Fletcher Building’s decision to issue new shares and retain cash is a good one but it doesn’t come without some pain for shareholders.

The company needs capital to strengthen its balance sheet but it also needs to keep moving in the current climate.

Chief executive Jonathan Ling emphasised this point in a statement this morning, saying the company considered it prudent to adopt a more conservative capital structure.

“This will ensure that the company remains well positioned for current market conditions and is able to access growth opportunities as markets recover,” he says.

This signals that the board hasn’t become gun shy by their last major acquisition and is still confident the troubled Formica group can turn itself around.

Only time will tell, however, and as far as Fletcher’s board of directors are concerned, Formica had better prove its worth.

But in the meantime the company mustn’t get trapped on a treadmill.

Further acquisitions should be considered if and when appropriate so Fletcher needs to position itself accordingly.

The company intends raising between $465 million and $505 million of new equity through: 



- An underwritten placement to institutions of $405 million;

- A share purchase plan for New Zealand and Australian shareholders 
underwritten to $60 million; and

- A top-up offer to eligible shareholders to a maximum of $20 million.

The placement to institutional investors is set at a fixed price of $5.35-a-share, and is being underwritten by Goldman Sachs JBWere and Macquarie.

That compares with the last traded price of $6.20-a-share.

The proceeds from the equity raising will be used to reduce borrowings and strengthen the balance sheet.

Fletcher had $1.98 billion worth of bank loans with $378 million undrawn as at its last balance date.

If Fletcher raises $465 million its pro forma gearing as at December 31 will be reduced from 41.3% to 35.2% after unusual items.

Reducing borrowings is obviously vital in the present conditions. And an improvement in debt to equity will enable the company to maintain an investment grade rating – important for continued access to credit markets and debt funding on acceptable terms.

This mornings’ announcement though will cause some grief to existing shareholders.

Among the raft of measures to be taken, Fletcher says it is increasing its focus on cash retention through a reduction in the final dividend.

This means the dividend will be nearly halved to about 14c a share from 24.5c last year.

The exact level of dividend will be determined by earnings performance and trading conditions.

Fletcher has found itself in this position due to its acquisition strategy, which has boosted debt levels just as the market for its main products entered an unprecedented downturn.

Fletcher says it has undertaken a preliminary assessment of balance sheet carrying values which indicates a potential impairment of certain assets of up to $150 million may be required at balance date and a US tax benefit of $50 million will be written off. 



Most of the impairment comes courtesy of the laminates division, which includes US subsidiary Formica.

The company confirmed its previous guidance provided at the half year announcement that net earnings before unusual items for the full year is expected to be towards the lower end of the analysts' consensus range of $289 million to $336 million, "assuming there is no significant further deterioration in trading conditions from those experienced in the year-to-date".

But it is working hard to cut costs and streamline the business. It plans further rationalising of business operations with associated costs to implement $25 million to $45 million and is spending up to $100 million to improve efficiency and lower unit costs.