Shell-shock decision devastates Fletcher

By GEOFF SENESCALL

The Commerce Commission stunned the investment community yesterday with a flat rejection of Shell's $4.6 billion bid to buy this country's largest oil and gas producer.

In response, the kiwi dollar fell more than half a US cent to a record low.

In a one-page statement, the commission declined to clear the purchase of Fletcher Energy because it would strengthen Shell's dominance of the local gas markets.

Shell spokesman Antonius Papaspiropoulos said the Dutch-based company was disappointed.

"This is a huge investment in New Zealand and its future," he said.

"We had good dialogue [with the commission] obviously over the last two weeks, right up until earlier this week. We have enjoyed a close working relationship with this one, given it is a big investment."

Mr Papaspiropoulos said Shell hoped to meet the commission today to argue its case.

He declined to comment on whether a new application would be made.

The commission's rejection comes eight weeks after the application was lodged and just two days after Fletcher and Shell (in conjunction with its partner, US-based Apache) trumpeted one of the biggest deals seen in this country.

Its decision throws doubt on the entire restructuring plan for the Fletcher Challenge group, particularly the $517 million recapitalisation of Fletcher Forests, in which Energy was to have played a major role.

One irate shareholder, who declined to be named, said: "This is just going to make New Zealand the laughing stock again.

"I am just stunned that the deal was announced without a very strong indication from the commission it was acceptable."

Fletcher Challenge ducked for cover last night, declining to comment until further details of the commission's decision are released early next week.

The announcement was made after the local market closed.

But in Australia, where Energy shares also trade, its share price plunged $2.

The New Zealand dollar also weakened last night, with dealers blaming its dive on the fallout from the Energy deal.

The kiwi shed more than half a US cent on the news, to 39.64USc. Its previous low was 39.90USc, on October 4.

While the commission ruling is a blow, it is not necessarily the end of the road for Shell.

It can reapply with a new proposal, seek to overturn the ruling in the High Court or apply to the commission for an exemption based on public good.

Even if Shell does reapply, Fletcher will have to move fast to salvage the $427 million rights issue by the debt-laden Forests, which is due next month.

This is because part of the funding for the underwriting of the issue was to have been provided by Shell in the interim.

However, Fletcher has hinted at a plan B. Market sources suggested this could involve the sale of Energy's Canadian and Argentine assets to Apache.

As part of the joint bid, Apache was to pay $US600 million for those assets, which have no regulatory issues surrounding them.

This would provide $1.5 billion (or 425c a share) to Energy.

Furthermore, at yesterday's closing price, Capstone Turbines, partially owned by Fletcher Challenge, is worth $1 billion (or 285c a share).

Such a sale and the subsequent sale of Capstone once restrictions were lifted in December would give Fletcher the financial capability to restructure.

It would also provide capital returns to Energy shareholders while Shell renewed its application to the commission.

Ironically, Energy's financial position has strengthened since its sale was announced, with the NZ dollar weakening and the price of oil rising.

The commission's objection to Shell's buying the New Zealand assets of Energy was based on its gaining dominance in the current gas production market, in the market for gas production after 2009, and in the market for production of liquefied petroleum gas.

Paul Richardson, an energy analyst for UBS Warburg, said he was not surprised by the rejection.

"I think the issue is highly contentious whether Shell will be dominant post 2009 considering the potential other sources of gas and what the shape of the market might be at that time."