Fletcher places its neck on Xylem's block

By STAFF REPORTERS

Fletcher Forests has given dissident shareholder Xylem a virtual veto power over its $1.3 billion deal to buy the Central North Island Forest.

The company revealed yesterday that it had placed a US$7.5 million cap on the net cost of buying back shares from dissenting shareholders if the deal is approved.

Once that limit is exceeded, Fletcher has the right to back out of the purchase.

Fletcher chief executive Terry McFadgen said last night that exposing the company to unlimited minority buy-back costs would jeopardise the entire transaction.

Last month, Fletcher announced a plan to buy the Central North Island Forest from the receiver with the help of Citic, the investment arm of the Chinese Government.

Under the deal Citic, through subsidiary South East Asia Wood Industries (Seawi), will pay $413 million for a 35 per cent stake in Fletcher.

The remaining $880 million will be raised from the BNZ and HSBC banks.

A controversial side deal will buy out 17.8 per cent Fletcher shareholder Rubicon in exchange for assets valued at 37c a share, well above the market rate of 23c available to other minority shareholders.

The proposal prompted the resignation of Fletcher director Stephen Hurley, representing 7.6 per cent shareholder Xylem.

Shareholders Association chairman Bruce Sheppard also criticised the preferential treatment offered to Rubicon, and the influence Seawi would have on the Fletcher board.

He said shareholders "would have to be pretty silly" to vote for the plan.

Fletcher needs the approval of 75 per cent of shareholders for the deal to go ahead.

Corporate law allows shareholders voting against the deal to demand that Fletcher buy back their shares if the majority votes yes.

Although the price of such a buy back is not certain, it is possible that an arbitrator could insist Fletcher pay 37c a share - the same as offered to Rubicon.

Such an outcome would expose Fletcher to costs of tens of millions of dollars.

With costs like that, the CNIF purchase becomes a loss maker from the start.

Fletcher has therefore warned that excessive buy-back demands will probably scupper the deal.

The net cost refers to the difference between the buy-back price and the market price.

A US$7.5 million threshold and a 37c buy-back price means holders of a maximum of about 110 million shares could exercise buy-back rights.

Xylem holds more than 200 million shares.

The cap hands an effective veto to small shareholders, and Xylem in particular, but it also forces them to calculate carefully the potential cost to Fletcher of not buying the CNIF.

But while Fletcher was yesterday warning shareholders of the consequences of their actions, it was also conceding a major victory to shareholder activism.

In what is being hailed as one of the great triumphs of the Shareholders' Association, Citic has agreed that it will not be able to dominate the Fletcher board should it become a 35 per cent shareholder.

Sheppard made the deal public at the group's first annual meeting in Auckland yesterday.

He cited it as evidence of the association's success.

Seawi will be eligible for only two seats on the Fletcher board, which will have seven directors, soon reducing to six.

By agreeing not to vote on new directors, it is giving away rights that most other major shareholders of New Zealand companies have.

Sheppard said that in agreeing to limit its influence over Fletcher, Citic had set a precedent which he intended also to apply to US energy giant Edison, which owns 51 per cent of publicly listed Contact Energy.