Leaked details plague plans for Energy sale

The debacle over the sale of Fletcher Challenge Energy highlights the issue of leaked information and insider trading.

These problems have dogged Fletcher Challenge since its separation process began 10 months ago.

A sharp decline in Fletcher Forests' share price must have had some influence over this week's announcement of the Energy division sale before Commerce Commission approval had been received.

This Stock Exchange release is now causing considerable embarrassment to Fletcher Challenge and New Zealand's financial markets.

Leaked information and insider trading will continue to affect NZ companies as long as rules covering illegal transactions are toothless and difficult to enforce.

An insider trading scandal was only days away when Kerry Hoggard, the chairman of Fletcher Challenge, announced that the group would dismantle its unsuccessful letter stock structure and convert its four divisions into separate entities.

Last December 15, the day before the announcement, Fletcher Building was trading at 236c, Fletcher Energy 430c, Fletcher Forests 68c and Fletcher Paper 110c.

A few days later it was revealed that Mr Hoggard had bought 390,000 Fletcher Challenge shares on December 15 and that his purchases breached insider trading regulations.

He resigned from the board two days before Christmas and Dr Roderick Deane replaced him.

On April 3, Dr Deane told the Stock Exchange that Norske Skog, a substantial paper producer in Norway, had agreed to buy Fletcher Paper at 250c a share. In the four days before this announcement, Paper's share price rose from 124c to 137c on unusually heavy turnover.

Although Paper's share-trading volume was high in this period it did not reach a level normally associated with insider trading.

The Norske Skog transaction was completed on July 28 and later that day Fletcher Paper was delisted from the Stock Exchange.

A few months earlier, the group had reaffirmed that it was still planning to separate the Building, Energy and Forests divisions and on August 21, Shell said it had filed an application with the Commerce Commission to acquire the New Zealand operations of Fletcher Energy.

Trading remained volatile over the next few weeks but the big action began on October 2-3 when Energy and Forests both came under heavy selling pressure.

The sharp decline in Energy's share price, which was arrested on October 6, was partly due to a big fall in Capstone's share price in the United States. Fletcher Energy owns 10.8 per cent of Capstone and the Nasdaq listed company consistently represented over 50 per cent of the Energy division's total sharemarket value in the middle of last month.

Forests' shares continued to drop on large volumes and on Monday, the Stock Exchange asked why its share price had fallen from 80c to 63c over the previous four trading days. The company replied that it was not in a position to make any statement regarding the separation process.

Fletcher Forests' shares finished the day at 62c on volume of 4.6 million shares. This was the highest daily volume since August 30.

On Tuesday morning, the Business Herald reported that Fletcher Challenge was understood to have appointed Credit Suisse First Boston to handle a rights issue for its problem Forestry division after sale talks collapsed.

At 10.19 am, Fletcher Challenge told the Stock Exchange that it was selling its Energy division to a Shell/Apache Corporation joint venture at an indicative price of $11.22 a share and that the Forests division would have a major capital raising.

Fletcher Energy's shares jumped 139c to close at 924c and Fletcher Forests slumped a further 12c to 50c.

The initial response was that Fletcher Challenge had made an early announcement because it was confident of a positive ruling from the Commerce Commission.

A more realistic assessment is that the early release was influenced by insider traders, or those tipped by insiders, who were heavy sellers of Fletcher Forests shares.

This selling was based on inside information that the sale of the Forests division had collapsed and that it would be announcing a major capital raising.

Why would directors make a full and detailed announcement just days before the commission ruling when at least one industry analyst continued to argue that there was a low probability that Shell's application would be approved?

Why did Fletcher Challenge make its announcement 49 minutes after the start of trading when a well-organised release is usually made before trading begins?

Why did Shell make its announcement more than 10 minutes before Fletcher Challenge's release to the Stock Exchange unless the two statements were uncoordinated and rushed?

The premature announcement of the sale of Fletcher Energy has caused considerable embarrassment to Fletcher Challenge and New Zealand's financial markets and has harmed the NZ dollar.

It would have been more appropriate to have just announced the Fletcher Forests rights issue and to place a "don't sell" notice on Fletcher Energy's shares.

The release of all the information together indicates that the directors still think of the group as one, even though it is well down the separation path.

The group placed double- and single-page advertisements in newspapers extolling the virtues of the Energy division sale and the separation of Building and Forests.

Big volumes of Energy shares were traded on Tuesday and Wednesday as investors tried to arbitrage the difference between the market price and indicative offer of $11.22 a share. As many of these investors are from overseas, they now have another reason to abandon New Zealand.

Even if the premature release of this week's information was not due to the sharp slump in Forests' share price, it probably had an influence on Forests' rights issue price. It is highly unlikely that the new preference shares would be issued at 25c a share if Fletcher Forests' ordinary share price had been above 75c on the announcement date.

The low issue price has had a negative influence on Forests' share price since Tuesday's announcement.

It is difficult to argue with Dr Deane's assertion that the leaked information did not come from Fletcher Challenge. The group took precautions to ensure that price-sensitive information was not disclosed and the finance industry must take most of the blame for the Forests leaks.

Finance industry sources argue that the separation and sales process was extremely complex and leaks were inevitable because a large number of advisers were involved. These sources are blasé on the subject but surely, highly paid advisers who sign confidential agreements should be able to keep their mouths shut.

The problem is that Chinese walls between the corporate and broking divisions of financial organisations are really more fiction than fact.

The Stock Exchange has asked the Securities Commission to investigate Fletcher Challenge's share trading activity in the leadup to Tuesday's announcement. Even if parties are found guilty of illegal selling of Fletcher Forests shares the penalties are not sufficient to stop widespread abuse of insider trading rules.

Based on yesterday's closing prices, Mr Hoggard is sitting on a profit of $271,500 - after paying compensation of $58,790 to the selling shareholders - on the Fletcher Challenge shares he bought last December.

This is hardly a deterrent to insider trading.

* Disclosure of interests: Brian Gaynor is a shareholder of all three FCL divisions.