Back to the future for Fletcher Forests as it repurchases CNI

By NZPA

Monday 17th June 2002

It was back to the future for Fletcher Forests when it conditionally agreed to repurchase the Central North Island Forestry Partnership (CNI) from receivers Ferrier Hodgson for $US650 million ($NZ1.35 billion).

Its partner is none other than China's Citic, with whom it originally purchased CNI in 1996 and then had a bitter falling out as a collapsing log market sent CNI into receivership.

Citic would not detail its losses but they run to hundreds of millions. However, the company has decided to put the past behind it despite any loss of face.

"In a commercial world, you have to make commercial decisions," Citic director Charlie Tian told a news conference.

He said New Zealand had about the best plantations forests in the world which would help feed China's near insatiable demand for wood.

Forests chairman Sir Dryden Spring promised a new relationship under a new structure. He and Citic chairman Mr Wang Jun worked for 18 months on reconciliation.

The complex deal has Citic, through Hong Kong listed company South East Asia Wood Industries (Seawi), injecting $US200 million to Forests via a share placement that will secure it 35 percent control. It will pay 37 cents per share as stated when the surprise deal was announced in May.

Rubicon will exchange most of its 17.6 percent in Forests for a forest owned by Forests.

Sir Dryden said the deal had the full support of Forests' independent directors although Stephen Hurley, president of United States forestry investor, Xylem Corp, resigned, saying he was not satisfied the deal was fair and reasonable for minorities. Xylem is Forests' second biggest shareholder with 7.6 percent.

Mr Hurley was unavailable to comment.

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

Rubicon's is paying $8 million more than other bidders for the 11,800ha Tahorakuri forest near Lake Taupo but the 37 cents per share it is receiving for its stake is well north of Forests' prevailing price.

Rubicon's shares hit a new record of 70 cents but eased back to close one cent up at 68 cents. Forests ordinaries also gained 1 cent to 26 cents.

For Forests, the exchange of Tahorakuri helps it preserve cash which was vital given that its target debt ratios will "temporarily" be blown out by the CNI purchase. Harvesting of Tahorakuri is not due to begin for three years and so it is not producing any cash.

Forests and Citic hailed the deal as having a significantly improved structure than the previous partnership, with all assets owned by one vehicle.

Forests have been given assurances on operational independence. Seawi will have two non-executive directors on a seven person board that will reduce to six "over time".

Sir Dryden acknowledged there were some unpalatable aspects to the deal for all parties but institutional shareholders had indicated support as it broke the gridlock between the parties.

The benefits included rationalisation of assets, removal of uncertainty and enhanced access to the huge and growing Chinese wood market.

He said China was facing an annual wood deficit of 60 million cubic metres by 2010 and even after the "wall of wood" came on stream in five years New Zealand would only produce 10-12 million cubic metres.

"This is our major growth market, with enormous potential for the future as China continues to lift its living standards and expand its use of imported wood products."

Asked if New Zealand timber should be processed here or in China, Mr Tian said it would be both, with his aim to maximise value for all Forests shareholders.

Sir Dryden said he was confident of shareholder support at meetings to be held in mid-August.

"Shareholders are essentially sensible -- they will see the deal for what it is -- value enhancing."

A new banking syndicate led by the Bank of New Zealand and HSBC will finance the deal. Seawi will be bound by a standstill agreement on the purchase of Forests shares for two years other than a full bid for the company.

There would be some redundancies -- less than 100 -- in administration but these would be offset by new jobs in processing.

Forests anticipates the deal will be concluded by the end of August and settlement by the end of September.

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