Fletcher faces new threat

CHRIS DANIELS talks to Stephen Hurley, the dissident director turned bitter foe of Fletcher's huge Central North Island forest scheme.

American fund manager Stephen Hurley has lit the fuse on a campaign to explode Fletcher Forests' $1.3 billion plan to buy the Central North Island Forest Partnership.

Boston-based Hurley is chairman and chief executive of Xylem, the second-largest holder of Fletcher Forests shares.

On Monday he will post letters to each of Fletcher's 50,000 New Zealand shareholders and 14,500 Americans with an interest in the company, that will attack the plan to buy the 162,000ha forest and associated sawmills.

"You can quote me on this - this is outrageous. There is no part of this deal that we like," he says.

Until this week Hurley, who resigned from the Fletcher board in protest last month, has made no public comment on the deal.

He is now promising to fly to New Zealand to lobby shareholders and be present for a crucial shareholders vote at Eden Park on August 13.

Hurley is also calling for a clean-out of Fletcher's board and senior management, saying they are paying too much for the forest and handing effective control to an obscure Hong Kong company, South East Asia Wood Industries (Seawi).

The investment company of the Chinese Government, Citic, is using Seawi as an investment vehicle to take a 35 per cent stake in Fletcher Challenge Forests as part of a complex scheme to finance the purchase.

Citic and Fletcher are erstwhile partners, having owned the forest as a joint venture before it collapsed into receivership.

The $1.3 billion purchase price will be paid to receiver Michael Stiassny, who will then pass it on to the banks owed money from the collapse.

Hurley says he is outraged at the deal that 17.6 per cent Fletcher shareholder Rubicon has secured.

"It's been structured in such a way as to give preferential treatment to one shareholder, who is not a cornerstone shareholder, at the expense of minority shareholders including us," he says.

"There is really nothing about this deal that we like."

It meant Fletcher would be increasing its debt level fourfold when financial markets were in turmoil.

Borrowing so much money could have made sense if Fletcher had a good deal in buying the forest, but he estimates it is planning to pay $214 million more than it should.

A 10 per cent drop on log prices would put Fletcher in breach of its loan promises, a real possibility given the plunging value of world stock markets, he said.

"In these markets - our equity market is off 25 per cent this year - it doesn't take much for log prices to decline by 10 per cent."

If this happened, Fletcher would breach its covenants with bankers, which then in turn released Seawi from its promise to restrict its shareholding to 35 per cent, opening the way for a complete takeover.

"They are not a cornerstone shareholder - they are a controlling shareholder - for the chairman to say this company stays in the hands of New Zealanders is ridiculous.

"It insults the intelligence of the shareholders of Fletcher.

"They are paying too much for it. They are paying too much for CNIFP and they are taking on a lot of debt, and introducing a shareholder that no one knows anything about.

"Who are these individuals that will control Seawi that is controlling Fletcher?"

Hurley disputes any claim that the Fletcher share price would immediately drop if the CNIF deal was abandoned.

The company had a "rising wood profile", which the CNI forest did not.

It had a strong balance sheet, with improving cash flow coming simply from an increase in wood volumes.

"It can perform very well. Having a strong balance sheet during a time of significant financial turmoil is a good place to be.

"What this company needs is a new board of directors, it needs a new senior management team and this is really important - it needs a new team that is going to work for all shareholders of Fletcher Challenge Forests."

He believes the other large institutional owners of Fletcher shares, who have so far said they support the CNIF deal, can be convinced to vote against it.

Hurley says he resigned last month after being presented with the CNIF deal as a fait accompli by a subcommittee of the Fletcher board.

"They said - 'we'll ask you to approve this, sign and certify this'.

"I said 'I'm not doing that, I'm not going to certify to this transaction. This transaction is outrageous. It should not be taking place'."

Defending the levels of debt that will be incurred in the CNIF deal, Fletcher has been saying there will be a huge repayment of debt in the next 18 months, with any spare cash going straight to paying it off.

Fletcher must pay $150 million back to banks within two years.

It is receiving $428 million from the issue of new shares to Seawi, but is also borrowing more than $960 million to pay for the rest of the CNIF.

An independent assessment of the CNIF deal by Grant Samuel & Associates says the high gearing ratio - the net debt compared to its total tangible assets - of 41 per cent was "forecast to decline reasonably rapidly to 18 per cent by June 2006".

The accusation that Rubicon is getting a sweetheart deal for its Fletcher shares has been refuted by both companies since the CNIF arrangement was announced.

Rubicon has said that, because it would be paid for most of its shares in the form of a forest, it would not truly be earning 37c a share for its stake in Fletcher - it will have the risk of trying to sell the Tahorakuri Forest.

The involvement of Seawi, and the possibility of it being used as a Trojan Horse, has also occupied the public relations writers employed by Fletcher.

When asked if it has paid a fair price for the forest, Fletcher points to its assessment of its value, $1.493 billion, which is $166 million more than it is paying receiver Michael Stiassny for it.

It claims likely benefits of the deal are more than 10c per existing share.

Its forecasts show operating profits rising from $79 million in the year to June 30 to $110 million next year and $162 million in 2004.

After-tax earnings forecasts were not so pretty, but the Fletcher report is still upbeat.

It said Fletcher's earnings after tax would increase from a forecast $53 million next year to $109 million if it bought the CNIF. This would drop to $37 million in 2004 after a revaluation of the forest.

Shareholders Association chairman Bruce Sheppard shares Xylem's concerns about the debt levels of the post-CNIF company, Fletcher Challenge Forests.

He has been leading the charge against the CNIF deal, opposing it on procedural grounds and arguing that the treatment given to minority shareholders will be unfair.

The risk of a breach in the loan commitments to the banks is high, says Sheppard.

"US stock markets are in turmoil, we know that will lead to a reduction in consumption. That will fuel a drop in corporate earnings.

"A drop in consumption and corporate earnings translates into an even bigger drop in commodity prices. Logs are a commodity."

The possibility of a 10 per cent drop in log prices, lasting for six months and breaching banking covenants, was a reasonable one, said Sheppard, given present markets.

He is also concerned at the risk posed by the burden of debt on the company's logging operations and is investigating whether the harvesting programme is sustainable.