Fletcher and Citic courting

By CHRIS DANIELS and AGENCIES

Fletcher Challenge Forests shares leaped 20 per cent yesterday as the company gave itself another chance to clinch the central North Island forest assets crucial to its future.

If Fletcher succeeds, the troubled Central North Island Forest Partnership will have come full circle, with erstwhile partners turned bitter enemies Fletcher Forests and Citic back in business together.

This time they hope it will all be different - instead of being at each other's throats, they will be heading in the same direction, with Citic in the driving seat.

Forests chief executive Terry McFadgen said his company and Citic had new boards and had put the past behind them.

"We have been able to get back on track and put Humpty Dumpty together again."

In the latest chapter of the increasingly strange tale of the CNIF sale, Fletcher said yesterday that it had "reached understandings" with Citic to buy the three mills and the 190,000ha forest estate that lies between Taupo and Rotorua.

The Chinese Government-owned Citic plans to inject $439 million of new equity into Fletcher at 37c a share.

McFadgen said a new loan of $550 million was also being arranged, with $450 million to be used to buy the CNIF, and the rest used to "refinance its own estates".

McFadgen said Fletcher chairman Sir Dryden Spring and Citic chairman Wang Jun had been in talks for 18 months.

In a side deal, listed company Rubicon will sell its 17.6 per cent stake in Fletcher, receiving a Fletcher forest, rather than cash, for its shares.

If finalised and approved by shareholders, Citic would become Fletcher's cornerstone shareholder, owning 35 per cent of the company.

The market's response - Fletcher shares gained 4c to 24c - suggests shareholders are likely to look kindly on the scheme, despite sacrificing a substantial chunk of their equity.

Citic and Fletcher were joint owners of the forest when it went into receivership late in 2000, owing more than $1.4 billion.

The partnership ended in acrimony, Citic accusing Fletcher of mismanaging the forest to its own advantage.

But all these arrangements will count for nothing if fishing and bloodstock businessmen Philip and Peter Vela succeed in buying the forest.

When Fletcher failed last month to meet a financing deadline imposed by the receiver, a back-up deal involving the Vela brothers was invoked.

Questions are now being asked about the Velas' ability to secure the necessary finance - the assets are likely to cost about $1.4 billion, an amount equal to the CNIFP's debt.

Despite repeated calls from the Business Herald over the past few weeks, a Vela CNI director, and spokesman for the brothers, Auckland lawyer Clive Bradbury, has refused to comment on the deal.



The Vela brothers are on an extended trip to Europe.

McFadgen said Forests had had several discussions with receiver Ferrier Hodgson since its bid lapsed.

"We have indicated to the receiver that should the Vela bid not proceed, we are ready, willing and able to present our deal."

UBS Warburg analyst Frances Loo said that the exit of Rubicon from the Fletcher board might have been a condition of Citic buying in.

By being the largest shareholder, Citic might be able to avoid the problems of different agendas that dogged the last, ill-fated partnership.

"What is the difference this time around?"she asked.

"One is that their interests are aligned with those of Fletcher Forests. It's in both their interests for the combined profitability of the two estates to be maximised."

A forestry analyst at First NZ Capital, Andrew Mortimer, said Rubicon would now own a "reasonably liquid forest" which it could sell, rather than Fletcher shares.

Citic simply buying the Rubicon shares would not have raised any fresh money, money that Fletcher needs to buy the forest.

"I don't think people would have picked it a while ago but if you get past emotions and look at economic sense, this is probably a pretty favourable outcome."