Death of an empire
Fletcher fades with a whimper
- Bill Rosenberg
Over the last year, decisions from the Overseas Investment Commission (OIC) have chronicled the dismemberment of one of the most significant companies in New Zealands commercial history: Fletcher Challenge Ltd (FCL). Descended from the Fletcher empire that thrived on State housing and other public works under the first Labour government in the 1930s depression, Fletcher Challenge (after numerous takeovers and mergers), its board and top managers, became central to the New Zealand economy and politics. Its former head, Sir Ron Trotter, was one of the most vocal supporters of Rogernomics and its successor "structural adjustment programmes" and a prominent member of the Business Roundtable. On the other hand, the leading representative of the Fletcher dynasty remaining in the company, Hugh Fletcher, has been a critic of the neo-liberal economic experiment, while still pursuing the transnationalisation of Fletchers itself ultimately leading to its splitting apart and sale to overseas control. Its adventures overseas particularly in Canada and Chile drew huge public criticism, and, in Canada, angry and bitter industrial action.
That is not to say that FCL was really a New Zealand company: in the last decade, its overseas ownership rose to around 50%, though arguably it was still controlled in New Zealand (while having to rely heavily on overseas investors). In August 1999, the OIC withdrew its exemption from the Overseas Investment regulations and recognised that it was in fact an overseas company. In May 2000, the OIC reported that FCL was owned
The break up was blamed on the failure of FCL to make the best of the split of its shareholding into four "targeted" divisions Paper, Forestry, Energy and Building. "Dr Death", Rod Deane, fresh from making Telecom one of the most disliked and ruthless companies in New Zealand, took over as Chairman, and with his usual lean efficiency proceeded to carve the company up.
The importance of the company is obvious from the OIC decisions reported below. Only the sale of Fletcher Building, which will remain as a standalone company, is not covered.
May 2000: Norske Skogindustrier Of Norway Buys Fletcher Paper
In May 2000, Norske Skogindustrier ASA of Norway gained approval to acquire Fletcher Challenge Paper. FCP includes the Tasman Pulp and Paper Mill at Kawerau, plus substantial assets overseas including Canada and Australia. It owns 510 hectares of land in Aotearoa in the Bay of Plenty around Kawerau, Whakatane and Tauranga, and an additional 88 hectares of leasehold land in the same region.
FCL had tried to sell off FCP to its 50.8%-owned Canadian associate, Fletcher Challenge Canada, in 1999 (see our commentary on the October 1999 OIC decisions), but failed.
According to the OIC,
Given that expansion "will be achieved through acquisitions rather than building new capacity", it seems unlikely this will result in anything but the takeover, and pressure on New Zealand assets to perform as part of the intra-firm trading of their new owner. To the extent that FCP was still locally owned, it also means the loss of dividends from the overseas assets of FCP, and increased exodus of dividends.
Norske Skog described its acquisition as meaning that
It said that it was "the largest acquisition any Norwegian company has ever made outside Norway" (Press release, "Largest acquisition in Norways history completed today", 28/7/00 see http://www.norskeskog.no).
For examples of environmental protests against Norske Skogs activities see http://forests.org/archive/europe/norskes2.htm (17/4/97 Urgent Appeal to Spread Word That Norske Skog Broke Environmental Promise); and http://forests.org/archive/europe/urghelpn.htm (12/3/97 Urgent Request for Norske Skog to Change Their Old-Growth Policies).
The sale was at a price that surprised even FCL itself: approximately $5 billion. This was an 83% premium on both the average trading price of the shares during the 12 months preceding the offer, and the closing price on the day prior to the announcement. The sale paid off 60% of the group debt an obstacle that contributed to the failure of the planned Fletcher Challenge Canada buy-out in 1999.
It was opposed by small shareholders watchdog, Max Gunn, who at the meeting to approve the sale, denounced such a "material heritage" going overseas, describing it as an "unmitigated disaster". He described FCL Chairman, Roderick Deane, as a "grossly over-paid puppet", and other directors responsible for the sale as "traitors to the economy of New Zealand and wimps who should be replaced" (Press, 5/7/00, "Huge support for Paper sale", p20).
