Fletcher Forests-CNI saga has more twists than World Cup Soccer

By NZPA

Friday 21st June 2002

Picking the winner of soccer's World Cup would be easier than forecasting the final result of the Fletcher Forests saga over the Central North Island Forestry Partnership (CNI).

The complex deal announced this week involves Forests repurchasing the 163,000ha forest from the receivers for $1.35 billion.

Former CNI partner turned foe, Citic of China, will buy 35 percent of Forests at 37 cents per share, injecting $415 million of capital. That will be through listed Hong Kong company South East Asia Wood Industries (Seawi), a company with a chequered past.

Rubicon will trade most of its 17.6 percent stake in Forests for the 11,800ha Tahorakuri forest near Lake Taupo. It will sell its other Forest shares directly to Seawi.

Rubicon is paying top dollar for Tahorakuri and taking the risk of owning it. But the 37 cents per share it is receiving is 85 percent above where the shares were trading before Forests and Citic got back into bed and well above what other shareholders can get.

Investors were muted in celebration of the long-awaited deal. Forests shares, which jumped 5 cents -- 25 percent -- to 25 cents when it was first announced in May it had reconciled with Citic, initially rose 1 cent to 25 cents but then fell back to 24 cents.

Rubicon, which looks to have squeezed Forests for every cent, initially rose 3 cents to a record 70 cents, but then retreated to 65 cents.

The spin from Forests is that this deal is the best of a bad situation. If shareholders reject it Forests shares will sink.

Combing the Kaiangaroa forests with Forests' estates will give it a massive 260,000 of plantation forest. The Chinese connection will give it better access to China's massive and rapidly growing market.

Forests chairman Sir Dryden Spring tried to assure investors that things would be different now.

"This time we will have one set of assets, under common ownership and a greatly simplified ownership and operating structure. It's a new relationship with new personalities at board and management level," he said.

Asked why Citic should now trust the company it accused of cheating on it, Citic director Charlie Tian said: "In a commercial world, you have to make commercial decisions." Nothing was mentioned about loss of face or Citic's hundreds of millions of dollars lost in the previous partnership.

A standstill on Seawi's Forests holding has been agreed and assurances were given that Forests would have operational independence. All deals involving China would be at arm's length.

Seawi will have two members on the six member board.

But as the Forests share price has indicated, all is not sweetness and light with this deal and a smooth passage through the three shareholder meetings particularly Forests, should not be assumed.

Forests second largest shareholder, Boston-based forestry investment company Xylem Investments, strongly opposes the deal.

Its board representative Stephen Hurley resigned saying the deal was not fair and reasonable for minorities.

Mr Hurley has not been available for further comment but it is assumed Xylem wants the same 37 cents/share that Rubicon will get.

Under the new Takeover Code, Seawi will need shareholder approval to buy its 35 percent stake without making a full takeover at the top price. Forests needs 75 percent support for some resolutions and Rubicon will not be able to vote.

Sir Dryden said he and other independent directors thought the deal fair and "certainly highly beneficial to all shareholders". Institutions have indicated their support.

The problem for shareholders is -- what is the alternative to rejecting the deal.

"The alternative options are limited. If the deal does not go through, I suspect the share price will come under pressure," said one analyst who declined to be identified.

There was possible upside for the share price if the benefits of the deal had not been fully factored in to the share price.

"The question which noone knows is, to what extent the deal has been factored into Forests' share price. If it hasn't been, there is more upside," the analyst said.

But the Shareholder Association is promising a fight.

Chairman Bruce Sheppard said the transaction had all the hallmarks of an unfair deal where one partner, Rubicon, gets out of Forests at a high price -- 37 cents a share -- and the rest are stuck with a partner they know nothing about, Seawi.

"In order for shareholders to get out with a fair price we are advising shareholders to vote no," Mr Sheppard said.

"Then we would serve notice on the company that we are co-ordinating a class action minority buyback."

Under sections 110-115 of the Companies Act shareholders who vote against the proposal can force Forests to buy back their shares.

One institutional investor who does not have shares suggested a cunning institution might join the nay-sayers to have a chance of the higher price. The problem is if the resolution is defeated.

Institutions support the deal with some expecting Forests' share price to rise 20 percent to 30 cent if the deal is approved by the requisite 75 percent majority.

"This is a reasonable deal," said Tower Funds Management's Wayne Stechman.

"Fletcher Forests' minority shareholders would be mad to vote against it," he said.

AMP Henderson's Nat Vallabh said he was "quite confident" the deal would go through.

"In the absence of this transaction where do I see the Fletcher Forests share price? Probably going back to 20c. With the deal, probably going close to 30c," Mr Vallabh said.

Andrew Bascand, who represents Alliance Capital with a 3 percent will support the eal.

Rubicon might be seen as getting a good deal, but without its support there would be no deal, he said.

He suggested Forests could tweak the deal by doing an open tender buyback of 50 million shares at 26 cents.

New Zealand Herald columnist Brian Gaynor has dug up interesting details of Seawi's murky past. It has been subject to a large number of Hong Kong stock exchange queries into exceptional price movements since it listed in 1997 and a Seawi executive was successfully prosecuted in 1999 by the Hong Kong Securities and Futures Commission.

Mr Gaynor believes Rubicon's self-interest toppled Forests' previous deal to buy CNI in March.

"Hancock Timber of Boston would have been a far better partner for Fletcher Forests and its minority shareholders but it has been dumped to satisfy Rubicon's self-interest."

He accuses former Fletcher Challenge chief executive, now Rubicon, chairman, Michael Andrews, of helping sell New Zealand's largest forest into foreign control as happened to Fletcher Paper and Fletcher Energy.

He notes that Peter Kwok Viem and Ma Ting Tung, whose jointly owned, Virgin Islands-registered company that controls Seawi, stand to profit by hundreds of millions of dollars by selling control of Seawi to Citic. Mr Kwok is a member of the Chinese People's Political Consultative Conference and has a long association with Citic.

Many New Zealand companies have been lured by the size and rapid growth of China's markets and it has all ended in tears. The talk of fantastic developments in China should be treated with scepticism.

"I think you have to be very careful when you talk about the Chinese market. It is big, there is no doubt, but how you can make money, that's a separate issue altogether." said the analyst.

He believes Forests' access to China will depend on Citic's input. It seems ironic that a crucial aspect of the proposed deal it to keep Citic at arm's length. In view of all the past bad blood, to believe Citic is planning to pay 37 cents a share for a 20 cent stock just to be fair and reasonable is to believe in fairies.

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