Fletcher looks to Plan B for Paper

By Geoff Senescall

Fletcher Challenge is ready to open negotiations with several parties following the collapse of its attempted $C3.6 billion reverse takeover of its Paper company.

Jilted by its 50.8 per cent Canadian subsidiary, Fletcher Canada, the pulp and paper company will now explore how serious this interest is.

There is no appetite within Fletcher's to go back with a sweetened offer to the Canadian minorities, who had baulked at the merger price.

The "no" vote therefore means that Fletcher Challenge must now look at other options for the debt-laden Fletcher Paper, which is the key to unlocking the rest of the group from the letter stock structure.

In the wake of the announcement the company simply said a statement on the future of Fletcher Paper would be made at the company's annual meeting today.

While the company has been close-lipped on what its plan B might be, the group chief executive, Michael Andrews, indicated to local institutions recently that approaches had been made to the group. However, it was unable to pursue them while the merger deal was on the table.

He is also said to have hinted at the possibility of a similar merger deal - to the one just vetoed - with another party. Any solution would happen reasonably quickly.

It is estimated that around $50 million has been spent since embarking on the merger with its 50.8 per cent Canadian subsidiary in March. Several analysts expressed alarm that the company could have gone to such expense without being able to secure a deal.

But while this $C3.6 billion merger deal might be dead, a turn in the paper cycle could save the company from potential disaster. In October the newsprint price moved off its low of $US470 a tonne to notch its first rise in 15 months.

Whether the prospect of further rises is enough to entice an attractive offer for Fletcher Paper remains a moot point.

According to one merchant banker, if an appropriate offer was not forth coming, Fletcher Paper would likely drive its 50.8 per cent Canadian subsidiary much harder by taking a firmer hold on the running of the company.

To date it has tended to let the local management and board run the asset.

More than likely it would attempt to strip out the $1.38 billion of cash sitting with Fletcher Canada to help pay down Fletcher Paper's debt, the banker said. While there were tax issues it should still be able to be done.

Furthermore, any expansion or capital expenditure plans for Fletcher Canada would likely be curtailed. Preference would be given to Fletcher Paper on any areas of competition between the two groups.

One option Fletcher Paper is believed to have ruled out is a rights issue. Some analysts have suggested a hefty rights issue might be needed to pay down Fletcher Paper debt.

Meanwhile, failure to get the merger proposal off the ground means that Fletcher's capital notes issue has been canned.