Fletcher's roots of debt

By MALCOM McPHEE

Norske Skog. The name is almost designed to conjure visions of Norsemen in longboats. Their descendants still cross the seas and this week they collected booty far from home, and far from the Scottish homeland coasts of those who had a major finger in the booty pie - the Fletchers.

Stock Exchange lists no longer carry Fletcher Challenge Paper, whose story began as that of Tasman Pulp and Paper.

The name was devised one wet night when the present Sir James Fletcher (JC to close friends) was driving back to Auckland from Rotorua with his wife and a couple of colleagues. But he nearly never got it.

Later, when his company was in partnership with the Spencers in Caxton Paper, he discovered several names incorporating Tasman had been registered by the Spencers. The registrar wrote to the Spencers and asked if they objected. They did not.

The Tasman mill was born near the banks of the Tarawera River that drains the lake at the foot of its namesake volcanic mountain in which Tamaohoi, a fierce cannibal chief, was imprisoned 500 years before its eruption with explosive force on June 10, 1886. The eruption killed 153 people and destroyed the fabled Pink and White Terraces.

Eleven days earlier in the morning mists an omen-like phantom war canoe had sped across the waters of the lake, creating concern that was soon justified.

The excitement on the morning of October 29, 1955, was a lot different as the first paper began rolling off Tasman's No 1 machine.

It was the culmination of the dream of Pat Entrican, director of the Forest Service, who said he envisaged the Murupara scheme, as it was first called, in a "blinding flash of vision."

He wrote an essay The Romance of Murupara and campaigned among businessmen abroad and politicians at home. He was forever optimistic about "his" project. He felt he had "ownership" of it and came to resent any who had a different concept for use of the vast Kaingaroa man-made and crown-owned pine forest whose planting origins date back to before the First World War.

Realisation of Mr Entrican's dream took a different shape because James Muir Cameron Fletcher had different ideas.

JC was born the second son of James (later the first Sir James) who emigrated to New Zealand from Scotland and began the Fletcher building business in Dunedin before moving north.

They did a lot of Second World War work. Through that and an overseas trip in 1937, JC was exposed to international thinking, not least that of Americans.

When he picked up on Murupara - at first more as a construction job - JC looked beyond the small home market.

Those were the days when the Government decided who could make what. So came the tradeoff that saw Tasman making newsprint, Caxton tissue/toilet paper and NZ Forest Products, with its own forests, making kraft and other papers.

A Murupara not only needed foreign expertise - it also needed capital. New Zealand has never had a lot of that, which is why the Government has so often played banker. When the Government bought the JC concept, it became a major shareholder in Tasman, joining Fletcher Holdings.

Then Prime Minister Sid Holland announced the project on Christmas Eve, 1951, just weeks after tenders closed for the Government's Kaingaroa forest log sale. He described it as "the largest single industrial plant ever to be established in this country."

The contractor, Fletcher Merritt Raymond, would complete the integrated mill in 30 months while the Government would finance 700 state houses, build a power line, a rail link and a new wharf at Mount Maunganui to service the enterprise.

The contract and its stumpage pricing to buy the logs from the Crown was the big key to the enterprise's viability (and profitability) but it became a source of recurring tension and friction for decades.

International paper moguls tried to sideline, if not derail the project.

The big handsome, impressive and sometimes autocratic Sir Eric Bowater collared the Prime Minister for lunch when he went to England and, as JC has told it, "frightened the living daylights out of Holland on the grounds that this was the most involved and highly technical, sophisticated industry, it was very capital intensive and no place for amateurs. What in the hell was he doing passing it on to somebody like Fletchers who had no background in the industry at all."

Another Fletcher insider, the late George Fraser, noted: "Sir Eric had already decided that Bowater's developments in North America [notably Newfoundland] deserved priority and all subsequent developments were aimed at keeping the timber resources [in NZ] on ice until Bowater was good and ready to proceed. Quite a normal procedure when Bowater's interests were being threatened by local manufacturers in the 'colonies'."

The Prime Minister cabled the Fletchers suggesting a trip to London to meet Sir Eric but they decided not to go. Their team by then had the Government's "letter of intent," a new device JC had picked up from the Americans.

