Fletcher Forests kindles mild enthusiasm with partition deals

By NZPA

Monday 24th March 2003

Fletcher Forests will "partition" its business in a bid to transform part of its $1.2 billion tree investment into higher value wood processing and distribution.

As part of the process, Fletcher Forests has also appointed two new joint chief executives.

The company will reduce its forest ownership, and partition that business from its added value processing, marketing, distribution and forest management activities, chairman Sir Dryden Spring said today.

Most marketing investments would be offshore, while most processing investments would be in New Zealand, Sir Dryden said.

The company foreshadowed the change of direction at its annual meeting late last year, when shareholders voted against purchasing the Central North Island forestry partnership.

In the immediate future, Fletcher Forests will increase its investment at its Taupo and Mt Maunganui mills, and is investigating a new mouldings mill at Taupo.

It also has the option of taking a majority stake in United States company American Wood Mouldings, which supplies Home Depot in the US.

Sir Dryden told journalists that the company would still own some trees, but gave no indication of the amount it wanted to retain. Fletcher Forests has invested $1.2 billion in its forest estate, and was not covering the cost of capital.

The company was confident of retaining security of log supply, and would not sell the land under the trees.

"If we are to focus investment on processing and marketing, we've got to make absolutely certain we've got secure supply of trees for that, and we believe it's possible to do that."

Fletcher Forest was keen to extract a higher value from its forest estate than is currently reflected in the company's share price.

"We've got a very large investment in trees, the market is attributing a value to that investment of only in very rough terms 50 percent of what the current prices would value those trees at," he said.

Fletcher Forest shares last traded up 2c at $1.03, while 17.6 percent shareholder Rubicon was up 1c at 68c.

Macquarie Equities forestry analyst David Stanley said there was a consensus that Fletcher Forests shares were worth at least $1.50.

"Clearly there's been an issue with how do you close the value gap. The company's previously indicated it would consider reducing capital in its trees, perhaps by way of asset sales a la the UBS transaction which are realising a value closer to book than the share price."

Other options open to the company were partnerships, or securitising the trees -- selling global securities backed by the forest estate.

Fletcher Forests has sold $US65 million ($NZ120.2 million) in cutting rights contracts, about 8 percent of its 117,000 ha of forests, to UBS Timber Investors.

The sale implied a share price of $1.85 and will result in the return to shareholders of $140 million in capital.

It was important that the release of capital value from the trees not compromise the company as a whole, and enabled the return of further capital to shareholders, Mr Stanley said.

Upon the retirement of Terry McFadgen at the end of the month, chief financial officer John Dell and chief operating officer Ian Boyd will be appointed joint chief executives.

Fletcher Forests had taken a practical step in appointing the joint chief executives from within the company, Mr Stanley said.

"The sharemarket reaction has been positive but fairly muted. That's because this is another step along the path but they're probably waiting to see the colour of potential investors' money."

Those potential investors were likely to include northern hemisphere forestry specialists such as UBS Timberlands and Hancock.

There was no deadline for the transformation, although Sir Dryden said he would be disappointed if the company had not completed major changes within 12 months. Macquarie New Zealand has been appointed as advisor and would be reporting back to the company within about eight weeks.

Fletcher Forests posted a half-year net profit last month of $4 million against a $302 million loss in the year ago period but warned the second half would be less buoyant.

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