Fletcher raising gains firm support

Fletcher Building has turned to investors to raise about $500 million in capital to weather the recession. Photo / Supplied

Fletcher Building on Wednesday earned market approval and investor support for its swift initial placement of $405 million to institutions in its bid to raise more $500 million in new capital.

The company, the latest to tap investors for fresh capital to help ride out the recession, also revealed plans to restructure operations, which may cost local jobs, and said it would probably suffer $200 million in write-offs, associated mainly with its troublesome US Formica division.

The company has cut its dividend payout to retain earnings and help bolster its capital position.

In what market watchers said was a healthy sign for the market, Fletcher's smoothly executed initial capital raising was welcomed by investors.

Fletcher offered $405 million in new shares in placement institutions at $5.35, a reasonably modest discount to the company's $6.00 close on Tuesday. The placement was fully underwritten by Goldman Sachs JBWere and Macquarie and as such was always going to raise the cash sought at the price set.

The Business Herald understands that by the close of play, institutions had bid for more than twice the amount of stock on offer.

Market commentator Arthur Lim said the company had "done it the smart way" by locking in a fixed price "before the market wakes up to the fact there's a capital raising going on".

"It avoids getting caught up in a downward spiral.

"They can do it because they are Fletcher Building, other companies would struggle."

The backing of the two underwriting companies and their competitive tension during the placement would have worked in Fletcher's favour too, he said.

The second and third legs of the deal, a "share purchase plan" and "top-up offer" aimed at retail investors and which both open next week, will raise up to $100 million.

AMP Capital Investors' head of equities Guy Elliffe said the apparent success of the initial offer alongside news of Kiwi Income Property Trust's $50 million capital raising yesterday was encouraging.

"It's quite positive for the market that deals of that size can be consummated. It shows the markets are functioning and there's investors looking to invest."

In a presentation to investors, the company said the equity raising "extends financial covenant headroom" and "provides flexibility to access growth opportunities during the market recovery phase".

While the company said it had "significant headroom with no covenant concerns before and after equity raising", a source close to the company said given the grim outlook, the company's margin of comfort on banking covenants could have been eroded had it not sought the breathing space.

"In our view they weren't close to breaching covenants, but given the amount of business uncertainty, it's quite a prudent thing to do to adopt a very conservative view of the future when you're defining your financial structure," said Elliffe.

In a business update Fletcher said operating conditions "have remained challenging and in some cases have deteriorated further".

It said it was reviewing "balance sheet carrying values in light of the current outlook" and the preliminary assessment was for an asset impairment of up to $150 million at balance date and that a US tax benefit of $50 million would be written off.

All of the US tax benefit and $140 million of the asset impairment is associated with US company Formica which was acquired in 2007, although the company expects it will be able to make use of the tax loss when the unit is turning a decent profit.

Chief executive Jonathan Ling said to maintain "acceptable shareholder returns" should reduced activity levels continue, "we will be seeking to implement further restructuring and resizing initiatives across the business".

These measures may cost the company up to $145 million during the second half but may also cost local jobs, with Fletcher Building's Philip King confirming New Zealand facilities fall within the scope of the review.

The company confirmed it was cutting its final dividend and a payout of 14c per share was likely, down from 24.5c per share last year which it said was "prudent in the context of current market conditions".

Fletcher Building shares rose 20c to $6.20 early yesterday just before being placed in a trading halt ahead of the announcement. They begin trading again this morning.

FORMICA CUT NO SURPRISE

Almost $200 million in write-offs associated with Fletcher Building's troubled US Formica division should come as no surprise to investors.

Formica was bought by the then cash-rich Fletcher for US$700 million in 2007 in a deal criticised by some senior executives. The acquisition, still the subject of litigation between the vendors and Fletcher, was just in time for the meltdown of the US housing market and the global economy.

Formica contributed pitiful operating earnings of $2.9 million at the half-year.

"It's pretty obvious from the earnings contribution that a write-down was likely," said AMP Capital Investors head of equities Guy Elliffe yesterday.

Fletcher said that of $150 million in likely write-downs it had identified in a preliminary assessment of balance sheet carrying values, $140 million was related to Formica.

The company will also write off a $50 million tax benefit, although it said "the benefit of these tax losses is expected to be realised in future years as taxable earnings are generated".

Market commentator Arthur Lim hoped the Formica write-downs were aggressive enough "so they don't have to come back to the market again".

RAISING CASH

Fletcher Building is seeking to raise $505 million from investors.

THE PLAN
* $405 million will be raised from an initial placement of new shares to institutions. Allocations under the placement, fully underwritten by Goldman Sachs JBWere and Macquarie, will be finalised today.
* Up to $100 million will be raised from New Zealand and Australian retail investors.
* The new shares will be priced at $5.35 each, compared with yesterday's price of $6.20.

SHAREHOLDERS' OPTIONS
* New Zealanders and Australians holding Fletcher shares can, on April 8, apply for up to $11,500 worth of new shares.
* Eligible shareholders who do not participate in the share purchase plan can avoid having their holding diluted by participating in a top-up offer which will raise up to $20 million, dependent on the amount of shares issued in the share purchase plan.

PAYING OFF DEBT
* The money raised will be used to reduce debt but the company says that it has no concerns about its banking covenants even before the equity raising.
* The additional strength to its balance sheet will give the company "increased financial flexibility" which may help it "access growth opportunities during the market recovery phase" and will make its capital structure "comparable to other companies with an investment grade credit rating".