Fletcher Challenge has knocked over the first of its letter stocks, selling Paper to Norway-based Norske Skog for $5 billion.

The cash sale unlocks the company's cumbersome letter structure, allowing the one-time New Zealand corporate giant to flick off another of its three remaining letters.

Energy, raring to be next, may have to wait.

Fletcher Challenge chairman Roderick Deane said the group was now concentrating on its forestry division.

"There's no necessarily predetermined order and 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," he said.

"There are various operations available for each of the division and it's really important we work through those with care."

Mr Deane said the company was on track to turn the remaining letter stocks into standalone companies by the end of the year.

Norske Skog has agreed to buy the group's struggling paper division at $2.50 a share, along with a payment of more than $2.1 billion to cover Fletcher Paper's debt and the cost of separating the division from the rest of the group.

The price represents an 83 per cent premium to the average trading price of Fletcher Paper over the past year and the closing price last Friday.

Mr Deane said the deal, which needs shareholder approval, delivered the best value to investors and would reduce the group's total consolidated debt from $3.7 billion to $1.6 billion.

"The board believes the offer represents outstanding value for Fletcher Challenge Paper shareholders and for this reason we have unanimously recommended that all Fletcher Challenge shareholders vote in favour," he said at a press conference in Auckland last night.

Fletcher Challenge has been trying to find a buyer for its paper division since a deal with its 50.8 per cent-owned subsidiary, Fletcher Canada, failed in November because of a "no" vote by Canadian shareholders.

The collapse of the deal led to Fletcher developing a plan to abandon its letter-stock structure in favour of four standalone companies for its paper, forestry, building and energy divisions.

Ord Minnett's David Shirer said it was a great deal for paper shareholders and would also benefit other Fletcher division investors.

"They have done a good job putting this deal together. Norske is a good company that's got a great reputation ... It leads the way for other deals."

The fourth-largest paper company in the world, Oslo-based Norske Skog will become the second-biggest international market player if the deal gains 75 per cent approval from Fletcher Paper shareholders and a "yes" vote from at least 50 per cent of Norske Skog investors.

Shareholders of the remaining Fletcher divisions will also be asked to give 50 per cent approval for the deal.

Norske Skog expects to achieve savings of up to $200 million a year in synergies from the amalgamation.

In Oslo, chief executive Jan Reinaas said that staff reductions were likely as "a consequence of integration."

Dr Deane said Norske Skog had promised to honour Fletcher Paper's existing employment contracts covering more than 4750 staff overseas and 750 in New Zealand.

Norske Skog will raise $357 million through a new share issue to help pay for the deal. Last week, the dollar rose to a high of 50.30USc as Deutsche Bank bought more than $1 billion thought to be a down-payment for Fletcher Paper.

The deal, which is expected to be wrapped up by July, reduces the Fletcher Challenge group debt-to-capitalisation ratio from 32.3 per cent to 27.5 per cent.

Norske Skog, founded in 1962 and with pretax earnings of $US224 million ($450.88 million) in 1999, has agreed to pay Fletcher $200 million if the deal falls through.

Part of the $5 billion purchase price includes more than $100 million to cover the cost of advisory fees and early repayment of debt.

Fletcher Paper chief executive Alexander Toldte said that while Norske Skog was likely to review the business, it had made a long-term commitment to the paper operation.

The market responded positively to the pending announcement, all four letter stocks making gains yesterday.

Not surprisingly, Fletcher Paper was the best performer, rising 33c to $1.70, while Fletcher Energy was close behind with a 31c gain to close at $4.80. Fletcher Building was up 7c to $2.25 and Forestry closed at 59c on a 6c gain.

Fletcher Paper runs Tasman Pulp and Paper at Kawerau and plants in five other countries, including Malaysia, Canada, Chile and Brazil.