Fletcher Paper deal hits Chinese wall

By GEOFF SENESCALL

Fletcher Challenge is scrambling to avert a potential risk to the crucial $1.52 billion sale of its paper division to the Norwegian newsprint and pulp giant Norske Skog.

According to information that has just come to light, one of the conditions of Norske's purchase is to secure an existing multimillion-dollar pulp log contract with the Central North Island Forests Partnership.

This requires the partners - Fletcher Forests and the Chinese Government-owned Citic - to grant a consent.

The problem, however, is that Fletcher Forests and Citic are embroiled in a dispute over the operation and management of the partnership.

In December last year Citic launched High Court action in a bid to terminate Fletcher Forests' management of the partnership, which Citic claimed was costing it between $20 million and $30 million a year. In March, the court referred both parties to arbitration. The matter is still outstanding.

News that Fletcher Challenge had such a hurdle to resolve unsettled the market yesterday with the paper shares trading as low as 234c before closing at 236c, down 2c.

Until then the market had foreseen few obstacles in the sale of the all-important paper division to Norske at 250c a share.

The sale is a key plank in the unwinding of the Fletcher Challenge group of companies.

A spokesman for Fletcher Challenge acknowledged the problem yesterday. But he said that talks were progressing and positive. "I believe we are on track for the total sale [of the paper division] still occurring by the end of July."

The spokesman also noted that the contract was important to the partnership, and therefore Citic, because the paper division is a major outlet for its products.

But brokers said that the requirement of consent from the partnership for the contract did give Citic leverage in any negotiations with Fletcher.

While they doubted it would scuttle the sale they said it could delay it.

Fletcher Challenge does appear to be taking this issue very seriously. It is understood to be investigating pulp wood supply alternatives. But it is believed to have identified a source for only a small part of its requirements.

The current contract (known as the Tasman contracts) covers the supply of 1.053 million cu m of pulp logs by CNI to the paper division's New Zealand Kawerau pulp mill and paper machines.

Kawerau represents a significant part of the division's consolidated pulp and paper capacity. The impasse also comes at a crucial time for Fletcher Forests which is in the midst of being sold.

Here Citic also has a role in vetting any potential new owner. Under an agreement entered into when the partnership bought the Central North Island forests from the Government, it is understood that preemptive rights were granted to Citic over any change of ownership of Fletcher Forests.