Fletcher shores up Norske sale

FLC acts on a report that finds the paper purchase to be fair and reasonable to shareholders. GEOFF SENESCALL reports.

Fletcher Forests will underwrite the multi-million dollar fibre supply contract with Fletcher Paper to ensure its sale to Norske Skog is not derailed.

This has been confirmed in a Fletcher Challenge-commissioned report, which judged the paper purchase by Norske to be fair and reasonable to shareholders of all divisions.

However, Fletcher Challenge chief executive Michael Andrews did not think Fletcher Forests would be called upon. He expected the Central North Island forestry partnership would "agree upon appropriate supply arrangements with the Tasman mill as such an agreement is also in their interests."

The partnership is a joint venture between Fletcher Forests and the Chinese Government-owned Citic. The problem is that the partners are in dispute, hampering the chance of the consents being granted on the current supply contract.

The report's authors, Grant Samuel, valued the paper shares between 204c and 276c each. Norske's offer price of 250c falls within this range and is deemed to be fair.

But Grant Samuel indicated the offer was not as attractive as it seemed.

While the Norske price represented an 83 per cent premium to the paper price on the day before the offer being made, the premium in terms of the ungeared business was only 18 per cent.

Having noted that, the report said that Norske was a good fit and its offer was the result of a competitive tender process.

While dismantling the letter stock structure process would boost the paper share price as well as the other Fletcher division stocks, Grant Samuel believed the paper price would trade below the offer price if the Norske offer was rejected.

The valuation took account of the rise in the price of both newsprint and pulp. Newsprint prices in the last 12 months have risen from a low of $US485 ($1060) per tonne to $US550 per tonne. Similarly, pulp price has gone from $US460 a tonne to $US680 a tonne.

Furthermore, the global pulp and paper industry is going through rapid consolidation.

Five big transactions with a total value of $US22 billion were announced in February alone.

North American newsprint now controls 70 per cent of the market compared with 55 per cent two years ago.

Because of Fletcher Paper's debt it did not have the capacity to take part in this consolidation as an acquisitor.

Grant Samuel said the transaction was fair and reasonable to the other three Fletcher divisions comprising forests, building and energy.

It said the financial position of the residual Fletcher group would be improved as a result of the paper separation.

The improvement in the key gearing ratios was significant with net debt plus capital notes reducing from $4.5 billion to less than $2 billion.

And the separation helps the planned dismantling of the targeted share structure - long seen by the market as a negative.

On the penultimate page of the 84-page report, Fletcher notes that the restructuring costs and direct costs associated with transactions are estimated at $25 million to $40 million per each remaining division.

Fletcher is due to hold its shareholder meeting on July 4.