CHH managers in gun

Peter Springford

Carter Holt Harvey independent directors slated the forest giant's management as they unanimously gave their support to Graeme Hart's $3.3 billion takeover, reversing an earlier snub.

In a boost to Hart's ambitions to take full control of CHH, the directors said they could not "reconcile" management forecasts for this year's profit and next with those used to justify their September rejection of Hart's $2.50 a share offer.

The directors also disclosed management now expected 2006 earnings to fall to $141.2 million - $110 million short of a forecast set out in the first appraisal of the offer. This cut follows last week's warning that profits for the year to December 2005 would be $200 million - $50 million short of the forecast in the appraisal.

The independent directors, led by Kerry McDonald, said: "The quality of management's forecasting makes it difficult to reliably predict long-term cashflows and valuation; limits the ability to separate short-term cyclical movements from long-term structural market developments; and limits the ability to separate short-term execution and timing issues relating to productivity improvements from the longer-term benefits."

McDonald told the Business Herald the earnings downgrade might reflect Hart's control of the company.

"Do I think management became more conservative in its forecasting? Yes I do - in parts," McDonald said. "They have missed three consecutive forecasts and I think they would be concerned about not achieving forecasts with a new major shareholder who is going to be very focused on value."

He said the earnings downgrade also reflected deferred asset sales, management's inability to meet performance targets and market conditions. But he said he was confident the independent directors had applied all necessary and appropriate checks on the earlier forecasts.

McDonald would retain his stake in the company, worth about $75,000 at the $2.50 a share offer.

CHH chairman John Maasland said yesterday he would sell his shares, of which he had 1500 at the end of last year.

The directors backed their view with a new report by advisers Grant Samuel that valued CHH at $2.43 to $2.90 a share. This compares with an earlier report that valued CHH at $2.55 to $2.95 a share.

"Importantly, the committee notes that the offer is towards the bottom of Grant Samuel's valuation range. However, the circumstances and risks outlined ... now outweigh the upside potential for shareholders."

They also highlighted risks of holding shares in a company dominated by Hart, who acquired a 50.5 per cent stake in September from International Paper of the US and by last night had 71 per cent of the company.

CHH's weighting in key market indices would fall, hitting trading volumes. This would weigh on interest from analysts and large investors, who could bring the company to account.

Hart's bid is due to close tomorrow, but he is now expected to extend the offer by two weeks.

CHH chief executive Peter Springford said as head of the executive team he had to take management failures "on the chin".

"We have not delivered on operational improvements ... the forecasts did have optimistic parts to them of what was going on in the market."

Shareholders were surprised by the latest profit write-down, but CHH's shares were steady yesterday at $2.50.

Walker Asset Management's Steve Walker, who had previously said he would reject Rank's offer, is now considering his position. Reflecting other fund managers' concerns, Walker, who helps manage a $200 million investment portfolio, said he had to weigh the uncertainty outlined by directors of Hart's record for creating value.

"Fundamentally, we have a business that has a lot of value and improvement potential. But with the projections from management, with their uncertainty, it's hard to have any confidence," Walker said.

CHH warnings

July 21: Cuts 2005 full-year forecast operating profits from $300 million to $283 million, blaming falling Australian demand and weaker pulp prices.

Sept 12: Cuts 2005 forecast operating profits from $283 million to $255 million, blaming slower sales in New Zealand and Australia and the strength of the kiwi dollar.

October 26: Cuts full-year 2005 forecast operating profits from $255 million to $200 million, blaming the Australian housing market, weaker pulp prices, operational problems and the strong dollar.

November 1: Cuts full-year 2006 forecast operating profits from $251 million to $141.2 million.