The momentum has swung dramatically against the Fletcher Challenge Forests/Central North Island Forest Partnership (CNIFP) proposal in the past few days.
Sir Dryden Spring and Terry McFadgen are deep in the trenches, desperately trying to fend off a wall of words from Stephen Hurley of Xylem, Tony Gibbs of Guinness Peat
Group, Bruce Sheppard of the Shareholders Association and Dennis Lee of ABN-AMRO.
Many shareholders have begun to realise that there are huge risks, and low returns, associated with the CNIFP deal and Fletcher Forests' best prospects may be as a stand-alone company.
When the proposal was announced, the general view was that Fletcher Forests' share price would fall if shareholders rejected the deal and pick up if the response was positive.
But the information memorandum put a big dint in this perception. It showed that the existing company had a net asset value (NAV) of 41c a share as at the June 2002 balance date and term debt of just $261 million; whereas, on a pro forma basis, the enlarged group has a NAV of 40c and $1184 million of long-term borrowings.
Why would a forest owner with a slightly higher NAV and a strong balance sheet have a lower share price than one with a huge level of debt?
If the proposal is approved, Hong Kong firm Seawi will be the controlling shareholder with a 35 per cent stake and Rubicon will be the only shareholder to capture the premium for control.
Seawi will then be in an unassailable position and it is highly unlikely that any other party will make a takeover offer and risk getting locked in.
The presence of a controlling shareholder reduces the market value of a company and removes one of the attractions of investing in it. Carter Holt Harvey is a good example of this.
On the other hand, if the proposal is defeated and Fletcher Forests' share price drops below 20c, then it will be trading at a discount of more than 50 per cent to NAV and will be extremely attractive to any potential bidder. Is this the main reason GPG is voting against the proposal?
Fletcher Forests will still have an interest in the CNIFP if the current deal does not proceed and will benefit from a sale to another party at higher levels.
In the event of a sale of the CNIFP assets, the CNIFP banking consortium is only entitled to the repayment of principal and any outstanding debt. This is approximately US$650 million.
The amount by which the sale price exceeds the outstanding debt plus costs of receivership will be paid to Fletcher Forests, which has a second debenture, including accrued interest, of about US$300 million over the assets.
Thus if the assets are sold to another party for more than US$650 million, Fletcher Forests will receive the first US$300 million as second debenture holder.
Fletcher Forests will benefit from any increase in the realisable value of the CNIFP assets but no further downside if these operations are adversely affected by further wood price falls.
The extensive, and expensive, advertising campaign by Fletcher Forests over the past few days is a sure sign that the company is worried that the deal will be defeated.
Sir Dryden and McFadgen have a great deal at stake, as do Michael Andrews and Hugh Fletcher of Rubicon.
If shareholders reject the CNIFP proposal, there will be major changes at both companies and these four are likely to be the first casualties.
Newmarket Property Trust
National Property Trust has run into another potential roadblock in its bid for full control of Newmarket Property Trust.
In 1999 it was defeated by Eion Edgar and this time two shareholders hope to stop the Dunedin-based trust from reaching 90 per cent and moving to compulsory acquisition.
Newmarket Property Trust, which owns the AA Centre in Albert Street and the Rialto retail centre and Carlton DFK office building in Newmarket, was listed on the Stock Exchange in May 1994 after issuing shares to the public at $1.00 each.
Its performance was dismal and at the end of 1998 the Newmarket and National trusts agreed to explore an amalgamation.
National is a Dunedin-based trust, which listed at the end of 1996 after a cash issue and placement at 90c a share.
After the announcement, Newmarket's unit price rose to $0.65c and National's to $1.11.
A month later the terms of the merger were announced. National would be the vehicle and Newmarket unitholders would receive 75 National units for every 100 Newmarket units.
At an extraordinary meeting held in Auckland on March 25 1999, the substantive motion was under Section 129 of the Companies Act 1993 and NZSE Listing Rule 9.1. The resolution required a 75 per cent majority and Metropolitan Life, which owned 38.8 per cent of Newmarket, could not vote because it was a related party. Eion Edgar was able to organise sufficient support to defeat the motion and the merger did not proceed.
Next week's Fletcher Challenge Forests meeting is also under Section 129 of the Companies Act and NZSE Listing Rule 9.1 yet Rubicon, which is a related party, is allowed to vote on the substantive motion.
Why is Rubicon allowed to vote on the special resolution when the NZSE Listing Rules indicate that it is not supposed to do so and Metropolitan Life was barred from voting at the 1999 Newmarket meeting?
On May 5 National Property Trust announced it was having a second go at Newmarket, this time via a takeover offer instead of an amalgamation proposal. National is offering six units for every 10 Newmarket units, a far less attractive ratio than the 1999 offer.
National currently holds 74 per cent of Newmarket but two shareholders - St Laurence Property with 6.68 per cent and clients of Sterling Portfolio Management with 3.56 per cent - hold 10.2 per cent between them.
The two parties are critical of the valuations in the Grant Samuel report.
The Rialto retail centre has a mid-point valuation of $33.8 million compared with PricewaterhouseCoopers' $39 million valuation in February 1999.
Grant Samuel has given the Carlton DFK Centre a value of $15.3 million, compared with $17.5 million three years ago, and the AA Centre $19.35 million compared with a purchase price of $21.1 million in April 1999.
Ironically the trust's remaining asset, the Rialto Carparks, was valued at $5.7 million by PricewaterhouseCoopers in 1999 but was recently sold for $7.25 million.
St Laurance, which recently raised its shareholding from 5.07 to 6.68 per cent, and Sterling have both indicated that they will not accept National's offer.
Thus Newmarket, like Otter Gold Mines, will probably remain listed with National frustratingly short of its 90 per cent target.
* Disclosure of interest: Brian Gaynor is a Fletcher Forests and Rubicon shareholder.
* bgaynor@xtra.co.nz
The momentum has swung dramatically against the Fletcher Challenge Forests/Central North Island Forest Partnership (CNIFP) proposal in the past few days.
Sir Dryden Spring and Terry McFadgen are deep in the trenches, desperately trying to fend off a wall of words from Stephen Hurley of Xylem, Tony Gibbs of Guinness Peat
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