Reports back Fletcher merger

By Mark Reynolds

Fletcher Challenge Canada should purchase Fletcher Paper's assets in the southern hemisphere, according to two research reports that have been issued on the controversial proposal.

Two large North American investment brokers, Merrill Lynch and Nesbitt Burns, have concluded that Fletcher Canada would benefit substantially from a proposed merger with Fletcher Paper.

The proposal had been scorned by minority institutional shareholders in Fletcher Canada, because they believed their company was being strong armed into paying too much for the Fletcher Paper assets. But both Merrill Lynch and Nesbitt Burns have concluded that the southern hemisphere assets are worth substantially more than comparable assets in North America.

The assessments have been made by Canadian-based analysts who were brought on a tour south by Fletcher Challenge.

Nesbitt Burns said in its report that its visit to the Australian and New Zealand showed that mills in this region "are more profitable in North America and Europe".

"These mills have distinct advantages in wood, labour and selling prices," the brokerage said.

Nesbitt Burns concluded that if the merger was approved Fletcher Canada shares should move to $C25 each from their current level of $C15.70.

Merrill Lynch has suggested that the Canadian shares should be accumulated.

"We still expect the shareholder base to realign itself subsequent to the resolution of the proposed transaction which should create a buying opportunity upon weakness," Merrill Lynch said.

The brokerage said attractive pricing arrangements for the Fletcher Paper operations, particularly in Australia, underpinned the value of the assets.

"Fletcher Paper assets are well managed and do have a sustained advantage," Merrill said.

Northern hemisphere analysts had previously suggested the different value of paper assets in the different regions was not justified, and their views had caused Fletcher Canada investors to rebel against the planned merger.

A vote on the merger proposal will not be held until next month and if other brokers follow Merrill Lynch's and Nesbitt Burn's views then the vote could well swing in Fletcher's favour.