Fletcher Forests and receivers agree on deal over CNI

Fletcher Forests said today that it had agreed to a deal with the receivers of the Central North Island Forestry Partnership (CNI) to conditionally buy the assets of CNI for US$650 million ($1.348 billion).

The deal clears the way for Forests' former partner in CNI and recent legal combatant, Citic, to buy 35 per cent of Forests at 37 cents per share through Hong Kong listed company South East Asia Wood Industries (Seawi). That deal involves shares being placed to Seawi and Seawi buying Rubicon's 17 per cent stake at 37 cents per share.

The final terms and structure of the transaction are consistent with the deal announced on May 20, Forests said.

The agreement with the receivers, Ferrier Hodgson, is subject to Forests' shareholder approval, the company finalising a new debt facility, various regulatory and governmental approvals and the satisfaction of conditions relating to the associated arrangements involving the placement of new shares to Seawi.

Seawi will subscribe for equity in Forests to the value of US$200 million. The placement will be a mix of ordinary and preference shares which will, on issue, rank equally with the existing issued ordinary and preference shares in the Company.

A new bank facility is being established by Forests with a new banking syndicate led by the Bank of New Zealand and HSBC, to finance the balance of the purchase price and to replace Forests' current bank facility.

Rubicon will acquire Forests Tahorakuri forest estate in return for surrendering (at a valuation of 37 cents per share), most of the 492 million Fletcher Challenge Forests shares that it holds.

Tahorakuri comprises approximately 11,800ha of forest in the Central North Island region, and has been valued for the purposes of this buy-back at US$64 million subject to any final due diligence valuation adjustments.

As a result of the Seawi placement and Rubicon share repurchase, Seawi will obtain a shareholding of approximately 31 per cent in Forests. Under separate arrangements agreed between Seawi and Rubicon, Seawi will acquire almost all of the Rubicon residual shareholding to increase its shareholding to 35 per cent.

The governance arrangements agreed with Seawi provide that it will not increase its shareholding in Forests beyond 35 per cent, other than through a bid to all shareholders under the Takeovers Code.

Seawi and Rubicon and shareholders will also need to agree the deal.

Forests said it anticipates the deal will be concluded by the end of August and settlement by the end of September.

"Although the receivership has been a long one for all concerned, we are delighted to now be in a position to recommend this proposal to shareholders," Forests chairman Sir Dryden Spring said.

Sir Dryden said the deal had a number of compelling attractions:

* it enables consolidation of the ownership of the 163,000ha CNI forests with the rest of Forests' estate;

* it retains current operating synergies from the management of the combined estates and offers further cost savings through a simplified ownership and management structure;

* it creates a unified ownership structure for the CNI and Fletcher Forest estates, eliminating the complexity inherent in the previous arrangements, and aligns the interests of all equity holders;

* it removes all the uncertainty associated with the lengthy receivership of CNI and enables Forests to focus on enhancing the performance of its asset base;

* it stabilises the company's share register by facilitating Rubicon's exit and introducing a new, long-term cornerstone shareholder;

* and -- through the corporate governance arrangements agreed with Seawi, it preserves Forests' independence.

Sir Dryden said the placement price to Seawi of 37 cents per share was well above the level at which Forests' shares had recently been trading.

Forests' shares rose 1 cent to 26 cents shortly after the announcement. Rubicon's shares rose 3 cents to a record high of 70 cents.

Sir Dryden said the involvement of the Chinese government-owned Citic was an endorsement of Forests' management capabilities and would assist market development in China.

"This is our major growth market, with enormous potential for the future as China continues to lift its living standards and expand its use of imported wood products."

Forests would continue to be responsible for the management and marketing of all the company's forest products in all countries, and there were no agreements or arrangements involving Seawi or Citic in any area of the business including log supply, he said.

The US$200 million cash injection into Forests would be used to fund the CNI purchase.

The parallel Tahorakuri forest purchase and share repurchase arrangement with Rubicon would enable Forests to meet Rubicon's requirement that it exit substantially all its shareholding on the entry of a new cornerstone shareholder, and does so without diluting Seawi's cash injection or the need for Seawi to acquire more than a 35 per cent interest, Sir Dryden said.

Seawi will have two directors on the seven-person board, which will "over time" be cut to six. Sir Dryden will continue as chairman and management will not be affected by the proposed changes in shareholding.

Seawi has agreed a two-year standstill period from the date the CNI deal is closed. It cannot bid for more shares except in exceptional circumstances and if it does, the Takeovers Code will be invoked, meaning it would have to bid for all shares.

The CNI purchases brings its total holding to 260,000 planted hectares.

Sir Dryden said the recent appreciation of the New Zealand dollar has increased the attractiveness of the deal.

He said the forecast near-term operating cashflows were robust, and would be assisted by a rising harvest profile.

The company expects to have net debt at June 30 of about $240 million, prior to CNI acquisition costs, compared to $323 million on June 30 last year.

Forests would hold a special shareholder meeting in August.

Rubicon said the ultimate price it exited its Forests holding would depend on the value it could bring to the Tahorakuri forest.

Although it had not quit forestry, it said it would have full operational control. The quality and tree profile of the forest, located northeast of Taupo, would give Rubicon flexibility in managing the estate.

Like Forests, Rubicon will hold a shareholders' meeting in mid-August.

- NZPA