Investors grab Hart's coat-tails

Carter Holt Harvey's shares surged yesterday as investors bought into the forest giant on the coat-tails of billionaire Graeme Hart's $3.27 billion takeover offer.

At one point, the shares rallied 16c to a high of $2.62, but later settled to end the day up 10c at $2.56, 6c above Hart's offer.

Investors are counting on Hart cutting costs, boosting profits and, eventually, selling it in bits.

Some also believe the billionaire will come back with a new and higher bid for the shares, although that is regarded as an outside chance.

"People are saying Graeme Hart can do a good job here. They think in two years it will be worth more," said Craig Brownie, managing director of merchant bank and merger and acquisition specialist Bancorp.

Hart, a school-leaver at 16, former panelbeater and tow-truck driver, has a watertight deal to buy the 50.5 per cent stake owned by US forestry giant International Paper.

He will now offer the same terms to minority shareholders, as is required by takeover laws, within four to six weeks. But it is not clear that he will succeed in getting the entire company.

Forsyth Barr equity analyst John Cairns said the share-price gain indicated that investors wanted to go along as minority shareholders with what he had in mind.

"The alternative is they think he will lift his price, but there's a big risk that he may not want the minorities. You do not know what his end game is or how he is playing," Cairns said.

The bid trumps several other investors interested in Carter Holt, which was put up for sale in June, when International Paper said it would review its ownership of the stake.

Many of those rivals, believed to include buyout firms such as CVC Asia Pacific, Newbridge Capital and Castle Harlan Australian Mezzanine Finance Partners, would have preferred to hold off launching a bid until they had run their eye over Carter Holt's books.

Carter Holt had planned to open a "data room" at the end of this month. But Hart decided to proceed without doing due diligence.

A source said International Paper had been willing to give Hart the first cut at the deal because he would avoid Overseas Investment Commission scrutiny.

The source said the deal involved the sale of "sensitive land".

"There is a possible change of government, so you will not be sure who you will be dealing with."

Meanwhile, the high dollar, now trading at 70USc, makes it a good time to repatriate funds to the United States and created pressure for a quick sale.

Hart said in a statement that he was "pleased to enter into the agreement with International Paper" but declined to comment further.

Focus is now firmly on his intentions. The debate is not whether he will sell parts or all of the business but how quickly he will start selling.

Analysts say the breakup value of the company as it stands is $2.70 to $3 a share. Some say there could be more if he rejigs the business.

"I do not think Graeme Hart's strategy is purely breakup and sell off," Brownie said.

"I think he is a bit smarter than that. There is a whole lot of hidden value in the business."

BT Funds Management head of equities research Slade Robertson said: "People buying or holding this asset now are showing confidence in Graeme Hart's ability. The expectation is that he is buying this asset to divest parts."

Given the size of the transaction, Robertson expected that Hart would be looking at ways to realise some of the value of the deal sooner rather than later.

But some analysts noted Hart's past behaviour in investments such as Whitcoulls, Burns Philp and New Zealand Dairy Foods, where he had restructured and held assets for the long term.

Observers say the clearest candidate for sale is Carter Holt's huge forest estate. The company has sold just under one-third of its estate, because the trees never really delivered a return on the capital invested.

Brownie said: "The rationale around selling off forest is strong. There is no reason why it will not continue.

"It is a specialist asset category and people who own those are long-term holders, not necessarily mixed conglomerates like Carter Holt or Graeme Hart's Rank."

No part of the company is sacred. Asked which parts of the business were underperforming, one analyst said: "All of them".

Any of the trade buyers who had previously expressed an interest in Carter Holt were still likely to be interested in dealing with Hart.

Amcor, Australia's largest packaging company, and rival Visy had said they might bid for CHH's paper and packaging assets.