Fletcher brushes off Rubicon criticisms

By PAULA OLIVER

Fletcher Challenge has rejected analysts' concerns that a key part of its restructuring plans - new vehicle Rubicon - is dangerously dependent on the volatile Nasdaq market.

Rubicon was created in October as part of Fletcher Challenge's break-up. Although looking like a ragbag of Fletcher's minor interests, it is intended to be a technology-based company that could offer commercial opportunities to groups such as local universities, crown research institutes and other research groups.

It will house a chunk of Fletcher Forests shares, the Challenge petrol station network, and Forests' biotechnology and South American assets.

As an underwriter of the recent Forests rights issue, Rubicon could also be required to take up a maximum of $67 million of the issue shortfall.

To cover those purchases, which total $257 million, Rubicon will begin with $120 million in cash and look to make up the rest by selling a holding in Nasdaq-listed small turbine maker Capstone Turbines.

Capstone's share price has been the victim of Nasdaq volatility since the separation plans were revealed, making it difficult for Fletcher to predict how much it will get for the 2.1 million shares. Fletcher cannot sell its shares until mid-February, because of a lock-in clause.

Capstone sat at $US43 when the separation plans were unveiled in October, but has since plunged as low as $US18.50. It closed yesterday at $US27.81.

The unpredictable share value has led one analyst to say the establishment of Rubicon looks like a tight equation. If the Capstone shares were sold yesterday, Rubicon would have had $263 million to cover the $257 million purchases, he said.

But Fletcher Challenge spokeswoman Ginny Radford rejected the claim that Rubicon was heavily dependent on Capstone.

Rubicon had raised $120 million in cash through an initial injection from Fletcher Challenge, the sale of shares in New Zealand Refining, and 900,000 Capstone options, she said.

"It has more than a third of its money in cash now, which is not volatile.

"The cash issue is not a hassle for Rubicon, and one of the reasons is that it still has the ability to borrow on assets worth at least $100 million - those being the biotech and Challenge assets."

Rubicon's biotech assets were clearly important long term, she said, but Challenge was not intended to be in the picture long term.

Rubicon would take on Challenge for $20 million, significantly less than some analysts' valuation, said Ms Radford.

"The rest of its assets are part of Forests, and people suggest that they're perhaps undervalued at 25c a share."

Rubicon would hold about 18 per cent of Fletcher Forests.

Ms Radford said that if the equation to finance the purchases turned negative because of a fall in Capstone's price, Fletcher had the options to:

Sell Forests shares to generate cash.

Hold Capstone for a better price.

Borrow against Rubicon's solid assets.

Analysts the Business Herald spoke to said the Capstone price would still play a huge part in the entire Fletcher separation, which shareholders will vote on in March.

One said it was important to remember that 4.89 million Capstone shares were going to Fletcher Energy shareholders as part of Royal Dutch Shell/Apache's deal to buy Energy. "Many of those shareholders will sell because they won't know what to do with a miserable 100 Capstone shares.

"If a lot of those shares come to the market, the Capstone price will go down - at the same time that Fletcher wants to sell its share for Rubicon."

A complication is Rubicon's underwriting of the Forests rights issue, but it can pass on $29 million of its maximum $67 million commitment to Fletcher Building.

The analyst said Credit Suisse First Boston, the major underwriter, would be reluctant to hand over any of the shortfall to other underwriters because it had the chance to hold a strategic stake in Forests. It could then look for a corporate buyer.

Fletcher Forests shares closed yesterday unchanged at 28c.