Norske Skog did not hold on to the Kawerau Mill for long. In 2001, it passed it on to the largest forestry company in Aotearoa, Carter Holt Harvey Ltd. CHH received OIC approval to acquire the Tasman Pulp Mill at Kawerau, Bay of Plenty for a suppressed amount (but see below) in March 2001. CHH is 51% owned by International Paper Company Ltd of the USA, 5.12% by Franklin Resources Inc of the USA, 5.11% by Dellaware International Advisors Ltd of the UK, and 5% in small shareholdings in Australia. A further 13.77% is overseas owned, leaving only 20% of the shares owned in Aotearoa.
CHH applied for Commerce Commission approval for the purchase in January 2001. Announcing the application, the Commission proclaimed that the proposal involved "two of the worlds biggest forestry companies" Norske Skog and International Paper ("Carter Holt Harvey applies for clearance to acquire Norskes Tasman pulp mill", Commerce Commission Media Release 2001/8). In its decision clearing the sale (decision number 424), the Commerce Commission noted:
It described Norske Skog as follows:
As to the Kinleith and Tasman mills:
The purchase therefore gives CHH a monopoly over kraft pulp supply in Aotearoa, and domination of pulp supply in general. The Commission also notes there is very little pulp imported into Aotearoa (p20), and most of the pulp production is exported. Even though imported kraft pulp would be more expensive than that manufactured in Aotearoa (and the two companies have raised their prices to this level!), and is rarely imported, the Commission concluded that imports provided sufficient competition:
The Commission looked at seven markets affected by the takeover: production and supply of
and purchase of pulp fibre in the central North Island.
In summary, while the Commission acknowledged that "the proposal would leave CHH with large market shares in all seven markets",
Late in March, CHH announced it had bought the Tasman mill for $311 million. It aimed to extract $20 million in savings from operating the two mills, which are only 80 km apart as the crow flies, without job losses. Norske Skog will still own and operate the paper making operation at the mill. (Press, 27/3/01, "CHH sees savings in Tasman mill buy", p12).
Shell And Apache Take Fletcher Energy
In October 2000, Shell Exploration Company BV gained OIC approval to purchase Fletcher Challenge Energy (FCE) for a sum "to be advised". However, the sale was a long and tedious process that was settled only in March 2001, five months after the OICs approval.
Shell, the second largest oil company in the world, is owned 60% by Royal Dutch Petroleum Company (NV Koninklijke Nederlansche Petroleum Maatschappij) of the Netherlands, and 40% by Shell Transport and Trading Company of the UK.
The sale includes a total of 155 hectares of freehold land at 1334 Otaraoa Road, Waitara, 90-160 Beach Road, New Plymouth, and 567 Bird Road, Stratford, Taranaki. It also includes a total of 19 hectares of leasehold land at Mangahewa Road, Foreman Road, Mangaone Road, Otaroroa Road, and 867 Bristol Road, New Plymouth; and 562-548 East Road and 133 Cross Road, Stratford.
The sale began with the smell of blood in the air, following the high price gained in the sale of Fletcher Paper. Another of the giants of world oil, Chevron (Socal, owner with Texaco of Caltex) was also rumoured to be a bidder. The prospect was sweetened by the rising price of crude oil, and Fletchers leading shareholding in Capstone Turbine Corporation, an innovative manufacturer of gas and liquid fuel-fired micro-turbine power generators with a high-technology-like share price despite having never made a profit (Press, 5/8/00, "F Energy scores investors favour", p21). However things moved slowly towards Fletcher Challenge putting its division on the block.
In August 2000, Shell applied for Commerce Commission approval for the purchase, but ran into trouble. The Commission repeatedly extended the time it needed to make a decision, and then in October (decision no. 408) rejected the proposal. The rejection came despite Shells offer to divest itself of all of FCEs interest in the Kupe field, in Kapuni Gas Contracts Limited, in Fletcher Challenge Gas Investments Limited, in Challenge Petroleum Limited (the "Challenge!" petrol retailer, including its New Plymouth terminal), and FCEs 14.2% interest in the New Zealand Refining Company Limited. Under the deal, Challenge! and the interest in New Zealand Refining Company would be sold to Rubicon, a new, supposedly technology-focussed, company to be set up by Fletcher Challenge to hold a number of the assets it did not wish, or think appropriate, to sell with its divisions.
