Millions hanging on Forests shake-up

By GEOFF SENESCALL

Fletcher Challenge will have to shell out up to $200 million if its restructuring fails to become reality.

Fletcher Energy and Fletcher Building would have to pay that amount to underwriters for any losses incurred from the planned $427 million Fletcher Forests rights issue and $90 million share placement.

Shareholders will vote on the Forests rights issue at the beginning of next month and, in late January, on the separation of the three divisions.

Another key hurdle for Fletcher's restructuring plans is Commerce Commission approval for the $4.6 billion sale of Energy to Royal Dutch Shell and US-based Apache.

But even if the commission knocks back the proposal, Fletcher Challenge still intends going ahead with setting up a new company called Rubicon to house its non-core assets.

The initial reaction from analysts and fund managers to the long-awaited restructuring of the Fletcher Challenge conglomerate was generally favourable.

Stephen Walker, head of equities for AMP, said it was good that Fletcher found a way to unwind the structure.

"It is not surprising the deal is complex. I think the solution for holders of Energy is very attractive," he said.

"Building has some attractions and some difficulties. But if anyone is interested in it once it is listed, it will be sitting there as a nice clean business. If there are buyers out there who think it is worth more than the market level, it will be taken care of."

Mr Walker said there were concerns about Energy having to help underwrite the recapitalisation of Forests. But that had to happen to get the deal away. "It is not a huge risk given it is a deeply discounted issue," he said.

Forests had clearly been a problem. Recapitalisation was a less preferred option, but without a sale there was no alternative.

Meanwhile, Forests shares continued to come under pressure, tumbling 7c yesterday to 43c in reaction to a two-for-one rights issue at 25c.

Building, which is to remain a standalone business, also fell back 10c to 195c.

Energy moved up 6c to 930c - still a long way from the $11.22 a share that Fletcher Challenge says the Shell/Apache offer represents.

One of the big issues brokers were grappling with yesterday was valuing Rubicon, which will house 3.2 million Capstone Turbines shares, Forests shares, residual Energy assets and biotech assets.

Fletcher's valuation of Rubicon is 120c a share. However, some brokers are already heavily discounting this price. They say many overseas holders of Energy will not want to hold a non-oil and gas asset.

Paul Richardson, an energy analyst for brokers UBS Warburg, believed that the market would discount the Rubicon value by around half because of its structure and mixed asset base.

"But step back, 830c a share bid for the oil and gas assets; if Capstone falls to $US20 a share that is still 70c a share on a one for 70 basis; and on the other side Rubicon is worth 20c to 30c. So at the worst case Energy is worth 920c to 930c a share."

"If you assume that everything is going ahead, then it is only upside from 920c in Energy in the short term."

On the basis of Capstone's current market value, he said, the price was more like $10.50, even without ascribing much value to Rubicon.