Fletcher Challenge Forests logging off

By PAM GRAHAM

When Fletcher Challenge Forests said this week it would slowly sell forests and concentrate on building the "front end" of its business, was it a glimpse of the future for investors?

The remnant of a great conglomerate which three months ago failed to convince shareholders it should buy huge forests in the central North Island is now not only no longer trying to buy those forests but is moving to sell its own trees.

What is going on?

Answer: the industry is trying to confront a history of poor returns and low share prices before the "wall of wood" arrives.

Fletcher Forests chairman Sir Dryden Spring said the company now had a three-part strategy - increasing revenue, cutting costs and finding ways of stopping "New Zealand competing with New Zealand" when it sells wood.

Sir Dryden and board member Warren Larsen know a bit about how to do that, having been key figures in the dairy industry.

Fletcher Forests is not selling its forests overnight and plans to keep a "baseload".

It will use the money from forests that it does sell to buy back shares, which boosts earnings per share.

Sir Dryden said the purchase of the Central North Island Forest Partnership assets with an associate of Chinese investment company Citic would have provided "a leg" to control marketing but it did not happen.

"We can't sit on our hands," said chief executive Terry McFadgen.

One of Fletcher Forests' greatest critics, Shareholders Association chairman Bruce Sheppard, said he approved of the strategy.

It is clear that a lot of talking is going on behind the scenes and Sheppard is plugged into some of it. He is prepared to offer an industry plan.

"I would form a new entity in conjunction with Maori, Fletcher Forests, Carter Holt Harvey and Guinness Peat Group."

Each could own 25 per cent. They would put capital into that business and buy forests, agreeing to supply wood to Carter Holt Harvey and Fletcher Forests.

Carter Holt could focus on pulp, paper and packaging and Fletcher Forests on processing wood products.

After the reshuffle pay a special dividend to shareholders and list the forest owner on the stock market or sell it to someone else.

One could even put the cat among the pigeons and suggest the Government's new pension fund might want to invest in New Zealand's trees.

That is an example of the kind of thinking that is going on, and those doing it note the trend internationally for pension funds to buy forests.

Sheppard, who dominated the Fletcher Forests annual shareholder meeting at Eden Park on Wednesday for half an hour on a range of governance issues before walking out, said the old Fletcher Challenge culture of being a "natural master" of the industry made it difficult for it to lead a consolidation, especially one with Maori involvement.

He thought Carter Holt Harvey chief executive Chris Liddell could have led a consolidation. Liddell has said his company would consider proposals for marketing but it did not favour a Fonterra-style industry model.

He leaves for the United States in December and will be replaced by Peter Springford, who has been leading controlling shareholder International Paper's Asian business.

Sheppard thinks "there is a chance of GPG pulling off a consolidation".

But the GPG director fronting the exercise, Tony Gibbs, acknowledges the difficulty of threading a path through the minefield of Maori politics, noting "I'm a corporate."

Gibbs has never done a deal with Maori and it is unclear how he is regarded by elders, although the "old fella" Sir Ron Brierley is said to have mana.

Gibbs did note: "I have had some discussions with senior Maori which went very well, but it is for Maori to sort out the ownership of the land with the Crown."

Minister for Land Information John Tamihere says he is trying.

"There is goodwill on the part of government and a large component of goodwill on the part of Maori to try to get Maori interests in the central North Island unleashed so that the commercial opportunities available can be moved on."

Maori lived in the area, they were the skilled workforce and they would own the land at the end of the settlement process.

"This is a good group to do business with," he said.

Maybe, but the 10-year struggle to allocate ownership in the fishing industry after the Sealord deal causes cringes in some quarters at the suggestion of what some are calling a "Treelord" deal in forestry.

One scenario doing the rounds is that the Government will agree to fast-track the settlement process in the central North Island.

A round of hui could obtain a mandate to set up a commercial entity using money from the Crown Forestry Rental Trust and a mechanism could be designed to placate iwi not wishing to take part.

The commercial entity could deal with anyone. It could be the forest owner in an industry consolidation.

The complexities are immense and while they are being worked through, Central North Island Forest Partnership receiver Michael Stiassny could sell the forests at any time, possibly even to Citic, which is reportedly still trying to put a bid together.

Still, a Maori bid would have access to financing.

The rentals on the CNIFP land currently go into the trust which pays Treaty of Waitangi claims. The trust has accumulated $160 million relating to the area where the CNIFP forests grow.

Alternatively, iwi could wait out the harvest from the cutting rights - the original sale was of the trees on the land plus one rotation.

The drawback to this is that the land would become free in patches, depending on when trees are cut.

"If there is a Treelord deal around it may well be around bigger forestry companies deciding that they either want to own forests or they want to be in processing," one industry watcher said.

Fletcher Forests made its choice clear this week.