The moment it was known the Government was accepting the Fletcher proposal in principle for using the wood, Australian Newsprint Mills and the Australian newspaper publishers dropped Sir Eric with whom they had combined to tender for the Kaingaroa log sale that was the base for the new industry, and cabled seeking talks with Fletcher.

In effect, the Government played banker for the project, underwriting it with Fletcher as they worked to bring in new funding as the project progressed. Fletcher agreed it had to put its money where its mouth was and stump up 700,000 pounds.

That was a lot of money, something like 44 per cent of total assets, to commit and there would be no dividend for some time. It took a lot of courage and scratching around its subsidiaries to find the cash.

Fletcher-Tasman needed direct access to international newsprint experience to help in managing the mill and in marketing the pulp and paper abroad. Reed of Britain, which was seeking to counter Bowater's international presence, after talking to JC ended up a shareholder.

By October 1954, the Tasman share register was (62 per cent NZ-held): the Government, 2 million pounds; Reed, 1.5 million Pounds; Fletcher,1 million pounds; Commonwealth Development Finance, 500,000 pounds; NZ public, 1 million pounds - a total of 6 million pounds.

A London paper called Tasman a 19 million pound paper giant. So debt there was, inside and outside the company.

When more foreign markets were needed in 1959, Bowater with a different chief bought a 21.5 per cent stake in Tasman in return for a 20-year marketing contract and surrender of its Australian market to Tasman.

The 1960s were golden years; 1963 brought a second newsprint machine and an exchange of shares with Australian Newsprint Mills, which built a third machine in Tasmania.

In 1970, the Government put up for sale what was described as the Crown's last big North Island log supply available for a decade. Tasman, influenced by the introduction of the New Zealand-Australia Free Trade Agreement, decided to go for a two-stage expansion: first, a chemical kraft pulp plant and second, a mechanical pulp plant and third paper machine.

The $82.7 million cost of the Tane project was huge for those days and beyond the New Zealand debt market. Tasman resorted to the unusual - borrowing abroad. The lenders required big shareholder guarantees and long-term production contracts.

The biggest contract, made in 1968, was for 15 years for 100,000 tonnes at a world parity price with the NZ Newspaper Publishers Association. It had a 2.5 per cent annual price escalation clause. The initial Tane financing was based on $55 million overseas borrowing but it blew out to $75 million. Currency devaluations raised the cost of overseas debt, and severe construction cost overruns boosted the capital cost by $27 million. Repayment was made worse by an 18-month delay in new production starting.

By late 1976, Tasman's directors reckoned they did not have enough cashflow to meet the debt schedule without new guarantees or capital. In 1977 Fletcher and the Government offered temporary backup finance to allow a resolution.

Meanwhile, the Government and Fletcher bought out Bowater when it decided to concentrate on managed business rather than investment. Reed wanted out for the same reasons so in 1978 Fletcher bought that stake.

Tasman was again defined as being a New Zealand company under the Overseas Investment Regulations for the first time since 1954. Fletcher had 36.5 per cent of the capital, the Government 34 (plus a preference share holding), ANM 20.6, NZ public 6.9 and overseas public, nearly 2.

By now marketing contracts like that with Bowater were ending. And the Government wanted out. Many in the political bureaucracy reckoned Fletcher was too big and "big was bad."

The Government brought in Ron Trotter as Tasman chairman; his Challenge Corporation ended up with a 28 per cent stake.

Before that mutated into what was to become Fletcher Challenge, JC's second son, Hugh, had taken the Fletcher helm.

Challenge was as little averse to debt as Fletcher, so for them Tasman - basking in a stellar year after financial and contract rejigging - held irresistible cashflow magic. The merger of all three was under way by year's end.

The boldest and most imaginative piece of financial engineering that broke Fletcher Challenge out of the confines of the NZ market and over the foreign exchange barriers that Kiwis faced in investing abroad was the takeover of Crown Zellerbach's Canadian forestry interests, launched in 1982. It propelled Fletcher on to the world stage. It meant more debt - and it was debt that became the burden of Fletcher Challenge.