Murky waters beyond the Rubicon

By BRIAN GAYNOR

Rubicon: A small Italian river (Rubicone) that flows into the Adriatic Sea north of Rimini. The movement of Julius Caesar's troops over the Rubicon in 49BC, which violated a law forbidding a general to lead an army out of his assigned province, initiated Caesar's successful three-year civil war against the Roman nobility.

"Crossing the Rubicon" now symbolises a determined course of action or a point of no return.

fxdrop,4,100 R rrubicon is a strange entity. The directors describe it as a business developer - a company providing the industry knowledge, management skills and financial capital to develop ideas and intellectual capital into commercial enterprises.

But investors have a totally different perspective. They see it as an attractive asset play or a cheap entry into Fletcher Forests (every 1c increase in Fletcher Forests' share price raises Rubicon's net tangible assets by 1.4c).

The company's shareholding base is also inconsistent with the directors' longterm objectives. Large overseas arbitrage funds, which are not interested in a company with a venture capital strategy, seem to dominate the share registry.

The unstable shareholding structure has created considerable uncertainty.

Rubicon is the runt of the former Fletcher Challenge family. When Shell made an offer for Fletcher Energy, several assets not required by Shell or Fletcher Forests were dumped into the new company.

Rubicon also played an important role in the recapitalisation of Forests.

As part of the Shell offer, Energy shareholders received one Rubicon share and $US3.55 ($8.78) for every Energy share. They also received one Capstone share for every 70 Energy shares.

The new listing has a mixed bag of assets. Challenge Petroleum, which was bought by Rubicon for $20 million, is the country's fifth-largest petrol station operator with a 5 per cent market share.

It has 111 branded retail petrol stations, 17 owned and run by Challenge and 94 independently owned.

It also has fuel terminals in New Plymouth, Timaru and Brisbane.

Challenge's purchase price appears to be on the low side, but no historical financial figures or profit forecasts have been supplied for this operation.

Biotechnology is identified as Rubicon's core activity. The company's prospectus gives far more coverage to this area than any other, but once again no historical financial figures or profit forecasts have been provided.

Fletcher Forests' South American biotech and forest assets have been bought for $80 million. An Argentine sawmill and plywood mill acquired as part of this deal appears to be operating at a loss.

Rubicon also has a 31.7 per cent shareholding in ArborGen, a tree bioengineering company in South Carolina. It is committed to contributing $US4 million a year to this operation over the next four years.

New Zealand-listed Genesis Research and Development has a 5 per cent shareholding in ArborGen and Rubicon owns 3 per cent of Genesis. Rubicon has an unresolved dispute with Genesis over royalties that is subject to arbitration proceedings.

A 17.6 per cent shareholding in Fletcher Forests is Rubicon's largest investment. These shares were acquired through the recent Forests' rights issue (267 million preference shares at 25c) and a placement (75 million ordinary and 150 million preference shares at 40c each).

Rubicon can require Fletcher Building to buy up to 117 million Forests preference shares at 25c each by May 9. This put option is unlikely to be exercised because Forests has a market value of more than the transaction price.

An appropriate value for Forests is difficult to determine because Central North Island Forest Partnership (CNIFP), in which it has a half share, is in receivership and export markets are soft at present.

Rubicon believes Forests is significantly undervalued. The directors say the low share price is primarily the result of the overhang from the recent rights offering and the uncertainty over CNIFP.

They believe the rights issue overhang will quickly disappear and the resolution of CNIFP's problems will enhance value.

Analysts take a more sober view. They are not expecting any immediate improvement in Forests' core earnings and a dividend payment is unlikely.

Nasdaq-listed Capstone Turbine Corporation shares have traded between $US98.50 and $US17.75 over the past nine months. At latest market value and exchange rates, Rubicon would realise $38 million from the sale of its remaining 594,000 Capstone shares, giving the new company cash resources of $51 million and the ability to borrow against its existing assets.

At yesterday's closing price of 46c, Rubicon is trading at a 47 per cent discount to its estimated net asset backing of 86c a share. On this basis it is an attractive investment, but investors should consider a few important factors before buying.

A huge number of Rubicon shares overhang the market. Before the Shell offer, the ANZ, Citibank, Westpac and National nominee companies, which normally hold shares on behalf of overseas investors, were the registered holders of 127 million Fletcher Energy shares, or 37 per cent of the company.

Even though one Rubicon share was issued for every Energy share, these four nominee companies held 222 million shares, or 63 per cent of Rubicon, on Thursday morning.

These figures seem to confirm that a large number of Rubicon shares are in the hands of US arbitrage funds - not natural longterm holders of a New Zealand biotech group.

Just before Shell's offer, Energy had 45,700 shareholders but Rubicon now has only 24,700. Nearly half of the original shareholders sold out before the Shell offer was completed because they didn't want either Rubicon or Capstone shares.

As Rubicon is a totally different company to Energy, it is highly unlikely many of these sellers will buy back into Rubicon.

Share registry records show that in the first three days of this week the total number of Rubicon shares held by the ANZ, Citibank, Westpac and National nominee companies fell from 242 million to 222 million.

Although stock exchange records show that 147 million Rubicon shares, or 42 per cent of the company, have been traded in the 10 days since listing, share registry figures indicate the bulk of the arbitrage fund holdings have yet to be sold. It also appears that Rubicon's value will be determined by asset backing rather than earnings, price/earnings multiple and dividend yield (the company does not intend to pay a dividend).

This valuation method contains good and bad news for Rubicon shareholders.

Genesis and eVentures trade in excess of their NTA but Brierley Investments and GPG have been consistently below asset backing per share. Direct Capital, with a fairly similar business model to Rubicon, traded at a large discount to NTA before it was taken over in 1998.

Finally, there is the issue of directors and management - the most important determinant of company success.

It is encouraging to see that Rubicon has three outside directors with biotech and business development backgrounds, but the board and management are still dominated by former Fletcher Challenge employees.

Until the mid-90s, Fletcher Challenge was an open and communicative company that embraced the views of its shareholders.

But in recent years it has become increasingly unresponsive to the outside world, particularly concerning the appointment of directors and senior management.

In this respect, Rubicon's association with Julius Caesar is somewhat unfortunate.

Caesar crossed the Rubicon and started a civil war that eventually overthrew the inept Roman nobility. Caesar became the dictator of the Greco-Roman world, but was murdered less than two years later because of his autocratic rule.

Investors must determine whether Rubicon's reign will be longer and more successful than Julius Caesar's. They should also ask whether Rubicon's directors will take a more democratic approach towards shareholders.

* Disclosure of interest: Brian Gaynor is a Rubicon shareholder.

* bgaynor@xtra.co.nz