CHH share price responds to sales surprise

10.45am - By PAUL PANCKHURST AND PAM GRAHAM

UPDATED REPORT - Carter Holt Harvey's share price surged 6.1 per cent in early trading this morning after last night's announcement the company had offloaded its tissue business and an associated joint venture for more than $1 billion.

CHH share price rose 13 cents in the first few minutes of today's sharemarket session to a four-year high of $2.25. The shares have traded between $1.57 and $2.17 over the past 12 months.

Carter Holt Harvey blew analysts' forecasts out of the water yesterday by selling its tissue business and an associated joint venture for more than $1 billion.

A snap poll of analysts touring the company's Kinleith plant yesterday had predicted a price for the tissue business of $715 million to $830 million.

That was without factoring in the sale of Carter Holt's 50 per cent stake in Sancella, a joint venture with the company that has bought both assets, tissue giant Svenska Cellulosa (SCA), of Sweden.

But even adding in the Sancella stake - possibly worth $120 million - the price for the tissue business is well above market expectations.

The sale price prompted Forsyth Barr to increase Carter Holt Harvey's valuation by 8.2 per cent to NZ$2.25/share yesterday.

"It's a strong price and was way above what everyone was going for in the market," analyst John Cairns told Dow Jones.

But he still had reservations about CHH's core processing business as "we think that part of the business is fairly priced."

Carter Holt will return at least $450 million to shareholders - a minimum of 25.8c a share - through a pro rata share buyback planned for the July to September quarter.

The biggest shareholder is the largest paper company in the world, International Paper.

The tissue business is the leading maker and marketer of tissue products in Australia and New Zealand, with the brands Sorbent, Purex, Handee and Treasures.

Sancella makes and markets Libra tampons and Tena incontinence products.

The sale price is at an earnings multiple of 8.4, compared with a typical 5 or 6 when Carter Holt has bought businesses.

Carter Holt says it will make a profit of $464 million on the sale after transaction and separation costs of $31 million.

The deal was done in the Auckland office of law firm Bell Gully yesterday afternoon - just over four months after the assets went on sale - and announced after the stock exchange close.

Chief executive Peter Springford has flagged the possibility of using some of the proceeds for acquisitions.

An Australian analyst yesterday said the company was believed to have negotiated to buy the corrugated box business of Australia's Amcor, which is operated in a cosy duopoly with Visy.

It would be a good fit, since Carter Holt would supply pulp to the business, but Amcor is reportedly not ready to sell.

Carter Holt is also looking at trimming corporate office costs, since the sale will slash 15 per cent from future revenue.

Yesterday's sale is conditional on consents from the Overseas Investment Commission and Foreign Investment Review Board, with completion expected in mid-May.

The deal marks a major strategic shift for New Zealand's second largest listed company, which is getting out of a proven money-spinner to focus on wood and packaging. Its stated aim is "to consolidate its position as Australasia's leading wood-fibre processing company".

Springford said the company was "delighted with the outcome and the opportunities the new owner can provide CHH Tissue and Sancella employees".

SCA - Europe's biggest tissue maker - had the resources to develop the businesses and would benefit from strong synergies.

The tissue company's chief operating officer, Don Matthews, will become president of SCA Hygiene Australasia.

Matthews said SCA's focus on hygiene products would give the businesses opportunities which might not have existed under Carter Holt's ownership.

SCA has worked with Sancella for 25 years. Carter Holt was a joint venture partner for eight.

Carter Holt says it will continue to supply pulp to the businesses.

First NZ Capital and Credit Suisse First Boston advised Carter Holt on the sale and Deutsche Bank acted for SCA.

The deal

* Carter Holt has sold its tissue business and its stake in joint-venture Sancella to Swedish company Svenska Cellulosa for $1.015 billion.

* The tissue unit has annual sales of $745 million and assets of $597 million. It includes the brands Purex, Sorbent and Treasures. The unit is leader in several markets in New Zealand and Australia.

* The transaction is expected to conclude in mid-May.

* Carter Holt will distribute about half the sale proceeds, or at least $450 million, to shareholders through a pro rata share buyback between June and September.