Defeat of forestry deal a victory for small shareholders

By NZPA

Friday 16th August 2002

More significant than the defeat this week of the Fletcher Forests' $1.4 billion deal to buy the Central North Island Forestry Partnership (CNI), was the victory for small shareholders.

It is the only time in the 20 years this reporter has been covering financial matters that small shareholders have scored such a victory.

Even during the disastrous aftermath of the 1987 share crash, small shareholders failed to exert any kind of retribution on the perpetrators.

There have been lessor victories, such as forcing Contact Energy directors to abandon plans to vote themselves higher fees, and the rejection of Edison Mission's takeover of Contact this year .

But this was something bigger.

Organised by the recently formed Shareholders Association, led by the colourful Bruce Sheppard, minorities toppled the plans by Forests in conjunction with the Chinese government-owned Citic, to buy New Zealand's largest plantation forest.

"I don't think it's about victory. It's about voice," said Mr Sheppard, who dressed in forester's clothes for the meeting. "Perhaps the Shareholders Association's stand has been a galvanising point for other interests that then came into play.

"But it certainly isn't about victory. It's about collectivism and the power of little people... when they come together in force."

It has to be said it was something of a shoot yourself in the foot victory, as stitching CNI together with Forests appeared to make sense. But the small shareholders were not prepared to take an inferior deal to that offered Forests's 17.6 percent owner Rubicon.

The success is part of a shifting tide against the old guard who have controlled the New Zealand equities market.

The Stock Exchange, backed by bodies such as the Business Roundtable, have lost a series of battles over market regulation, including the implementation of the Takeovers Code and legislation covering insider trading.

Having tasted blood, small shareholders may develop a set of vampire fangs.

Central to opposition to the deal was preferential treatment accorded Rubicon. It had screwed an agreement from Citic and Forests for 37 cents per share for its stake, compared with the prevailing price of 25 cents.

Preferential treatment for certain privileged stakeholders was behind much opposition to Lion Nathan's failed attempt to take over Montana Wines last year. In numerous deals, it has been the major gripe for small shareholders over the years.

Forests' second biggest holder with 7.3 percent, private United States forestry investor Xylem, strongly opposed the deal because it was not offered the same exit opportunity as Rubicon.

It failed in a legal challenge against the deal but was pivotal in mustering the necessary quarter of the votes to oppose the deal.

The role of Sir Ron Brierley's Guinness Peat Group has been somewhat curious. After the deal was announced, it raided Rubicon to gain a 19.9 percent stake, also in controversial circumstances. Despite Rubicon apparently being the clear winner from the deal, GPG opposed it.

Further muddying the picture, US-based investment company Perry Corp, bought 16 percent of Rubicon after GPG and favoured the transaction.

Forests chairman Sir Dryden Spring said he was disappointed in failing to win the necessary 75 percent majority but said the process had been "a wonderful exercise in corporate democracy".

He blamed Rubicon, agreeing that opposition to the premium price offered to Rubicon was a major reason why the deal fell over.

He more or less accused Rubicon of being too greedy.

"We worked very hard with a number of proposals which tried to accommodate some of Rubicon's needs, and would have given all shareholders an equal opportunity of getting some cash out, but the bottom line was that unless Rubicon agreed, the receiver was not going to sign a contract with us.

"We knew that the Rubicon thing did two things -- first that it was not going to be popular, and we didn't like it any more than shareholders. And we knew it was going to cause a debt level which for two years was going to be higher than we wanted it to be."

An interesting aspect of the shareholders' decision to reject the deal is that they could be fairly sure Forests' share price would fall. It fell from 25 to 23 cents ahead of Tuesday's meeting although it held reasonably firm afterwards.

As well as disapproving of Rubicon's privileged exit, minorities were unhappy that effective control of Forests would go to little-known, Hong Kong-listed company South East Asia Wood Industries (Seawi). Seawi would be controlled by Citic, which gave assurances about retaining local management of Forests and ensuring commercial decisions affecting exports to China would be kept at arms' length. But these failed to satisfy.

Further, there were worries about the level of debt to be incurred by Forests, despite Citic's planned $US200 million ($NZ438 million) capital injection, and whether the highly geared company could sustain any fresh adverse market move against it.

Given that this deal was already Plan C, it is unclear whether Forests has a fresh contingency plan. The receivers of CNI, Ferrier Hodgson, must be frustrated. Their previous Plan B, selling CNI to Waikato fishing and bloodstock tycoons Philip and Peter Vela, lacked market credibility.

CNI's bankers are sure to be sick of the whole business and may simply decide to manage CNI themselves.

One certainty is that Citic still wants to buy the 163,000ha plantation. China wants logs, and the Kaiangaroa forests is one of the world's premier plantation forests. Its determination can be measured by the fact that, despite the loss of face in losing a bitter legal wrangle with Forests when they jointly owned CNI, it was still prepared to jump into bed with the New Zealand company.

It said it may now try to buy CNI on its own and there is speculation it may simultaneously try to buy 19.9 percent of Forests.

Carter Holt Harvey has decided the price agreed by Forests was too high and other potential buyers are very thin on the ground.

GPG director Tony Gibbs has hinted Rubicon would be worth more broken up. Rubicon's Forests holding could end up in Citic's hands although GPG also has a small stake in Forests and some brokers believe it may move to increase that.

Since the meeting, Mr Gibbs has been playing things close to his chest.

"I think there are many more steps in this dance yet," he commented.

Comments from our readers

No comments yet