Carter Holt set to sell forests

The outcome of Carter Holt Harvey's review of its forest estate, the largest in the country, is imminent.

A sale of at least some of the estate is expected because Fletcher Challenge Forests has shown that selling forests is good for share prices.

Since it sold all its forests and returned money to shareholders, its shares have returned 41 per cent in the past year, Bloomberg data shows.

Carter Holt's share price is already up in anticipation of a decision. Analysts say it would be too costly to disappoint now.

They recommend a total sale to maximise the share-price hit but the company has ruled that out.

The decision affects small rural communities and city investors alike.

The Carter Holt estate is 400,000ha, of which 330,000ha is planted. Fifty-nine per cent is freehold. It is in the books at $2 billion.

The company owns forests in Northland, north of Auckland, near Kawerau and Kinleith, in the Coromandel, and in Hawkes Bay, Nelson and Canterbury.

If the company returns the proceeds to shareholders it will no longer be the NZX's second-largest company.

The most likely buyers are global timber management companies that invest money for private clients and rich institutions such as Harvard University.

They are detecting increasing interest in forests as an asset class. This form of investment is private: it goes nowhere near a sharemarket.

The so-called Timos, Hancock Timber Resources, GMO Renewable Resources, Global Forest Partners and Prudential Timber are already in New Zealand and Harvard, a client of GMO, is already the country's second-biggest forest owner.

The third is Malaysia's Tiong family, through its company Ernslaw One.

A corporate ego play is also going on. Many in the Carter Holt camp think the decline of the Fletcher Challenge empire has been one of the saddest sagas in New Zealand business.

Fletcher's forest sale was messy. The company sold at the bottom of the cycle and Auckland property investors made a killing by warehousing the estate to US funds and keeping the freehold land.

About 25 per cent of the estate is now being converted to dairying.

The question is, will Carter Holt execute the strategy any better?

The premise behind the exit from forests for both companies is that the forests do not earn their cost of capital. They have disappointed for a decade.

The new buyers, the global funds, have clients they say are prepared to wait out cycles, clients who want a commodity component to their large portfolios.

The funds say there will be no desperate over-cutting of forests, no sudden changes in silviculture regimes and no games played with timber supply to competitors. Time will tell.

Carter Holt is expected to be mindful of the future cost of wood supply because its pulp and paper mills have bigger needs than Fletcher's sawmills and mouldings plants.

The company has already been quietly selling land for conversion to dairying and for lifestyle blocks.

Carter Holt forestry chief executive Jeremy Fleming said more than 5000ha of land in the south Waikato had been sold for dairying. The industry thinks it is closer to 8000ha.

Small amounts of land near Nelson and Puhoi have been sold for lifestyle block development.

But Fleming said the best economic use of most of its estate was forestry.

Critics say the estate cannot be sold in one line because it is not contiguous. It is still overvalued and a tax liability has to be recognised on a sale.

They suspect the real agenda is a slow sell-up by 50.5 per cent shareholder International Paper. Pulp and paper mills are core business only because no one would buy them.

But Carter Holt has said it is not selling all its forests, and it is a buyer of the right assets in New Zealand.

It wants to buy structural sawmills from Tenon, the rebranded Fletcher Challenge Forests.

The company has identified its core business as structural sawmills that make timber framing for the building industry, pulp and paper mills, medium-density fibreboard plants and packaging where there is a margin to be made.

Tenon, the former Fletcher Challenge Forests, is focusing on clearwood suitable for furniture and other high-end uses, and on its distribution chain into big DIY stores in North America.

Carter Holt wants to buy Tenon's structural assets because it can get cost savings by running fewer, larger mills. Expect more old mill closures in small towns.

Tenon and its major shareholder, Rubicon, could merge, once the structural assets are gone. Tenon's Auckland head office is likely to go.

Its mills could end up in a joint venture with an international player, or with Carter Holt, rather than be moved in a straight sale. If Carter Holt buys them it will produce 40 per cent of the framing timber for the local building industry.

The forest owners that supply them and timber companies that buy from them are unhappy at losing competition.