Citic to bite bullet, says Deane

Fletcher believes it is unlikely that banks will be allowed to take control of its forestry partnership, reports GEOFF SENESCALL.

Fletcher Challenge chairman Roderick Deane doubts that the Central North Island Forestry Partnership will fall into receivership.

"I think Citic will go to the 11th hour," he said of Fletcher Forests' Chinese joint-venture partner.

"They will keep everyone on tenterhooks to the last minute."

But Dr Deane said he would be surprised if Citic allowed the banks to take control of the Kaingaroa and neighbouring forests.

"They stand to lose everything under receivership whereas Fletcher at least gets some or all of its debt back."

Fletcher holds $US230 million ($575.57 million) of secondary debt in the partnership, which ranks behind the $US550 million held by the banks.

Whether Dr Deane is right or not should become apparent by the end of the year.

The partnership is in breach of its banking covenants. It is expected that banks will ask Fletcher Forests and Citic to inject cash into the partnership.

If the partners cannot settle their differences and front up with the money, then banks could take control of the Central North Island asset and appoint their own chairman and manager.

The asset is now managed by Fletcher Forests but Citic is unhappy with the way the partnership is run.

It is seeking $318 million in damages through the courts. Dr Deane said that Citic's legal challenge had so far been unsuccessful.

The problems with Citic got worse as the value of the forestry asset fell.

Dr Deane said the possibility of smoothing the relationship with Citic was slim. "The gap [between us] is quite substantial."

Attempts had been made to go to arbitration and Fletcher Forests was considering asking for a court-ordered split of the partnership on the grounds that there were irreconcilable differences between the parties. This would see the asset split between the partners.

Dr Deane believed that Citic's plan all along had been to try and get the Central North Island forestry asset cheap. Citic had ran a disruptive campaign and tried to stop the separation process.

In the unlikely event of receivership Dr Deane said Fletcher had an "excellent" relationship with the banks.

He hinted at the possibility of bidding for the asset if it was put into receivership.

Dr Deane said that some of the parties which had shown interest in buying Fletcher Forests, such as American forestry giants Weyerhauser and Plumcreek, would likely be interested in the Central North Island estate.

Dr Deane made it clear that whatever happened with the partnership, Fletcher Forests had a substantial and successful business which would continue to operate.

Fletcher Forests' tussle over the Central North Island estate could have been averted if the board had listened to Dr Deane.

When the asset was bought four years ago, he was a loan voice on the board saying that the asset was too expensive.

Strategically the move was fine, Dr Deane said, "but we paid too much."

He had also strongly pushed for the current restructuring of the Fletcher group.

"If one looks over the course of the past decade the share price performance has been less than satisfactory."

Several parties looked at the Energy division and mergers with other companies were considered. But the $4.3 billion offer from Royal Dutch Shell was the best deal for the company.

Dr Deane said that there had been reservations about the viability of Fletcher Energy as a standalone company, as it was too small.

The company had considered outside managers for both the forest and building divisions. He considered Alexander Toldte to be an outside appointment for the building division, as he joined the group at the later stages of the paper division sale.

Terry McFadgen, who had previously headed building, had been appointed to run forests because he was a lawyer and had good negotiating skills.