Brian Gaynor: An unhappy legacy of weakness

The Rubicon annual meeting was an incredibly sad and depressing occasion for anyone viewing the event from a long-term perspective.

Two of the meeting's main participants, chairman Michael Andrews and fellow director Hugh Fletcher, once had great dreams and ambitions. Their objective was to turn Fletcher Challenge into an excellent international company, which, according to the Statement of Purpose contained in each annual report, would "always be New Zealand-controlled".

Fletcher took the company into North America in 1982 when it bought a 96 per cent stake in Crown Zellerbach Canada. He then acquired a 68 per cent holding in British Columbia Forest Products, 19.9 per cent of NZ Forest Products and 100 per cent of Australian Newsprint Mills and UK Paper.

New Zealand analysts and institutional fund managers proudly travelled to North America to inspect world-class forestry and manufacturing operations owned by one of their own companies. Every analyst wanted to cover forestry because he or she could then write about New Zealand's most exciting company and industry.

One of Fletcher Challenge's last big deals was the purchase of state-owned Fletcher Forests for US$1.092 million ($1.6 billion at the time) in September 1996. This was in conjunction with Citic and Brierley Investments.

Andrews, who was chief executive of Fletcher Challenge Forests at the time, was extremely positive about the purchase. He pointed out that the forests would remain in New Zealand control for the benefit of New Zealanders.

The dreams and ambitions of Andrews and Fletcher have evaporated and the two individuals have sold some of the country's most important commercial assets to overseas interests.

Fletcher Energy is gone, Fletcher Paper is gone and Andrews and Fletcher want to sell a big stake in New Zealand's largest forest estate owner to a small and unknown Hong Kong company.

The sale of Energy and Paper was forced on shareholders because Fletcher Challenge was sinking in a sea of debt, but Rubicon is under no financial pressure to sell.

When asked by a persistent shareholder at the annual meeting why Rubicon was selling out of Fletcher Forests, Andrews said: "It was never Rubicon's intention to be a long-term holder of Fletcher Challenge Forests".

But what about the Statement of Purpose, endorsed by both Andrews and Fletcher?

South East Asia Wood Industries (Seawi), which will be Fletcher Challenge Forests' new controlling shareholder, is an unproven and unknown organisation. It has been suspended from the Hong Kong Stock Exchange, pending the release of details of the Rubicon/Fletcher Forests transaction, since June 17.

In June 2000 Seawi, which is registered in Bermuda, issued 1.44 billion new shares (adjusted for a subsequent five-for-one share consolidation) to United Star International for 7.5HKc each.

United Star is incorporated in the British Virgin Islands and is jointly owned by Peter Kwok Viem and Ma Ting Hung.

In April last year, Seawi issued 200 million new shares to Keentech, an indirect wholly owned subsidiary of Citic, at 75HKc each. Keentech is also incorporated in the British Virgin Islands.

In January, Seawi shareholders approved a HK$1 billion ($270 million) convertible loan from Keentech that will convert into ordinary shares at 85HKc each. After the conversion, Kwok and Ma will own 43.7 per cent of Seawi, Citic 41.4 per cent and the public 14.9 per cent.

Who are Kwok and Ma? Why have United Star and Keentech been incorporated in the British Virgin Islands? Why has Citic invested through a structure that has enabled Kwok and Ma to achieve a book profit of $540 million? What contribution can Seawi, which operates a small plywood mill in China at a loss, make to Fletcher Forests?

But the big question is: how will future generations view the sale of the last remaining major New Zealand-controlled forestry asset to foreign interests?

Will they praise Andrews and Fletcher for selling out to Seawi and returning a few cents a share to Rubicon shareholders? What about the dreams and ambitions of future generations to control and manage a major New Zealand forestry operation?

Maori are making a strong stand against the sale of Young Nicks Head to foreign interests, yet the proposed Fletcher Challenge Forests deal has huge implications for New Zealand's economic sovereignty.

Do we want our largest forest resource coming under the control of a Bermuda-registered company, which is listed in Hong Kong, controlled by two British Virgin Islands-registered companies and has no apparent forest expertise?

Rubicon shareholders have an important decision to make. They should think carefully before endorsing the Seawi deal because, unlike Energy and Paper shareholders, they are under no financial pressure to do so.

Carter Holt Harvey

Chris Liddell, Carter Holt Harvey's chief executive, has a totally different attitude to the Rubicon directors.

Although Carter Holt is 50.5 per cent owned by International Paper, one of the 30 companies in the Dow Jones Industrial Average, Liddell has lost none of his dreams and ambitions for Carter Holt and the New Zealand forestry sector.

Since he was appointed chief executive in 1999 Liddell has:

* Sold the group's Chilean assets for US$1280 million ($2700 million).

* Built a $132 million laminated veneer lumber plant near Whangarei.

* Acquired CSR's Australia-based panel business and a sawmill for A$330 million ($338 million).

* Purchased the Kawerau pulp mill, once owned by Fletcher Challenge Paper, from Norske Skog for $285 million.

* Bought 25 per cent of Pacific Millennium Paper, a Hong Kong-based paper distribution and converting business with a strong focus on China.

* Purchased the Brown & Dureau sawmill in Victoria for an undisclosed sum.

The big difference between Liddell and Fletcher and Andrews is that he has been willing to sell assets to pay for his acquisitions, whereas Fletcher Challenge relied heavily on debt.

Carter Holt has a strong balance sheet but Liddell has resisted calls for a capital repayment. He continues to believe that there are excellent wood-based investment opportunities in Australasia.

But it hasn't been an easy three years for the Carter Holt chief executive. Commodity prices have been depressed and the group has struggled to achieve any earnings or share-price momentum.

But there are signs that the tide is turning. Last week the company announced a net profit of $73 million for the half-year to June 30, the best six-month result for two years.

Analysts are expecting the company to report a net profit of more than $150 million for the year to December year and some are predicting $300 million for the following year.

Commodity prices are notoriously difficult to predict, but if they continue to go in the right direction, Liddell's dreams and ambitions will begin to produce positive returns for shareholders.

* Disclosure of interest: Brian Gaynor is a Carter Holt, Fletcher Challenge Forests and Rubicon shareholder.

* bgaynor@xtra.co.nz