Brian Gaynor: Queries hang over Rubicon deal

There is no certainty that Fletcher Challenge Forests will clinch the Central North Island Forest (CNIF) Partnership deal, even though the Vela brothers have dropped out of the running.

The company needs shareholder approval before it can complete the purchase and there could be widespread opposition to Rubicon's special treatment.

The proposed transaction has two important elements:

Fletcher Forests' Chinese partner, Citic, will inject about US$200 million of new equity into the New Zealand company at 37c a share, giving it a 35 per cent shareholding.

Fletcher Forests will buy back most of Rubicon's 17.6 per cent shareholding in return for a part of the company's forest estate. No price has been disclosed for this buyback.

Fletcher Forests' minority shareholders should be asking the following questions: why is Rubicon being offered a special deal? Is Rubicon threatening to vote against the transaction if it doesn't get special treatment? What is the buyback price? What is Michael Andrews' role in the process?

Andrews, who is Rubicon's chairman and a Fletcher Forests director, was chief executive of Fletcher Forests when it bought into the CNIF partnership in 1996. He was particularly optimistic about the purchase and was widely quoted as saying the Fletcher Forests/CNIF partnership would add value to shareholders and the New Zealand economy.

Andrews later became chief executive of the Fletcher Challenge group and played a major role in its split-up. This included the establishment of Rubicon and the purchase of its 17.6 per cent shareholding in Fletcher Forests. The 492 million Fletcher Forests ordinary and preference shares were acquired by Rubicon at an average price of 32c a share.

Several analysts are suggesting that Rubicon will receive 37c a share, in the form of forest assets, for the buyback of its Fletcher Forests shares. These will be mature forests that can be easily sold by Rubicon.

From the outside it looks as if Andrews and Luke Moriarty, the Rubicon chief executive who is also on the Fletcher Forests board, are having a big influence on the other Fletcher Forests directors. Andrews is hardly in a strong position to insist on a favourable outcome for Rubicon, given his role in the establishment of the CNIF partnership and Rubicon.

Buyback offers to a selected number of shareholders should never be made above the market price, particularly when assets are being offered instead of cash. This proposal could lead to a large transfer in value from Fletcher Forests to Rubicon shareholders.

Fletcher Forests shareholders have been badly burned in the past and they would be extremely foolish to approve a deal that will transfer wealth to one particular shareholder.

Briscoe & Pacific Retail

From time to time the share market throws up some major share price anomalies. BIL International is trading at a big surplus to net asset backing whereas Guinness Peat Group, which has a much stronger investment portfolio, is at a discount to asset backing.

A major pricing anomaly also exists between the two retail groups, Briscoe and Pacific Retail.

The two companies have several similarities, including: fusqi They both achieved strong profit growth in 2001-2002 as they took advantage of the buoyant retail trading conditions.

They reported almost the same profitability, with Briscoe achieving a net profit of $17.5 million for the January year and Pacific Retail $17.4 million for the March year.

Both companies have a large controlling shareholder, with Rod Duke owning 75 per cent of Briscoe and Eric Watson 73 per cent of Pacific Retail.

But the similarities end there as Briscoe's sharemarket value is 3.2 times higher than Pacific Retail.

The vast difference is due to several factors, including: investors have a more positive view of Duke than Watson; Duke has a welcoming attitude towards minority shareholders whereas Watson doesn't; Briscoe pays a dividend and has a strong balance sheet whereas Pacific Retail doesn't pay a dividend and has a more aggressive financial structure.

The two companies share an optimistic view of the future. Duke told shareholders at yesterday's annual meeting that Briscoe had considerable scope to expand. Pacific Retail believes that the Bendon acquisition, which has been funded without a share issue, will help it to maintain profit growth.

The next test of Pacific Retail's value will be the release of the Grant Samuel independent appraisal report, which is due by the end of next week.

Based on Grant Samuel's traditional methodology, the lower-end valuation of Pacific Retail should be at least $3.20 per share, with a mid-range about $3.80.

This could help to narrow the huge valuation gap between Pacific Retail and Briscoe, although Duke will continue to have a much larger following than Watson. This must be extremely frustrating for Watson because he, together with chief executive Peter Halkett, has turned Pacific Retail into an extremely successful and profitable organisation.

Metlifecare

A frustrating aspect of many annual meetings is the unwillingness of directors to give a specific update of trading since balance date. There have been several of these instances in recent weeks, including Metlifecare last Thursday.

The retirement home provider has had a volatile history and directors didn't want to hype its share price by releasing positive profit figures for the five months since December.

After the meeting Metlifecare directors were in a more relaxed and communicative mood. They believe that the decision to focus on operations at the expense of property development is already producing results. They also believe the company has a strong management team and Todd Capital, with its 35 per cent shareholding, is making an extremely positive contribution as the cornerstone shareholder.

Net earnings increased from just $0.5 million in 2000 to $7.5 million last year, including $1 million from a key man life insurance policy. Given the strong start to the year and the positive residential housing market (which boosts the company's apartment and villa sales) Metlifecare should report net earnings of at least $8.5 million for the current year.

At yesterday's closing price of $1.32 the stock has a prospective price/earnings ratio of 13 but it doesn't pay a dividend. If chief executive Gavin Aleksich and his management team can sustain the present momentum then shareholders will have plenty to celebrate at next year's annual meeting.

* Disclosure of interest: Brian Gaynor owns shares in all five listed companies mentioned above.

* bgaynor@xtra.co.nz