Brian Gaynor: Plan leaves investors with dilemma

The long-awaited announcement of the purchase of the Central North Island Forest Partnership (CNIFP) assets by Fletcher Challenge Forests has not been greeted with any great enthusiasm by investors.

This is not surprising as the proposed deal offers more benefits to Rubicon than to Fletcher Forests' minority shareholders.

There are also several questions over South East Asia Wood Industries (Seawi), the low-profile Hong Kong-listed company that will take a 35 per cent stake in New Zealand's largest commercial forest owner.

Can Seawi make a positive contribution to Fletcher Forests, or is the proposed transaction little more than a clever scheme to boost Seawi's flagging share price?

On March 28, Forests said it had a deal to buy the CNIFP assets from the receivers.

This was a joint-venture bid with Hancock Timber Resources Group of Boston, Massachusetts, a highly reputable, long-term forest owner with more than US$2.4 billion ($5 billion) of assets under management in the United States, Canada and Australia.

The deal fell apart on April 23 at a meeting between Fletcher Forests and partnership receiver Michael Stiassny.

It now appears that Rubicon played an important role in scuttling the transaction because it did not offer the Fletcher Challenge offspring an exit opportunity from Fletcher Forests.

The latest proposal has several important elements:

* Fletcher Forests will buy the CNIFP assets for $1.34 billion. This compares with the original price of $2.25 billion paid to the Crown in September 1996.

* Fletcher Forests will buy back most of Rubicon's 492 million Forests shares in return for the Tahorakuri forest estate. This 11,800ha forest is valued at $132 million, or 37c a Forests share.

* Seawi will buy US$200 million ($413 million) worth of new ordinary and preference Forests shares at 37c a share.

Forests chairman Sir Dryden Spring admitted that Rubicon played a major role in the latest deal.

Rubicon is able to bail out at 37c a share, 48 per cent above the present market price.

It seems that Rubicon was only prepared to support a transaction that would allow it to exit at a favourable price, regardless of the long-term consequences to Fletcher Forests.

The other important part of the transaction is Seawi's purchase of a controlling 35 per cent stake in Fletcher Forests.

Seawi, which was listed on the Hong Kong Stock Exchange in September 1997, has a chequered history.

The company has been subject to a large number of Stock Exchange inquiries into exceptional price movements, and in 1999 the Securities and Futures Commission successfully prosecuted a company vice-president for share price manipulation.

In July 2000, Seawi issued 1.44 billion new shares at 7.5c each (the number of shares and price have been adjusted for a subsequent five-for-one share consolidation) to United Star International, a company incorporated in British Virgin Islands and jointly owned by Peter Kwok Viem and Ma Ting Hung.

Kwok is a member of the Chinese People's Political Consultative Conference and has had several associations with Citic, the Chinese Government-owned investment group.

In April last year, Seawi issued a further 200 million new shares at 75c each to Keentech, a fully owned subsidiary of Citic.

Seawi now has 2.12 billion shares on issue, with Kwok and Ma controlling 67.9 per cent and Citic 9.4 per cent.

Seawi, which manufactures and sells plywood in China, does not have an impressive track record.

Returns have fallen steadily in recent years and the company reported revenue of just $14 million for last year and a net loss of $2.7 million.

Its share price fell from HK$1.95 last June to 96HKc on May 14 but has picked up steadily since then on increased volumes.

Most of the share price improvement has occurred since May 20, the day Fletcher Forests told the New Zealand Stock Exchange that it had reached an understanding with Citic to pursue a potential acquisition of CNIFP.

On Friday, Seawi shares surged 14HKc to HK$1.49 on exceptionally high volume of 10.6 million shares, indicating that Hong Kong investors knew about the CNIFP deal before it was announced.

Seawi shares have been suspended this week but based on Friday's closing price the company has a market value of $836 million.

Kwok and Ma are sitting on a $540 million profit from their 1.44 billion shares.

Although no details have been revealed, Citic will convert its loan notes to shares to help finance the acquisition of a controlling interest in Fletcher Forests.

Following this share issue Kwok and Ma will own about 40 per cent of Seawi and Citic a similar amount.

Kwok, who is chairman of Seawi, will be appointed to the Forests board, and Ma, who is deputy chairman of the Hong Kong company, is expected to be Seawi's other board representative.

The proposed CNIFP deal is another sad legacy of Michael Andrews and the Fletcher Challenge group. Effective control of the country's largest commercial forest owner is being passed to a small Hong Kong company, with no apparent forest ownership expertise, to let Andrews and the rest of the Rubicon board squeeze the last cent from their Fletcher Forests shareholding.

It is not surprising that Stephen Hurley, a US investor who owns 203 million Forests shares (7.3 per cent), has resigned from the board in opposition to the transaction.

Why should Rubicon receive 37c for its Forests shares and no one else?

Who are Kwok and Ma? Why should they be handed effective control of our largest commercial forest owner?

Hancock Timber of Boston would have been a far better partner for Fletcher Forests and its minority shareholders but it has been dumped to satisfy Rubicon's self-interest.

The latest proposal also benefits Kwok and Ma's struggling Hong Kong company and satisfies Fletcher Forests' ambition to own the CNIFP estate.

Brokers and analysts are arguing that Forests shareholders have no option but to accept the deal because its share price will fall below 20c if they vote against the proposal.

This is probably true but a huge number of traders are also waiting to dump the stock when the CNIFP issue is resolved and there are unlikely to be many long-term buyers of Fletcher Forests with a small and unknown Hong Kong company at the helm.

Forests shareholders face a difficult decision. Should they accept the offer and allow an unproven Hong Kong company, controlled by Kwok and Ma rather than Citic, to take control of their company? Or should they hope that negotiations can be reopened with Hancock or another major forestry group?

At this stage it is unclear how shareholders will vote but the minority buyback provisions of Sections 110-115 of the Companies Act 1993 could have an influence.

Under these provisions, shareholders voting against the proposal can force Fletcher Forests to buy their shares.

Dissenting shareholders will argue for 37c, the same as Rubicon, but Forests will want to pay no more than market value.

* Disclosure of interest: Brian Gaynor is a Fletcher Forests and Rubicon shareholder.

* bgaynor@xtra.co.nz