Here lies Fletcher Challenge. RIP

By BRIAN GAYNOR

The death occurred in Auckland this week of Fletcher Challenge, aged 92.

The deceased played a major role in the New Zealand economy over the past 60 years and was primarily responsible for the nation's first newsprint operations at Kawerau.

In the early '80s, it replaced NZ Forest Products as the country's largest listed company. It held that position, except for a brief period during the sharemarket boom, until Telecom listed in the early 90s.

The last few years of its life were dogged by a complex corporate structure, poor performance and controversy.

Fletcher Challenge had many a sparkling innings, but it will be remembered for its unfulfilled potential and sad ending.

The company was founded by James Fletcher (later Sir James) in 1909. The previous year Mr Fletcher, a carpenter, had immigrated to Dunedin from a small village outside Glasgow, Scotland.

With the help of his brothers, Fletcher expanded rapidly throughout New Zealand.

Its first big break came in 1937 when the Labour Government started its state housing programme. Fletchers accounted for more than 6000 of the 30,000 state houses built before and after the Second World War.

Fletcher Holdings became a public company in 1940, mainly to allow family members to sell their shares.

The state housing programme was interrupted by the war but the company did not suffer. Mr Fletcher was appointed Commissioner of Defence Construction and the Fletcher group won a large number of construction contracts, including the Burnham and Papakura military camps.

In 1942 James Fletcher (the present Sir James) replaced his father as managing director.

In the early 50s the Government scoured the world to find a company that would build a newsprint mill based on state-owned timber. Mr Fletcher put together a consortium - including Fletcher, the Government, the New Zealand public and Reed International of Britain - that was the only serious bidder.

The Tasman Pulp and Paper operation at Kawerau was a huge undertaking that had many teething problems, including a two-year delay before it reached full capacity. But it was a major success and accounted for 20 per cent of New Zealand's exports in 1960.

Tasman Pulp and Paper's golden run came to an end in the mid-70s when labour problems and restrictive newsprint contracts (prices could increase by no more than 2.5 per cent a year in a high inflation environment) had a negative effect on cashflow.

Prime Minister Robert Muldoon blamed Mr Fletcher for Tasman's problems, and at the 1978 annual general meeting Mr Fletcher was replaced by Ron Trotter (later Sir Ron) as chairman. Mr Trotter was chairman and managing director of Challenge Corporation, the stock and station agents.

Reed sold its Tasman shareholding to Fletcher in 1978 and the Crown sold out to Fletcher and Challenge in September 1979.

At the end of 1979 Hugh Fletcher replaced his father as managing director of Fletcher Holdings.

In January 1981 Fletcher, Challenge and Tasman merged to create New Zealand's largest company. It was the beginning of a golden 10-year period with Mr Trotter as executive chairman and Mr Fletcher as managing director.

The group bought a huge number of pulp, paper and forestry assets in Canada and avoided the excesses of the sharemarket boom. Net profit surged from $87 million in 1981 to $662 million in 1990, a figure never repeated.

Its most significant long-term investment was the purchase of 70 per cent of Petrocorp from the Crown. A full takeover of the company was made in 1988 and this formed the basis of the very successful Energy division.

But Fletcher experienced a big change in fortune in 1992 when it recorded a loss of $158 million, because of depressed pulp and paper markets. In the previous few years huge sums were invested in the pulp, paper and forestry sector, including the disastrous purchase of UK Paper for £300 million. Most of the money was borrowed and the timing was terrible as product prices dropped sharply after the investment programme was completed.

At the same time Fletcher made a late and disorganised bid for Telecom. If the directors had diverted more resources into the Telecom bid, and less money into paper, then Fletcher could be a completely different company today.

Fletcher's reaction to the poor performance was the catalyst for its eventual demise.

Directors took the view that investors rather than the company were to blame. They believed that the group was soundly structured but investors failed to recognise its intrinsic value.

Over the next few years, the board took a number of steps to enhance the group's sharemarket performance:

* In December 1993 shareholders were offered one Wrightson share for every 10 Fletcher Challenge shares at $1.30 each. Wrightson was essentially the old Challenge Corporation.

* In the same month, Fletcher Challenge shareholders received one Fletcher Forest share and four Fletcher Ordinary Division shares for every four existing shares.

* In March 1996, shareholders were issued two Fletcher Paper shares, one Fletcher Forests and one Fletcher Building share for every four Fletcher Ordinary Division shares.

The group already had a complex structure because of its involvement in a large number of different industries and a strong emphasis on tax efficiency. It became even more complex after the letter stock structure, a move that was never fully accepted by investors.

The letter stocks might have worked had each division been strong and there was little debt. But the poor performance of the Forests and Paper divisions dragged down the whole group.

In September 1996, Forests invested in the disastrous Central North Island Forest Partnership that is now in receivership and in 1997 and 1998 Paper operated at a loss.

When the letter stocks were allocated, Forests and Paper represented 60 per cent of group value but this fell to 31 per cent (including Paper at last year's acquisition price). Energy rose from 20 to 56 per cent over the same period.

The separation process - the event that led to the resignation of chairman Kerry Hoggard over insider trading allegations - was announced on December 16, 1999. Paper, including Tasman Pulp and Paper, was sold to Norske Skog last year.

The final separation was so complex that shareholders were sent six booklets, totalling more than 700 pages, for this week's meeting.

The disintegration of the Fletcher empire was mainly due to a poor corporate governance structure and undisciplined decision making.

In the late 1980s and early '90s, too many executives were on the board. Many of these had a background in forestry, a self-interest in expansion and were less likely to support the sale or closure of a poorly performing operation.

Few of the non-executive directors had practical industry experience and were more likely to support a theoretical letter stock scheme instead of hard practical solutions to the group's problems.

Four of the six present directors - Mike Andrews, Paul Baines, Hugh Fletcher and Kerrin Vautier - were board members when Forests was created in 1993. Dr Roderick Deane joined before the creation of Building, Energy and Paper in 1996.

When family members (shareholders) gathered this week, the chief surgeon, Dr Deane, urged them to terminate the patient's life. He said there was no guarantee that its quality of life could be maintained if a two-week extension was granted.

In the absence of a clear guarantee that the quality of life could be improved family members had little choice but to support Dr Deane. They voted overwhelmingly to terminate a life established by an enterprising Scottish emigrant 92 years earlier.

The deceased is survived by Wrightson from a previous marriage and Fletcher Building, Fletcher Forests and the newlyborn Rubicon.

* bgaynor@xtra.co.nz