Fletcher Forests' investors spurn $1.4bn deal

By CHRIS DANIELS

It will be a gloomy scene around the boardroom table at the Penrose headquarters of Fletcher Challenge Forests this morning.

Despite the best efforts of Fletcher's senior management, a crucial shareholder vote last night failed to back their $1.4 billion plan to buy a huge chunk of prime New Zealand forestry assets.

The board and executives staked much on this ambitious, but complex deal, which they claimed would take the company in a whole new "global direction".

Shareholders will now inevitably question the future of chairman Sir Dryden Spring and chief executive Terry McFadgen.

For Fletcher is now faced with the prospect of a well-managed and lucrative forest sitting on its doorstep, with the risk of losing access to the high-quality logs it needs for its own processing mills in the Central North Island.

It will also have to contend with a new shareholder - corporate raider Guinness Peat Group - trying to influence its future. GPG has repeatedly called for a new board to be appointed, replacing "the old Fletcher guard".

Rubicon shareholders and management, for so long desperate to exit their unwanted stake in Fletcher, will have to cope with the possibility of an even bigger decline in their company's investment.

And, if the analysts are to be believed, Fletcher shareholders must watch the already ailing share price sink even further.

At a meeting of more than 1000 shareholders at Auckland's Eden Park, most shareholders voted for the plan but not enough to reach the 75 per cent approval threshold.

Sir Dryden expressed disappointment at the vote.

"We have probably lost an important future opportunity, but we have an excellent business which we will continue to maximise."

Chinese investment company Citic, intent on buying 35 per cent of Fletcher in a key part of the plan, said it would review its options.

"Citic is obviously disappointed that the acquisition has not been approved and that the uncertainty surrounding the future of this key strategic asset remains," said Peter Kwok, chairman of Citic's subsidiary Seawi.

Yesterday's meeting was the culmination of weeks of lobbying, advertising and public relations work from Fletcher.

It began with Sir Dryden delivering a 40-minute speech promoting the key points that the company has been pushing for the past few months.

The price of $1.4 billion was a good one, he said, as the receiver, who is trying to sell the partnership on behalf of the banks, would not accept anything less.

Sir Dryden tried to assure shareholders that Citic, through its Hong Kong listed investment company Seawi, would not control the company once it attained its 35 per cent stake in Fletcher.

He pushed the idea of consolidation of the forestry industry, which has been raised by others in recent weeks, primarily Rubicon and GPG.

This proposal holds that higher timber and log prices can be obtained by the New Zealand forestry industry players acting together, rather than as rivals, in opening export markets.

"The point I want to emphasise is that the CNIFP proposition is entirely consistent with this wider goal and indeed is the essential first step," said Sir Dryden.



Sir Dryden, despite being company chairman, was unable to chair the special shareholders meeting yesterday, because of his role as director of the National Bank, one of the financiers of the partnership deal.

Michael Walls chaired the meeting instead, and was immediately challenged on how he would vote the so-called "undirected proxies"of holders of American Depositary Receipts.

Walls had the ability to vote 3 per cent of total votes, because these US-based people had not responded to information about the meeting.

Walls said he had not decided which way he would vote those proxies, and would decide once the meeting had finished. He said 83 per cent of the 85 million votes from the United States favoured the deal. "A very high proportion" of domestic shareholders supported it.

GPG director Tony Gibbs, who had been trying to scupper the deal through the company's holding of 19.9 per cent of Rubicon (which owns 17.6 per cent of Fletcher) and a small Fletcher shareholding, gave assembled shareholders some idea of what GPG was up to.

Rubicon, through the GPG influence on its board, would ensure a better deal for Fletcher Forest shareholders.

"Our view is clearly that Rubicon, with GPG as its major shareholder, influencing Forests is a much better bet for Forest minorities than a 35 per cent shareholder who may well be, or become, a customer and who may well have other motives," said Gibbs.

"Fletcher shareholders will be better off with a GPG-influenced company than a Hong Kong-based, unheard-of investment company [Seawi]."

The deal was a good one for the banks and for Seawi but a lousy one for shareholders, he said.

"I believe it is time for a new broom, and it's time for the old Fletcher guard to move on."

If the partnership deal failed then GPG would begin talks with other players, said Gibbs, creating a structure that would benefit all and not leave minority shareholders out in the cold.

Fellow GPG director Gary Weiss later told the meeting that despite all the claims from Fletcher that buying the CNIF was such a good deal, the company's two largest shareholders - Rubicon and Xylem - both wanted out of the company.

Shareholders were being denied the premium price that usually came with a change in ownership.

Xylem president Stephen Hurley, who owns 7 per cent of Fletcher, urged shareholders to oppose the deal, saying "there is no part of this that we like".

The 35 per cent Seawi shareholding allowed it to effectively block any resolutions from other shareholders, granting it full control.

Hurley also repeated claims that Fletcher was taking on too much debt and paying too much for the forest.

Shareholders Association chairman Bruce Sheppard, who attended the meeting dressed as a forestry worker in a hard hat, his customary shorts and a bright orange safety vest, asked the board a series of questions during yesterday's meeting, primarily centred on the potential role of Seawi and Citic on the Fletcher board.

He also said the amount of debt being raised by the company was too much and this would be risky, especially given the current uncertainties in the world financial markets.

Sir Dryden, Walls, McFadgen and chief financial officer John Dell gave assured answers to their interrogators, with McFadgen giving an impassioned defence of the CNIF plan.

He made a pointed reference to Hurley, who at one stage had also wanted to buy the forest himself.

"What is in it for us as shareholders?" asked McFadgen. "There is a long list, it gets us the best forest in the world - Stephen, you know that, we have discussed it many times."