Forestry giants may ally to ward off Citic

By PAULA OLIVER forestry writer

Forestry giants Fletcher Challenge Forests and Carter Holt Harvey may form an unlikely alliance to block sole Chinese ownership of New Zealand's largest forest estate.

The battle for the Central North Island Forestry Partnership - which fell into receivership in February - escalated this week with news that Chinese Government-owned Citic had tabled a pre-emptive and unconditional bid for the estate.

Taking in the Kaingaroa forest, the 190,000ha estate supplies much of its timber to Fletcher Forests, Carter Holt Harvey and Norske Skog.

Though long-term supply contracts exist, there are fears in some quarters that China's need for a sustainable log supply may prompt Citic to try to negotiate a way out of contracts, triggering a court battle.

If it could not manoeuvre out of the contracts, say timber industry sources, Citic might try to lever up the prices customers pay for supply. Citic is seen as a log exporter rather than a processor, meaning it could affect Carter Holt's export strategy.

Citic NZ's Michael Kidd would not comment on the sale process when contacted by the Business Herald.

Receiver Michael Stiassny did not return calls. Mr Stiassny has previously said that the sale would go through an international tender process. It is understood that an information memorandum put together by Morgan Stanley is almost complete.

While Citic ownership would be expected to have an impact on local players, it is widely accepted in the investment community that both Fletcher Forests and Carter Holt would survive without owning the Central North Island estate. But owning it would give them more stability.

"Forests would be a slightly more marginalised player, but they would survive," an analyst said.

Fletcher Forests yesterday confirmed it is talking to several parties with a view to making a bid for the assets, but it would not say who the parties were.

Unable to fund a full buyout by itself, Forests is said to be looking towards Carter Holt as one of two partners in a deal that would be structured as 50 per cent equity and 50 per cent debt.

An analyst said the deal's third party would need to be someone who also needed logs, because the forest was ready to cut.

"It's not suited to a long-term investment-type fund, which makes me think Carters and Forests may have to look to Korea or Japan."

American names Weyerhaeuser and Hancock are also being discussed in the market.

Fletcher Forests holds $US225 million ($558.121 million) in second-tier debt in the partnership, giving it an edge in the game for control.