Canada asset faces wrath of Fletcher

By Geoff Senescall

Fletcher Challenge is taking its gloves off to knock its 50.8 per cent Canadian subsidiary into shape.

In return for a "no" vote by the Canadian minorities on a merger with Fletcher Paper on Wednesday, Fletcher Canada now faces the bare-knuckle treatment which has seen six directors go and cost cuts announced.

In the sights of debt-ridden Fletcher Paper is $C700 million ($900 million) cash sitting on the Canadian subsidiary's balance sheet.

The shakeup was outlined at yesterday's Fletcher Challenge annual meeting.

A disappointed Fletcher chief executive, Michael Andrews, indicated that the Canadian asset would now be driven harder.

The board wanted to see performance improvements at Fletcher Canada in the next two years similar in magnitude to the $120 million achieved at Fletcher Paper, he said.

The board was also looking at integrating the operations of the two companies in a bid to capture a significant part of the $C60 million synergy benefits which had been targeted through the merger.

Analysts believed the benefits of such a strategy would have a bias towards Fletcher Paper. This would be a blow to the chin of the Canadian minorities who vetoed the expensive merger plan which, it was confirmed yesterday, had cost around $40 million.

Fletcher's failure to get the deal away in spite of such expense raised the ire of some in the audience. Shareholder advocate Brian Gaynor questioned how the company got it "so hopelessly wrong" when 91 per cent of the Canadian minorities voted against the merger.

While the company talked about finally trying to fix its loss-making subsidiary, it also left the large Fletcher audience in little doubt that the paper asset was for sale.

In announcing he was stepping down as chief executive of Fletcher Paper (though he remains as group chief executive), Mr Andrews said he would now concentrate on the "exit from paper" which remained the first step in the restructuring of the group.

He was, however, coy about discussing any sales agenda or parties waiting in the wings. But he did point out that analysts valued the paper company at around 180c - the price at which the merger valued Fletcher Paper - which he thought was fair.

He also said after the meeting that a similar merger-type deal, such as the one torpedoed by the Canadian minorities, could be possible.

The decision to dismantle Fletcher's letter stock structure -which includes paper, energy, building and forests - also provoked comment from Mr Gaynor. He noted that despite the structure being set up in 1996 to create improved shareholder returns, the combined share price of the group was down 32 per cent since that date. The market was down only 2 per cent.

He asked why the company was just not split up back then, opening it up to takeover and saving it from the costly separation exercise it had just been through.

Mr Andrews defended the letter stock structure by saying it was an appropriate way for the Fletcher conglomerate to unwind its operations.

Taking over from Mr Andrews at Fletcher Paper is Alexander Toldte, who has also been made chairman of Fletcher Canada. He joined Fletcher recently from international consulting group McKinsey & Co, where he was involved in advising on pulp and paper.

Taking over the vacant chief executive spot at Fletcher Canada is Russ Horner, formerly chief operating officer of Fletcher Paper in Australasia.