Sour grapes prompts Xylem outburst

By Nick Stride

Friday 2nd August 2002

TERRY McFADGEN: Xylem wanted to be part of the deal

Xylem Investments, the US fund trying to derail Fletcher Challenge Forests' Kaingaroa buy, itself wanted to be part of the deal - at the same price Fletcher proposes to pay.

Xylem's Stephen Hurley, who resigned from the Fletcher board last month saying the $US650 million deal wasn't fair to shareholders, has written to holders urging them to vote against the deal. Principal among his many objections is an argument Fletcher is paying up to $US200 million too much for the asset.

Fletcher chief executive Terry McFadgen said yesterday Mr Hurley had proposed to Fletcher that they jointly bought the forest, which Mr Hurley described as "the jewel of jewels," for $US650 million.

But his proposal didn't find favour with the Fletcher board because he was unable to front up with the money, because he wanted expenses of around $500,000 paid by Fletcher, and because he wanted Fletcher to undertake not to talk to anyone else about participating in a bid.

He was subsequently "keen to go ahead" with a deal that would have seen "another US forestry fund" (widely believed to be Hancock Resources) bidding with Fletcher at the same price, Mr McFadgen said.

Mr Hurley is arguing the deal is funded with too much debt and is therefore too risky in an environment of falling equity markets and economic uncertainty.

He has highlighted the disclosure in Fletcher's deal memorandum that a 10% fall in prices, across all of Fletcher's products, if maintained for six months, would result in Fletcher breaching its loan covenants with its banks.

Mr McFadgen said such a fall over the next year, although it didn't sound very large, was "extremely unlikely if not impossible."

Prices, although trending upwards, were still below the long-term trend and couldn't fall much further before log values went below their extraction cost.

At that point there would be a dramatic contraction in supply as foresters stopped harvesting.

Housing starts, which had a 12-month "momentum period," were strong in New Zealand, Japan and Korea, three of Fletcher's largest markets.

"This isn't just our view. It's shared by our banks which are some of the best in the world," Mr McFadgen said.

"If the worst came to the worst we'd just sell some of our peripheral forests."

The forests' receiver, Michael Stiassny, said yesterday the banks he was acting for would not under any circumstances have taken less than $US650 million.

Mr McFadgen also rejected Xylem's claim the 37c Fletcher will pay to buy back Rubicon's 17.6% stake was unfair to the other shareholders.

If the price represented a "wealth transfer" from the other holders to Rubicon, then there was a corresponding transfer from incoming shareholder Citic, which is paying 37c for new shares.

"All we're doing is swapping one cornerstone shareholder for another, with a larger stake," Mr McFadgen said.

"It's just equivalence. Why would Rubicon sell out for less than Citic is buying in for?"

Xylem on Wednesday filed an action asking the High Court to bar Rubicon from voting on a special resolution to approve the various components of the deal, all of which are interdependent.

It is also hedging its bets by asking the court for an order requiring Fletcher to buy back its shares for 37c, or to pay it compensation.

If enough shareholders vote against the deal it will not proceed.

Even if it does, Mr McFadgen said, dissenting minorities were unlikely to get their shares bought back for 37c.

"You can't argue you should get a price which is dependent on a deal you voted against," he said.

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