The Commerce Commission described the two companies international activities as follows:
Shell Group companies are involved in activities relating to oil and natural gas, chemicals, electricity generation, and renewable resources in more than 135 countries.
[Shells] application spells out the following activities the Shell Group is engaged in internationally:
Exploration and Production (or "E&P"): searching for oil and gas fields by means of seismic surveys and exploration wells, developing economically viable fields by drilling wells and building the infrastructure of pipelines and treatment facilities necessary for delivering hydrocarbons to market;
Oil Products: refining and processing crude oil and other feedstocks into transportation fuels, lubricants, heating and fuel oils, liquified petroleum gas (LPG) and bitumen, and distributing and marketing these products to customers;
Chemicals: processing hydrocarbon feedstocks into base chemical products, petrochemical building blocks and polyolefins, and marketing them globally;
Downstream Gas and Power: marketing and trading natural gas, wholesaling and retailing of natural gas and electricity to industrial and domestic customers, developing and operating independent electric power plants;
Renewables: manufacturing and marketing solar energy systems, implementing rural electrification projects in developing countries, sustainably growing and marketing wood, converting wood fuel into marketable energy, developing wind energy projects.
Within New Zealand, Shell is currently active in all the above areas. The primary activities of Shell NZ include:
However, the Commerce Commission decided that only three markets were relevant to its decision: the national markets for
In the others, it decided, there was sufficient competition, or Shell had agreed to divest itself of offending operations.
Its concerns in gas production are highlighted in the following table, which shows that FCE and Shell between them had effective control of 100% of the production of gas in Aotearoa in 1999, using data from the Ministry of Economic Developments Energy Data File, July 2000:
(PJ = Petajoules; TAWN = the Tariki, Ahuroa, Waihapa and Ngaere fields in Taranaki.)
Many of these assets were the result of privatisations and subject to various "take or pay" provisions whereby the Government, or its present or former corporations such as parts of the former Electricity Corporation, had contracted to pay for gas even if it didnt use it. It had sold some of these contracts to the Natural Gas Corporation (NGC the Australian-owned owner of TransAlta/On Energy), Contact Energy, Genesis Power and Methanex. The Commerce Commission considered whether those corporations, or the Todd Corporation would provide competition by reselling the gas, but decided that was unlikely. It concluded: "the Commission considers that the constraint from competitors is not sufficient to preclude Shell from exercising significant market power post-acquisition".
It then looked at whether new competition would arise after 2009, when the Maui and other fields are expected to be close to depletion, and new fields are expected to be in production. It estimated likely 2010 production from known developed and undeveloped fields. Its conclusion was that 63% of the likely or possible new production (including 75% of the likely new production) would be owned by Shell/FCE and only 37% by other owners. Commenting on the commercial discoveries since 1959,
It concluded that with regard to new entrants to gas production post 2009, "the Commission cannot be confident of the extent of new entry and that it will be sufficient to ensure that the merged entity will not be in a dominant position in the market".
In LPG production, the Commerce Commission stated,
It concluded that "the only current producer other than FCE and Shell and their associated companies, NGC, is constrained in its ability to compete with Shell post acquisition". It considered it was unlikely that new entrants would change this position.
The Commission therefore rejected Shells application on the basis of the dominant position it would acquire in all three markets.
Naturally, Shell did not take no for an answer. It applied again on 20 October (eight days after the OIC gave its approval to the purchase!), this time offering to divest the following assets in addition to those offered the first time (see Commerce Commission decision 411):
Note that this still leaves Shell with control over 91% of gas production in Aotearoa, through the Maui and Kapuni fields. The additional divestment was minimal.
However the Commerce Commission decided that the remaining 9% of gas production not owned by Shell would provide sufficient competition noting that "it represents around 48% of the total amount of gas used last year by other than the electricity and petrochemical sectors" because the rest was to a large extent tied up in bulk supply contracts. It suppressed the data that show Shells estimated share post-2009, but convinced itself that the divestments would mean Shell would not have a dominant position post-2009. On LPG, the Commission considered that the TAWN divestment plus competition from NGC at Kapuni, the change in the Maui ownership and voting rights, plus new information on the nature of contracts between the various companies in the LPG market, would prevent Shell from having a dominant position.
