Forests next in line for sale by Fletcher

By LIBBY MIDDLEBROOK

At least three companies are understood to be carrying out due diligence on Fletcher Forests, making it the next division in the Fletcher Challenge group to be sold.

Yesterday the company sold its paper division to Norway-based Norske Skog for $5 billion, clearing the way for the restructuring or sale of its three remaining businesses - forests, energy and building.

For forestry, the company is looking for an investor to either buy out or buy a big shareholding to solve the division's debt problem and stabilise its balance sheet.

United States-owned forestry investor Weyerhaeuser New Zealand is understood to have taken part in the early stages of due diligence through investment bank Merrill Lynch, which was appointed by Fletcher Forests early this year to investigate the company's future options. Managing director Nick Roberts declined to comment.

Boston-based company John Hancock Life Insurance, which last month spent more than $US150 million on Australian farmland to increase its investment portfolio, is also understood to be a potential bidder.

One of the world's largest private plantation owners, Seattle-based Plum Creek Timber, is also a likely bidder, according to Business Herald sources.

Fletcher Challenge is splitting the company into standalone entities by dismantling the letter stock structure, which allows the group's paper, forestry, energy and building divisions to be separately listed on the stock exchange while maintaining a consolidated balance sheet.

Last year the company planned to separate its energy division from the group after the proposed sale of Fletcher Paper to its 50.8 per cent subsidiary Fletcher Canada.

However, when Canadian shareholders rejected the deal in November, Fletcher went back to the drawing board.

Earlier this week, Fletcher Challenge chairman Dr Roderick Deane said that while there was no predetermined order for spinning out its three remaining divisions, "we're looking at each division at the moment and particularly concentrating on the forestry division, which has some complexities around it which require quite significant attention."

Fletcher Energy has been directed to investigate potential acquisitions to address its stagnant growth issue before being spun out into a separate entity. While cash flows are stable, the company's growth has remained relatively flat in the past, leading to criticism from investors.

One market observer said that, until this week, investors and market players had assumed that the group would sell its paper division, split energy away and find some "fix-up" solutions for forests and building, which would make up the remainder of Fletcher Challenge.

"It appears to the market that what Deane is actually saying is that Fletcher will run a thorough process with a lot of integrity to ensure that they evaluate all the options for all divisions, not just simply spinning energy out.

"You're hearing some pretty strong statements from Deane that the company will look at all the options, which basically means everything's up for sale."

Options for Fletcher Forests include a full sale, a new key investor or being absorbed into another company.

Fletcher Forests spokeswoman Ginny Radford said several players had completed the early stages of due diligence, with a reduced number of parties entering phase two of the process.

"The beginning of the change in Fletcher Challenge, which the paper division sale announces, confirms that there have to be changes in the forest balance sheet.

"It's clearly understood that the forestry balance sheet needs to be restructured, that it is not in a position to stand alone with this amount of debt."

It is estimated that Fletcher Forests has $700 million of debt on its balance sheet. Its assets were valued at $2.3 billion on June 30 last year.

Ms Radford did not see Fletcher Forests' management dispute with its North Island forestry partner Citic as a stumbling block to splitting the division away from the rest of the group or attracting a new investor.