Sale first step in Fletcher Forests' new direction

By CHRIS DANIELS

Fletcher Challenge Forests has made its first step away from forest ownership, selling 8940ha of its mature trees for US$65 million ($120 million) and announcing a capital repayment to shareholders of 25c a share.

In separate deals, Fletcher will get US$45 million from US forestry investment manager UBS Timber Investors for 6400ha of its Tahorakuri forest in the Central North Island and another US$20 million for 2540ha of trees in its adjoining Tauhara forest.

The sales account for 8.2 per cent of Fletcher's forest estate of 108,500ha.

Shares in the company surged 10c on the news yesterday, finishing the day at $1.18 each.

The return of $140 million, equivalent to 25c a share, is coming through a "capital reduction", or pro-rata cancellation of shares, which shareholders will have to approve at a special meeting, due by May this year.

Details of the reduction, including the ratio of shares to be cancelled and the amount paid for each share, will be given closer to the meeting.

The company is hoping the payment will be non-taxable.

The money Fletcher earns from the deal comes from the sale of cutting rights, not the land on which the trees stand.

Fletcher will manage the trees on behalf of UBS, also providing "ancillary infrastructure services such as roading".

UBS can harvest designated trees, at maturity, over the next 13 years. As part of the deal Fletcher has the option of buying half of the crop, when harvested, at market prices.

UBS will sell the rest of the trees on the open market, meaning Fletcher could end up buying more than the 50 per cent it has options on.

Fletcher shareholders were told of the company's new direction at their annual meeting in November, when chairman Sir Dryden Spring outlined a three-part strategy: increasing revenue, cutting costs and finding ways of stopping "New Zealand competing with New Zealand" when it sells wood.

It would instead "lighten" its own $1.3 billion investment in forests and build the marketing and distribution "front end" of the business.

Chief executive Terry McFadgen yesterday said the prices obtained for the trees were broadly in line with its own assessment, carried out last year as part of the failed Citic bid to buy the Central North Island Forest Partnership, adjusted for current prices and with a discount of around 8.25 per cent.

They implied a company value "substantially in excess" of that given by the share price of $1.07.

McFadgen said the sale of the forests to UBS would not fragment the company's estate, as Fletcher would continue to own the land and intended to replant it after harvest.

Selling the forests to UBS means the company will wear an accounting loss of nearly $16 million, which will be recognised at December 31, 2002.

McFadgen said this loss was due to recent falls in log prices, caused by the appreciation of the New Zealand dollar against the US dollar.

The final accounting outcome would, however depend on the exchange rate on settlement of the deal.

Any loss would be partially offset by a gain of $8.1 million earned from the appreciation of the New Zealand dollar on Fletcher's US dollar debt.

Outlining the advantages of a pro-rata capital reduction, McFadgen said the company could efficiently return excess capital to shareholders and optimise its balance sheet while avoiding any change to the structure of its share register.

This was because all shareholders would take part in the reduction in proportion to whatever stake they already held.

The board and management were "determined to close the significant discount that exists in the company's share price", said McFadgen.