured they will be with the establishment of Rubicon.

But analysts said the future for a pure forestry company, albeit using products licensed back to it which it used to own, was extremely uncertain.

A good indicator of that uncertainty is being played out by Carter Holt Harvey, 50% of whose assets are forests, with its market-bucking log price leadership strategy.

Both Fletcher Challenge Forests, the company's new name, and Carter Holt Harvey must battle to get a return on forest assets they are widely perceived as having paid too much for.

Their forests are on the verge of maturing while logs are at record low prices.

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