Rubicon springs Easter surprise

By PAM GRAHAM

In a classic bombshell on the eve of a long weekend, Rubicon on Thursday launched a bid for control of forest products company Tenon, with the support of its shareholder Guinness Peat Group.

Rubicon is offering $1.85 cash a share for 50.01 per cent of Tenon, the renamed Fletcher Challenge Forests.

That price, argues Tenon, is a good deal because the $1.82 at which Tenon shares closed on Thursday was bloated by speculators. Rubicon already owns just under 20 per cent of its target.

The bid is the latest twist in a tortuous corporate saga in an industry seen as capable of much, but which has disappointed investors.

Now one remnant of the Fletcher Challenge empire is bidding for another, with Hugh Fletcher as front man, at least to start with.

And after a year of bitter disputes between GPG and Rubicon over the pay scheme for Rubicon chief executive Luke Moriarty, the two are very much together.

GPG will accept the bid for its 2.17 per cent of Tenon shares and its director Tony Gibbs is on the board of bid vehicle Rubicon Forests, a wholly owned subsidiary of Rubicon Ltd.

The view that Tenon was a tasty morsel after it sold its forests in February was well known. The counter-argument was that Tenon was a "toxic waste dump" of old contractual obligations.

"It can't be so toxic because we're bidding," said Fletcher.

Fletcher and Moriarty know what is in the leftovers better than anyone. They are not using an adviser to bid for them.

"They know how many bodies there are and where they are, and it will be almost impossible for any other bidder to take a view on those risks," said one banker.

Tenon is believed to be using adviser ABN Amro, which had a target price of $1.60 for Tenon shares in a research report released on April 1.

Rubicon's offer means it will need to buy 84 million shares, valuing the bid at $156 million. It will fund it with $98 million of cash reserves and about $60 million of bridging finance.

Its formal offer for Tenon is signed by Fletcher, on behalf of the other directors of Rubicon Forests.

Tenon is actually funding its own predator, because the second return of capital it will make to shareholders from its forest sale will give Rubicon $160 million to pay off any bridging loan plus money left over.

Rubicon argues that - based on a $1.85 bid price - after the $1.15-a-share second capital repayment is deducted, shareholders will be left with shares worth 70c. That is a 19 per cent premium on the 59c you get when you deduct $1.15 from Tenon's average share price in the last four trading days of $1.74.

Rubicon is trying to step up from having influence, with a 20 per cent shareholding, to control with 50 per cent.

Carter Holt was also seen as a potential bidder for Tenon.

Rubicon said no one had approached it to buy its 20 per cent Tenon stake and the company was now "bite-sized" after the sale of its forests.

Rubicon would not have been able to afford a bid before the sale, said Fletcher. He had no comment on whether management changes were planned if the bid succeeded.

Analysts said the bid was likely to flush out any other interested parties, and would address Tenon's unstable share register.

Fletcher said it gave liquidity to anyone seeking to get out of the company.

One shareholder in that category is likely to be the Ohio state public employees retirement fund, which recently cut its Tenon stake from 7.3 per cent to 4.4 per cent.

The question now is: does Rubicon want control of a breakup play or a long-term investment?

"Were Rubicon to move to a 50.01 per cent shareholding position, it would be incentivised to create value in Tenon," a Rubicon statement said.

Gibbs: "I think it is significant that Rubicon wants to take effective control of its largest investment and to influence the future direction of the residual of Tenon and we at GPG are supportive of that."

An announcement from Tenon on Thursday night said it had received notice of the offer and advised shareholders not to take any action.

The announcement pointed out that the offer price was only 2 per cent higher than Thursday's closing price.

Tenon's independent directors would deal with the issue, it said, and directors Moriarty and Michael Andrews would not take part.

Earlier on Thursday, Tenon upgraded the operating profit forecast for the ongoing businessess from $45 million to $58million-$60 million.

The move boosted its share price to the highest level in 2 1/2 years, making it a more expensive takeover target. The upgrade was because the price of mouldings and better lumber in the United States has risen to US$1240 ($1880) per 1000 board feet from US$1050 in December.

Tenon will report a loss of $33 million in the year to June 30, because of a loss on the sale of forest assets.

The company is forecasting net profit after tax for continuing operations of $32 million for the period, up from $21 million in the forest sale explanatory memorandum.

The US mouldings lumber market makes up about 51 per cent of Tenon's profit, with the rest coming from Asia and the New Zealand domestic market. New Zealand lumber prices have fallen 3 per cent in the past quarter, according to Macquarie Equities.

Tenon has just added a new line, which makes smaller-sized mouldings, at its Taupo mouldings plant, which sells to North America. The plant makes solid, rather than finger-jointed, mouldings from clearwood to order.

The company considers it to be competitive internationally and workers at the plant said there was a new vigour at the site with the emergence of Tenon as a focused wood-processing company.

EMPIRE GAMES

1999: Fletcher Challenge decides to separate into four divisions - Building, Energy, Forests and Paper.

2001: Rubicon created as listed company, holding various assets left over from restructuring of Fletcher empire.

February 2004: Fletcher Challenge Forests, renamed Tenon, sells most of its forests to concentrate on wood processing.

April 8: Rubicon launches takeover for 50.01 per cent of Tenon.