Muted response to paper firm bid

By DREW HASSELBACK

VANCOUVER - Canadian forest sector analysts have adopted a wait-and-see approach to Norske Skog's friendly bid for Fletcher Paper, the majority shareholder in one of Canada's largest paper companies.

The cautious reaction is in stark contrast to the visceral contempt that Canadian minority shareholders dumped on last year's Fletcher-endorsed bid to sell the paper unit to its Canadian subsidiary.

Fletcher Paper holds a 50.8 per cent stake in Fletcher Challenge Canada. More than 90 per cent of minority shareholders rejected last year's bid to buy Fletcher Paper.

This time, the rebellious minority shareholders in Fletcher Challenge Canada are sitting on the sidelines. The decision whether to approve the $NZ5 billion deal is in the hands of Fletcher Paper's shareholders and its parent, Auckland-based Fletcher Challenge.

"There is very little deal risk here. It's going to go through," said Don Roberts, an analyst with CIBC World Markets in Ottawa.

That means Canadian minority shareholders, mostly large pension and mutual funds, must wait to see what will become of their company if control goes to Norske Skog.

For some, just the prospect of a change of control is cause for celebration.

"The new owner will think like us," said Hamish Kerr, analyst with Goepel McDermid in Vancouver.

Fletcher Challenge Canada has been sitting on a pile of $C745 million cash, proceeds from an earlier asset sale. Minority shareholders have wanted to see this cash paid out in a dividend or used to buy paper assets close to Fletcher Challenge Canada's operations near the British Columbia coast.

Mr Kerr said Canadian shareholders believed the New Zealand parent company had been too preoccupied with its own debt problems to make those decisions.

"I think the consensus among the minority shareholders is that nothing could be worse than the situation they had."

There is also a sense of vindication among Canadian shareholders because it looks as if Norske Skog is paying less for Fletcher Challenge Paper than they were asked to.

In terms of share price, Norske Skog is offering $2.50 a Fletcher Paper share; the previous deal valued the unit at only $1.80.

In terms of capacity, however, Canadian analysts think Norske Skog is paying less.

Reid Carter, forest products analyst with National Bank Financial in Vancouver, pinned the value of last year's deal at $C1758 a tonne of purchased paper capacity. Canadian shareholders complained the price was too high compared with other North American deals.

Mr Carter calculates Norske Skog's offer to be $C1520, a figure he considers more in line with recent deals.

But the temptation to shout "told you so" is tempered by concerns over the amount of debt Norske Skog is using to make the purchase.

John Duncanson, a Toronto-based analyst and one of the fiercest critics of last year's failed reverse takeover bid, said Canadian shareholders were worried what Norske Skog might do with Fletcher Challenge Canada's pile of cash. Canadians also questioned whether it was possible to run a viable paper company with assets dispersed so broadly around the Pacific rim.

If completed, the transaction will give Norske Skog an annual newsprint production capacity of 5.8 million tonnes, making the Norwegian firm the second-largest paper producer in the world behind Canada's Abitibi-Consolidated.