Richard Inder: CHH team in the gun over latest u-turn

Carter Holt Harvey boss Peter Springford was clearly chastened this week as he warned for the third time in just over three months that the forestry giant would miss its full-year profit forecasts.

Springford even seemed equivocal over the likelihood of keeping his job.

Asked whether he expected to survive, he replied: "That is a matter for me and the board."

The occasion called for gravity. After all, if a downgrade in March was counted, it was actually the fourth profit warning in seven months.

(On that occasion, CHH said its first-quarter earnings would be down by more than two-fifths, largely blaming the introduction of new accounting rules but also the sharp Australian downturn that has wreaked havoc throughout the whole year.)

The latest warning was ugly. Instead of delivering a promised full-year operating profit of $255 million, CHH would turn in only $200 million - a 20 per cent downgrade.

As one analyst noted, if it were not for billionaire Graeme Hart's $3.3 billion, $2.50 a share takeover offer, CHH's shares would have plunged.

But the spotlight this time was firmly on Springford and his team.

The revision was on figures they supplied just 18 days before the end of the September quarter.

In the intervening six weeks there has been little to justify such a large cut. Even if the market had been hideous, four warnings in under a year must raise questions over the senior team's grip on the business.

Springford admitted as much. When asked why he had got it so wrong he replied: " ... expectations for cost reduction programmes and performance improvement initiatives haven't been borne out".

The independent directors - BNZ chairman Kerry McDonald, CHH chairman John Maasland and Helen Nugent - were left exposed.

They and Springford were all that remained of the board that signed off the September figures. Hart, who took control of CHH after he bought a 50.5 per cent stake from US giant International Paper, replaced the IP directors with his own men at the end of last month.

Independent directors also used the flawed September figures to justify their recommendation against Hart's takeover bid. They agreed with advisers Grant Samuel that CHH was worth $2.55 to $2.95 a share.

Underscoring their desire to put distance between themselves and the executive team, the independent directors put out two statements largely saying the same thing - they were reviewing their previous recommendation.

Odds on the directors tweaking the valuation must be shortening.

Failure to meet the year-end forecast is by itself not enough to justify a change, as the directors noted. CHH's value is based on its long-term prospects, not just what happens over the next couple of months.

But the Grant Samuel forecast for 2006 profits of $251 million must be called into question as it is based on the same flawed September figures and this will have substantially more influence on CHH's value.

Odds on the directors changing their recommendation in favour of Hart should also not be discounted, although this seems less likely.

All should become clear on Monday, when the independent directors expect to disclose the result of their deliberations.

Whatever their decision, there are still good reasons for staying with Hart.

His extension of his bid by 21 days until next Thursday indicates his enthusiasm for 100 per cent of the company. By putting up $3.3 billion - $1 billion more than the National Business Review judges his net worth - Hart has indicated a high degree of confidence in his bet.

Despite the gloomy outlook for the rest of the year, CHH pointed to signs of a bottoming out in the key Australian market, while forecasts of strengthening pulp prices bode well for the pulp and paper division.

The $15 million of one-off items in the third quarter were largely made up of redundancies following cost cuts, which is what Hart does best and are perhaps necessary medicine. Investors expect more in the current quarter, especially after the closing of a mill at Rainbow Mountain.

Lower property sales accounted for $9 million of the cut to the full-year forecast. Land is as good as money in the bank. Gains not realised now will be reaped by those who hold for the long term.

Forgetting these latter two points plays into Hart's hands. Investors pessimistic about CHH's prospects are more likely to sell into his offer.

Meanwhile, Hart has only this week reaffirmed his reputation as an astute deal-maker. Draft earnings forecasts for the shortly-to-be-floated food giant Goodman Fielder show he stands to make a $240 million gross profit on the dairy assets he acquired from Fonterra at the end of August. Goodman, to be spun out of Hart's Burns Philp, is taking over the assets, which include the Meadow Fresh and Tararua dairy brands and the Huttons cured meat business.

Hart also rewards those who stick with him. Burns Philp shareholders who have matched his investment are well ahead.

Burns Philp does appear to be paying a rich price for the assets Hart is putting into the Goodman Fielder business ($850 million). But this may be quickly recouped when Goodman is sold to the public.

Indeed, Hart's holding of as little as 10 per cent of the shares in Goodman when the float is completed may be reason enough to give its shares a wide berth.