Fletcher rejects forest bill

By PAULA OLIVER

Fletcher Challenge yesterday disputed how much cash would be needed to keep its troubled forestry partnership with Chinese company Citic afloat but admitted that it had paid too much for the huge estate in the first place.

At a packed and often intense annual shareholders' meeting, chairman Roderick Deane said Citic's forecast that the partnership would need a further $US200 million to meet its banking requirements was vastly inflated.

The Business Herald reported on Wednesday that the debt-laden Central North Island partnership, which owns Kaingaroa and adjoining pine forests, was in danger of breaching banking covenants unless both parties agreed to inject more cash.

"Fletcher Challenge doesn't believe that number [$US200 million] is anything like appropriate," said Dr Deane.

"We would hope it will be far less than that, but it is important to remember that Citic cannot hold up this separation [of Fletcher's three letter stocks] process."

Asked by a shareholder if he thought Fletcher had paid too much for the forestry asset, Dr Deane said: "Given today's prices, we would feel that."

Log prices have fallen since the partnership was established in 1996.

Dr Deane and his board faced questions for more than two hours from the 1200-strong audience at the Ellerslie Convention Centre.

Many centred on a forestry dispute with Citic, which Dr Deane agreed had partly prevented Forests being sold rather than recapitalised.

But in the end the planned $427 million Forests rights issue passed with 93 per cent in favour. Shareholders knew they had few alternatives.

In his 50-minute opening address, Dr Deane outlined the industrial conglomerate's separation plan and rejected a persistent market rumour that Fletcher had turned down a cash offer of 300c a share for Building.

He revealed that while a sale of Energy was the preferred outcome, the necessary work was under way to establish it as a standalone business if the Commerce Commission stopped its sale to Royal Dutch Shell and Apache Energy of the United States.

"The standalone option is a sustainable and realistic alternative," he said. "Indeed, it's fair to say that there was a genuine conviction by energy management to operate as a standalone company, having made major strides in the past 18 months to reposition the business."

Dr Deane confronted the issue of falling share prices for Building and Forests, blaming short-term investors who had been hoping the divisions would be sold.

When it had been revealed that the companies would stand alone, the investors had bailed out, putting selling pressure on the stock.

"The board expects the [Forests] share price to move upward again over time, driven by those investors who see the fundamental value upside in the division," said Dr Deane.

Log prices were at a low point in their cycle and would eventually rise.

Dr Deane said the separation process would not be completed until at least next March. The Commerce Commission's second ruling on the proposed Shell and Apache buyout of Fletcher Energy was due on November 17.

The Forests rights issue would cost the company $13 million, he said.

Well-prepared shareholders, including veteran campaigner Max Gunn, took the opportunity to voice their discontent with the separation plan, some even opposing the re-election of Dr Deane and chief executive Michael Andrews to the board.

Asked why the Forests rights issue had been done at a discounted 25c rate, Dr Deane said the company needed to raise a large sum but had to keep the price low enough for shareholders to take part.

The cashflow generated would clear part of Forests' debt, leaving it with an 18.6 per cent debt-to-total-capitalisation ratio, an improvement from 34.7 per cent.

Documentation on the two-for-one issue will be sent to shareholders on November 13, with trading to begin shortly after. The final date for taking up of rights is December 8.

Fletcher Forests shares closed at an all-time low of 32c, Building lost 4c to 177c and Energy gained 10c to 840c.