Just what we have come to expect of the Commerce Commission.
The actual deal involved US exploration company, Apache, buying the Canadian and Argentine assets of FCE. According to Fletcher Challenge, Apache is a "leading oil and gas exploration and development company with operations in the United States, Canada, Australia, Egypt, Poland and China. As at 30 September 2000, Apache has $US6.75 billion in assets".
The original deal offered FCE shareholders in October 2000
(Press, 11/10/00, "Winners and losers on FCL", p34).
This total offer, of $11.22 was a 43% premium on the sharemarket price of $7.85 in mid October 2000, but subject to the whims of the exchange rate and the value of Capstone shares between October 2000 and settlement in late March 2001. Indeed, by the time the formal offer documents were published in 2001, the value of the offer had fallen to $9.65 per share. At that value, the 353.2 million shares were valued at $3.4 billion, and Shell was paying $2.6 billion for FCE itself.
Other Fletcher Challenge shareholders were affected by the sale, Fletcher Forests shareholders faring particular badly, and venting their anger at the annual meeting in November 2000 (Press, 3/11/00, "Deane, Andrews bear brunt of shareholder frustration", p18).
Though other bids were not apparent in 2000 (other than the suggestion of Chevrons interest), a late bidder in February 2001 forced Shell to increase the cash part of its offer to $US3.55 a share. The new bidder, Greymouth Petroleum, played up the "little guy" and "Kiwi" image, but in fact was a consortium of Ron Brierleys Guinness Peat Group, FR Partners (Faye Richwhite), and Canadian oil company, Penn West, plus New Zealand and overseas institutions. It offered $US3.70 in cash, later raised to $US3.85, leaving the rest of the offer unchanged. A subsidiary, Peak Petroleum, would be set up to run FCEs New Zealand and Brunei assets if the bid succeeded, while Penn West would take FCEs Canada oil and gas interests. In Greymouth Petroleums favour was sharebroker Forsyth Barr which was arguing that Shells valuation was too low. Against it was the lateness of its bid, which Fletcher Challenge claimed came too late to allow it to back out of the Shell offer.
Nevertheless, Shell raised the cash part of its offer to $US3.55 in response. That was the only achievement that Greymouth spokespeople could claim when their bid was rejected overwhelmingly at a drawn-out Fletcher Challenge shareholders meeting in March 2001, which approved the sale by 96%. Perhaps the most cutting irony was Shells answer to their "patriotic" call: Shell had been in New Zealand for 90 years, but Greymouth Petroleum only for weeks.
A telling commentary on the sale of one of our largest energy companies comes from Australia. At the same time as Shell was bidding with great confidence for FCE, it was battling in Australia for 57% and controlling ownership of Woodside Petroleum, manager (and owner of 34% share) of the huge North West shelf liquefied gas project off Western Australia. The decision was left to the Australian government (rather than a statutory authority like the OIC) which procrastinated over the decision for some time. Bruce Baskett described the dilemma in the Press (12/3/01, "Smile doctors no longer required", p15):
In the end the Australian government vetoed the takeover, Treasurer Peter Costello saying it was "not in the national interest". The financial markets were "stunned", and conveyed a warning through international ratings agency, Fitch Inc, that the act shouldnt be repeated or it would be seen as "a generalised resistance to foreign direct investment in Australia" which would "likely hurt the countrys sovereign [credit] rating". Fitchs director of international public finance in London "stressed that Australia remained heavily dependent on international finance with its large current account deficits and heavy external debt burden. That makes it important that international investors remain confident they face a level playing field" (Press, 25/04/01, "Politics big player in gas decision - experts", p32). Australia has been warned!
Australian governments are different only in that they occasionally worry before selling out. Perhaps Howard should be advised not to concern himself any more about the country becoming a branch office economy. Our governments can teach him how to stop worrying and love servility.
