Fletcher weighs up its forest options

By PAM GRAHAM

Fletcher Challenge Forests' settlement with the Central North Island Forest Partnership receiver last week closed a chapter for the forestry industry, but the unrevealed plot of the next one has more potential to move share prices.

The company wants to separate forest ownership from other businesses because its share price, up 1c to $1.01 on Friday, undervalues its forests.

Options include a trade sale to an international fund that preserves management control and some timber supply; turning the assets into tradeable securities for international sale in a process known as securitisation; or a joint venture with a partner. Maori were the forestry industry's "natural partner", Fletcher's joint chief executive, Ian Boyd, said in a speech this month.

Fellow joint chief executive John Dell said on Friday that Macquarie New Zealand would report on options to a board meeting this month and the market would be updated.

"The key thing we are seeking from Macquarie is how we realise greatest value, the ability to implement a strategy quickly and securing appropriate supply arrangements for the processing and distribution businesses," Dell said.

David Stanley, head of research at Macquarie Equities, said he would like to see Fletcher sell forests and secure long-term supply contracts: "That would go a long way in narrowing the gap between the share price and intrinsic value."

Macquarie Equities does not share information with the advisory business.

Fletcher Challenge historically played a large role in forestry as a diversified conglomerate. The company broke itself up at the same time as the forest industry ownership structure is changing. There are more small forest owners while large vertically integrated corporates are selling forests and focusing on processing, forest management and marketing.

Fletcher Forests is joining the trend after its shareholders stopped it buying the Central North Island Forest Partnership with Chinese investment company Citic. It previously owned the assets with Citic and jointly managed them with its neighbouring forests.

Last week's agreement with CNIFP receiver Ferrier Hodgson settled outstanding lawsuits, the transfer of management of the CNIFP forests to its own team and wood supply from CNIFP to Fletcher in the future.

"We see the settlement as a positive development because the issues had been consuming a significant amount of management time," ABN Amro said in a report.

"Fletcher can now focus on crystallising its recently announced strategy of partitioning its forest assets from the rest of its business and returning excess capital back to shareholders."

The synergies lost from the separation from CNIFP will cost $10 million a year after tax. Analysts said the pre-tax and cash impact was closer to $15 million a year.

The 500,000 cubic metres of pruned and unpruned logs agreed was more than the 440,000 cubic metres under "Tasman" contracts that had been in abeyance and included poorer quality logs.

"We are very satisfied with the wood supply arrangement," Dell said. He said the agreement was for "market pricing", without giving details. Fletchers had already been losing staff to the new management company for CNIFP that was seeking 80 people. Dell said about 30 to 40 staff had left.

How Fletchers will sell forests is just one uncertainty. Another is the future of a 7.5 per cent stake owned by an Ohio pension fund, previously managed by Xylem.

Guinness Peat Group remains on the register of Rubicon, which owns 17.5 per cent, of Fletchers. GPG's thinking also involves separation of forest ownership from other activities, the Herald understands.