Report backs forest deal

By CHRIS DANIELS

Fletcher Forests is expecting significant gains in operating profit after buying the $1.3 billion assets of the Central North Island Forest Partnership, says an independent report from Grant Samuel.

Forecasts showed operating profit rising from $79 million in the year to June 30 to $110 million next year and $162 million in 2004.

After-tax earnings forecasts were not so pretty, but the report remained upbeat.

It said Fletcher's earnings after tax would increase from a forecast $53 million next year to $109 million if it bought the CNIF.

This would drop to $37 million in 2004 after a revaluation of the forest.

More importantly, said the report, "the cash flow from CNIFP assets is strongly positive and will, in the absence of further large price declines, enable debt and interest expense to be reduced".

Grant Samuel's endorsement of the plan will go a long way to solidify institutional shareholders' support for the CNIF deal when they are asked to vote on it next month.

The valuer's report and an information memorandum from the Fletcher board are posted on the internet and are being mailed to all shareholders.

Fletcher chief executive Terry McFadgen said yesterday he was comfortable with the debt the company was taking on to buy the forest.

While it would have preferred to finance the purchase purely with equity, the new debt package was more flexible and cheaper than what it now had.

Grant Samuel valued Fletcher Forests shares at 33.6c to 37.4c without the CNIF, well above their present 20c to 25c range.

Fletcher is also telling its shareholders that it has assessed the value of the forest at $1.493 billion - $166 million more than it is paying receiver Michael Stiassny for it. Likely benefits of the deal are said to be more than 10c per existing share.

Under the terms of the new debt deal with the banks, all excess cash flow will be used to repay debt.

Directors would review this use of its cash flow, but dividends could be paid only after debt obligations were covered.

McFadgen said Fletcher might sell some of its forests not next to the CNIF to help repay the debt.

But this was not a preferred option, as Fletcher was a forestry company, in the business of owning, not selling, its forests.

Major timber mills in the area could be reorganised once the CNIF purchase brought them into the ownership of one company, McFadgen said.

Some of the mills could expand or specialise in particular products, instead of doubling up, as they did now.

The existing split ownership meant central North Island mills were operating at 70 per cent capacity.

The information being sent to shareholders warns against rejecting the CNIF purchase to trigger rights to have a minority stake bought out by Fletcher.

It says that a condition of the acquisition is that the net cost of any minority buyout not exceed $15.3 million.

This amount reflected the limited ability of Fletcher Forests (FFS) to fund any buy-out obligations.

The document says Fletcher's ability to buy out minority shareholders is constrained by the need to keep the company on a sound financial basis.

"If this threshold is exceeded, FFS is entitled to cancel the CNIFP acquisitions agreement."

McFadgen said there had been no communication with Stephen Hurley, the board representative of US forestry investor Xylem, which owns 7.6 per cent of the company.

Hurley resigned from the board when the CNIF deal was announced, saying the deal was not fair for minority shareholders.

The report sent to shareholders also showed Fletcher predicting a loss of $254 million for the year to June 30, based on 11 month figures and a one month forecast.

The damage was done by a $359 million writedown of Fletcher's remaining interest in the Central North Island Forest Partnership.

Excluding unusual items profit was forecast at $61 million.

The board also says it did consider alternatives to the proposed transaction

"US$200 million equity is required to fund this acquisition and Seawi was the only party prepared to provide funding that met FFS's objectives."

Seawi is the Hong Kong-listed investment company that Citic is using to buy into Fletcher.

Rubicon is selling its 17.6 per cent Fletcher stake, in return for cash from Seawi and a forest from Fletcher's estate.

* A special meeting of Fletcher Challenge Forests shareholders will be held at Eden Park, Auckland, at 2pm on August 13.

Rubicon shareholders meet to vote on the transaction on August 27.

The deadline for the purchase to become unconditional is August 31.