Fletcher Forests was appointed to be the remaining Fletcher Challenge presence on the stock market as Fletcher Challenge Forests Ltd (FCF).
In March 2001, Credit Suisse First Boston Corporation, owned by Credit Suisse Group of Switzerland, was given OIC approval to acquire up to 27% of Fletcher Challenge Forests Division, valued at $167,853,413. The purchase was as a result of Credit Suisse First Boston underwriting an issue of FCF preference shares which were intended to raise $427 million to repay debt, as part of the break-up.
However, according to the OIC, Credit Suisse First Boston
The land that FCF states it controls is significant:
110,825 hectares of freehold comprising:
43,380 hectares of leasehold comprising:
This totals 154,205 hectares considerably less than the 288,000 hectares it has told the New Zealand Forest Owners Association it owns or manages ("New Zealand Forest Industry Facts & Figures, 2000/2001", publ. New Zealand Forest Owners Association, New Zealand Forest Industries Council, and Ministry of Agriculture and Forestry, p5). Presumably the 134,000 hectare difference lies in forest cutting rights, whose sale is now exempted from requiring OIC approval despite their conferring considerable control over the land.
It is not clear where its half ownership of the ill-fated Central North Island Forests Partnership fits into this. This partnership with Citic of China has 181,683 hectares of Crown forestry licences, 189 hectares of forestry cutting rights, 1,857 hectares of freehold land and 169 hectares of leasehold land, mostly in the Kaingaroa forest in the Rotorua area. That "partnership" has dissolved acrimoniously after Citic accused Fletchers of selling the logs too cheaply to Fletcher Challenge Paper mills. All parties (except the banks) appear relieved that it is now in the hands of receivers, having failed to make payments on its $1.48 billion debt to an international syndicate of 12 banks.
The ownership of FCF was given as 7.9%, Xylem Fund ILP, USA, plus listed shareholdings in Aotearoa (50.5%), USA (29.7%), UK (7.1%), Australia (3.6%), Japan (1.1%), and Canada (0.1%).
Rubicon Buys Challenge Petroleum And Trees and Technology
Part of the wash-up of the FCL dismemberment was to create a new company, Rubicon Ltd. It was sold to the sharemarket as a new technology company (what else!) because of its Capstone and forestry genetic engineering interests, but no-one seemed very convinced. In March 2001, Rubicon gained OIC approval to acquire a number of the assets it was bequeathed. That it required approval was interesting in itself: like the Fletcher empire at its end, Rubicon is largely overseas owned. Indeed its shares have been issued to existing Fletcher Challenge Energy shareholders. Only 37% of Rubicons shareholding remains in Aotearoa; 39% is in the USA, 10% in Australia, 9% in the UK, and 5% in Singapore.
First, Rubicon acquired Challenge Petroleum Ltd, the competitor to the major oil companies in Aotearoa. A competitor perhaps, but not a New Zealand one. The price was "to be advised". Rubicon acquired it from Shell Corporation Ltd, BV which got it as part of Fletcher Energy. Challenge owns 2.8 hectares of land at Omata Tank Farm, Centennial Drive, New Plymouth, Taranaki and 2.2 hectares of leasehold land at Timaru Tank Farm, corner of Dawson and Hayman Streets, Timaru, Canterbury.
Despite claiming to the OIC that the acquisition of Challenge Petroleum will produce exceptional results such as that it
in fact Rubicon quickly put it on the market. In June, the Commerce Commission approved its sale to Caltex, the smallest (by local market share) of the four major oil transnationals in Aotearoa. It was sold for about $50 million. Rubicon had paid $20 million for both it and a Brisbane fuels terminal which it had earlier sold for $23 million (Press, "Sale boosts Rubicon", 29/6/01, p14).
Second, Rubicon is acquiring the Tree and Technology business of FCF, again for a sum "to be advised". This includes:
Rubicon is also acquiring the following assets from FCF, which include genetic engineering projects: FCFs
Why the spin-doctors dreamed up "Rubicon" for this company is not immediately obvious. Certainly, having crossed it, we should turn around, look back, and consider the significance of this poignant and monumental failure of New Zealand capitalism which the Fletcher empire embodied.
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