Paper plans pillar of FCL progress

By GEOFF SENESCALL

Fletcher Challenge is understood to be well advanced in dealing with its problem paper asset.

Resolving paper is the key pillar of plans announced yesterday to abandon the group's letter stocks structure in favour of four standalone businesses.

According to a broking source who declined to be named, Fletcher has "narrowed and prioritised discussions with parties" interested in the paper division.

"There are a number of acceptable proposals in front of them," he said.

This fits with comments by Fletcher's new chairman Kerry Hoggard that the group anticipated being in a position by "the end of the first quarter, 2000 to have significantly advanced some of the options currently being evaluated."

However, the company has given itself until the end of next year to have completed the restructure of the group.

Mr Hoggard, who has been instrumental in seeking to dismember the group, declined to criticise the letter stock structure. However, he did say that the clear message from the market was that the letter stock structure was detrimental to share value.

The decision to bow to shareholder pressure - not to mention pressure from the heads of the four divisions - and unwind the cumbersome letter stock structure was greeted favourably by the market.

All four stocks enjoyed a rally, particularly Building and Paper which rose 22c to 258c and 12c to 123c respectively.

Arthur Lim of broker Ord Minnett said the move was a step in the right direction. "But a year is still a long time to wait," he said.

Stephen Hudson of Salomon Smith Barney reckoned that 20 per cent had been wiped off the value of the group since the deal collapsed to merge Fletcher Paper with its Canadian subsidiary last month.

The group had already been discounted by around 10 per cent to 15 per cent before the deal fell over, he said.

This was despite the commodity cycle being on the improve, fuelled by expected global GDP growth.

Mr Hoggard said: "It is clear that the group's capital structure is seen as complex by investors, is perceived to raise governance issues, and has resulted in a significant structural discount being applied to all our stocks.

"A significant factor in the timing would be the requirement to restructure corporate funding, taxation and other arrangements in ways that maximise shareholder value."

Paper would likely take priority. "This may result in asset sales and potential new equity. Forests, which obviously needs recapitalisation, will also be addressed early in the programme and a number of potential options are currently being progressed.," Mr Hoggard said.

"Buildings, followed by Energy, will complete the programme."

Fletcher's chief executive Michael Andrews said the energy division was looking at growth opportunities.

It is understood that investment banking firm Morgan Stanley has been appointed to assist in this.

The dismemberment of the group will need shareholder approval. The decision to separate the whole group differs from what had previously been stated. Had the company successfully got the paper division off its books, the building and forestry divisions were to be housed under the same roof.

Meanwhile, ratings agency Standard & Poor's has kept Fletcher on negative watch.

It said: "The credit watch reflects uncertainly about the timing and amount of cash to be raised from divestment of the paper division, and about the structure and credit quality of the entities that will remain.

"The credit watch will be resolved as the strategy to deconsolidate the group and finance the separate entities is further clarified."