Is Fletcher's capital raising the most unfair ever?

Source: New Zealand Shareholders’ Association’s parting gift to Andrew Reding.

Fletcher Building is like a running sore, continually dragging down the reputation of NZX and New Zealand Inc.

Every time I think it can't get any worse, it does get worse.

Something seems to happen to everybody who becomes part of the company, and it didn't take long for the newly appointed chief executive Andrew Reding to ditch the principles he upheld as chair of the New Zealand Shareholders Association (NZSA).

He accepted his appointment to become both Fletcher's CEO and managing director, meaning he jettisoned the principle that a chief executive should not also sit on the board.

And yesterday he gave his imprimatur to one of the most unfair capital raising I've ever seen, contrary to NZSA's long-standing view that capital raisings should be pro-rata and that all shareholders should have rights to participate with the option to sell those rights if they don't want to or can't participate.

The $700 million capital raising consists of a $282 million placement to institutions and a $418 million one-for-4.49 accelerated non-renounceable entitlement offer (ANREO).

And that's even before Reding officially takes the reins – he's not supposed to become CEO until Sept 30 and yet he fronted the briefing of analysts yesterday.

“Heavily involved”

When I asked about this, the company confirmed Reding's official start date is Sept 30 but that “he has also been a director since mid-August and has been heavily involved in the planning and decision-making around the equity raise. As such, it is most appropriate for him to be fronting the equity raise.”

In my view, the person who should have fronted the briefing was acting chair Barbara Chapman, who was nowhere to be seen.

I've asked Fletcher a number of other questions and am still awaiting its response.

I suggested to NZSA CEO Oliver Mander that he was in a difficult position, given it's only a month since Reding stepped down as NZSA chair.

“I've always had a great deal of respect for Andrew, but we're objective in what we do, we're independent in what we do. It's our job to call these things out. I'm holding true to what the NZSA believes,” Mander said.

Mander stressed that he thought a capital raising in itself was sensible in that it gives the company, which is enduring very depressed trading conditions and mounting debt, more flexibility to conduct the review that Reding has promised.

“It will be a deep dive review,” Reding promised analysts yesterday.

Depriving shareholders of a property right

However, Mander said he couldn't understand why the board chose an ANREO rather than an AREO – the difference with the latter is that investors have the option of realising some value for their rights if the market deems those rights to have value.

By going with an ANREO, the board is choosing to deprive shareholders of that property right.

Mander also questioned the urgency: “This doesn't look like an emergency, it (raising capital) looks like good planning. It keeps things stable while they go through a root-and-branch review.”

There absolutely was no urgency; just one month ago when he released Fletcher's annual results, acting chief executive Nick Traber was asked whether a capital raising was imminent.

Traber said his team was focused on a number of other measures aimed at shoring up the balance sheet, including cost reduction, tight management of working capital and capital spending, targeted divestments and finding potential equity partners for Fletcher's residential construction business.

“We will have to see what we get as a response from investors over the next couple of weeks and months,” Traber said then.

The potential of an equity partner in the house-building business was first announced that day, and earlier in August, the company announced the sale of the Australian Tradelink business for A$170 million with settlement due Sept 30.

So, Fletcher already knew it had a sizeable lump of cash about to arrive.

Back to front

Incidentally, one of the analysts at that August briefing asked why the company had appointed a new chief executive and chief financial officer before replacing the chair when the initial indications had been that a new chair would be appointed first.

Traber said that was a question for the chair, who, of course, was not at the briefing.

“It's really key that you get the right talent, the right experience, the right skill set,” Traber added.

“We can't let perfection get in the way here,” he said, in tacit acknowledgement that a new chair should have been the first step.

Fletcher’s woes are primarily a failure of governance, and the appropriate remedy for its demonstrably dysfunctional board would have been to appoint a new chair, who would then have taken charge of future decisions.

It's worth remembering that former chair Bruce Hassall stepped down on March 4, bringing forward his expected departure from after the annual shareholders' meeting, while both he and former managing director Ross Taylor resigned on Feb 14.

So the company has been without a permanent chair for nearly seven months.

Another reason why there's no need for urgency in the capital raising is that Fletcher had already negotiated breathing room around its banking covenants.

Even if you did concede there might have been some urgency, surely the $282 million placement would have been more than enough to satisfy that urgency.

If you take urgency off the table, why has this board chosen a capital raising method that was designed for extreme urgency and which also disadvantages shareholders who don't participate?

The connecting link is Jarden

As with the Auckland International Airport capital raising last week, which by no stretch of the imagination could be called an urgent matter, the Fletcher cap raise is being managed and underwritten by the same merchant bank, Jarden.

I'd suggest that the reason both issues are accelerated is because that's what Jarden finds convenient and in both cases it was able to dictate terms to supine boards.

The fact that these boards have proved so supine is no surprise in Fletcher's case but it is in the Auckland airport's case.

The airport's chair is Patrick Strange, a former Transpower and Mercury Energy CEO, and its directors include former Meridian Energy CEO Mark Binns, Ryman Healthcare chair and former Silver Fern Farms CEO Dean Hamilton and former Port of Tauranga CEO Mark Cairns, all men with sterling reputations.

Why did a board of this calibre support what's convenient for Jarden rather than consider the best interests of its shareholders?

Cairns had been interviewed to become Fletcher's chair, and given his engineering qualifications and operational experience, would have been a good choice, but he publicly withdrew from the running in July, saying he'd heard nothing from Fletcher in three months - just another proof-point of the board dysfunction.

As I've previously written, Chapman, a former banker with no building or construction industry experience, should never have been appointed to Fletcher's board, let alone be allowed to act as chair.

Another poison pill

She was inflicted on the company by former chair Ralph Norris after he had disgraced himself by presiding over what has turned out to be more than $1 billion of losses on high-rise construction projects.

Norris is well known to be Chapman's mentor – he had been chief executive of Commonwealth Bank of Australia when she was a CBA executive and he appointed her CEO of CBA subsidiary ASB Bank.

Chapman was one of a number of new directors who joined Fletcher's board the same day Norris stepped down and Hassall had also joined the board when Norris was chair.

In effect, Norris bequeathed Fletcher poison pill in the form of a dysfunctional board and Chapman appears determined to repeat the exercise – unlike Norris, she has given no indication of intention to resign once a permanent chair has been appointed.

How long is NZ Inc prepared to remain quiet in the face of such atrocious corporate governance?

Meanwhile, as Fletcher's retail shareholders ponder whether or not to participate in this latest raising, it's worth looking at the company's capital raising history since it was spun out of Fletcher Challenge in 2001.

Based on the 2001 annual report, Fletcher Building had a market cap about about $857 million on Aug 31, 2001 and its balance sheet showed total assets of $1.76 billion at June 30 that year.

Over those 23 years or so, the company has conducted eight capital raisings including this week's one, which raised a total of about $3.5 billion.

Fletcher's market capitalisation on Friday was $2.26 billion.