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More bad news as Fletcher plans $750m raising, asset sales

Fletcher Building is being forced to raise $750 million in an deeply-discounted offer to shareholders, and sell its Formica and steel roof tile businesses, as it attempts to strengthen its balance sheet and get support from its banking syndicate after breaching lending conditions.

The announcement comes alongside the news that Fletcher is not expected to make any profit from its five-year Puhoi to Warkworth Northern Motorway extension project - part of the "horizontal infrastructure" arm which was meant to supporting the company in troubled times.

The pro-rata one-for-4.46 accelerated entitlement offer is at $4.80 a share, or 23 percent below Fletchers' last trading price of $6.27. Proceeds from the offer will be used to repay some of Fletchers' $2.26 billion-worth of debt.

Fletcher has been gutted by $660 million losses in its Buildings and Interiors Division due to big cost overruns on constructions projects like the International Convention Centre and the now-completed Justice Precinct in Christchurch. The company has decided it won't be bidding for giant "vertical" construction projects in the foreseeable future.

"This looks like another project where Fletcher has taken a gamble on a risk and it hasn't paid off. Having gone off the rails on vertical construction, it looks like it's starting to go off the rails on horizontal infrastructure as well."

But until now it seemed like its horizonal infrastructure division - roads and the like - was trucking along fine.

Not so. Cost increases on Fletcher's huge SH1 Puhoi to Auckland motorway extension joint venture mean the company is now forecasting it will make no profit at all on the five-year construction project, business commentator Rod Oram told Radio New Zealand's Nine to Noon programme this morning.

"This looks like another project where Fletcher has taken a gamble on a risk and it hasn't paid off," Oram says. "Having gone off the rails on vertical construction, it looks like it's starting to go off the rails on horizontal infrastructure as well."

Meanwhile, Fletcher Building's new(ish) CEO Ross Taylor announced this morning the company has decided to focus its activities on New Zealand and Australia, and as part of that strategy will sell its Formica and Roof Tile Group businesses. 

“An outcome of the work that we have completed to date on the group strategy is that it is now appropriate to strengthen our balance sheet," Taylor said. "Reducing our net debt also provides us with the opportunity to undertake divestment processes for Formica and the Roof Tile Group on terms that should maximize shareholder returns."

Fletcher said it has also obtained a new $500 million standby facility that runs until at least January 2020 with ANZ Bank, Mitsubishi UFJ Financial Group and Westpac Banking Corp, and has obtained commitments "from the required majority of lenders to a permanent solution of the current breach under the syndicated facility agreement". The standby facility may only be used to repay holders of its $1.1 billion of notes in the US private placement market.

These holders have yet to agree to new terms following the covenant breaches. However, discussions with noteholders in the USPP market "are ongoing and Fletcher’s objective and expectation is that it will achieve a mutually acceptable outcome," the company said. "While not expected to be needed, proceeds from the offer and standby facility are sufficient to redeem all USPP Notes and pay associated costs if required."

It expects to reach an agreement with noteholders by May 31. Costs to repay the USP notes is estimated at up to $125 million. Fletcher's net debt would reduce to $1.5 billion from $2.26 billion as at March 31, it said.

Following the share offer, Fletcher said it expects normalised leverage to reduce to 1.6 times, at the lower end of the company’s revised target range of 1.5 times to 2.5 times, it said. The offer comes as a result of the company's strategic review, undertaken by new chief executive Ross Taylor.

Fletcher reiterated its guidance for full-year 2018 earnings before interest and tax to be $680 million to $720 million, with the loss from its Building & Interiors unit expected to be $660 million.

The institutional entitlement offer will be made today and tomorrow while the retail part of the offer will open on April 23.

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