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Grant Samuel View On Greymouth/Peak

Grant Samuel View On Greymouth/Peak

AUCKLAND, 5 March 2001 - Fletcher Challenge this afternoon provided a copy of a report the Board has today received from independent adviser Grant Samuel. The report is in response to a request from the Board, and relates to the recent proposal made by Greymouth/Peak.

At the time of this press release, Greymouth has filed proceedings in the Court of Appeal, which will resume tomorrow, Tuesday. In these proceedings they are seeking to have overturned last Friday¡¦s judgement by Justice Anderson, who ruled that the meeting of shareholders should proceed tomorrow. Greymouth is again seeking to have tomorrow¡¦s Special Meeting of Shareholders adjourned.

Fletcher Challenge Directors unanimously recommend that shareholders vote in favour of the Shell and Apache offer for Fletcher Challenge Energy, which is the only offer that can be put before shareholders for voting on at the meeting. The Board¡¦s recommendation is further supported by the findings and advice received from Grant Samuel.



Limited can be viewed at the Fletcher Challenge World Wide Web site, at

5 March 2001

The Directors
Fletcher Challenge Limited
810 Great South Road

Dear Directors

The Directors of Fletcher Challenge have requested Grant Samuel & Associates Limited (¡§Grant Samuel¡¨) to comment on the Greymouth Petroleum (¡§Greymouth¡¨) proposal to acquire the business of Fletcher Challenge Energy (¡§FC Energy¡¨).

Grant Samuel has reviewed a copy of the Greymouth proposal dated 26 February 2000, a letter from PennWest Petroleum Limited (¡§PennWest¡¨) to Greymouth dated 18 February 2001 and press releases from Greymouth, Shell and Fletcher Challenge.

Shareholders of FC Energy are being asked to approve an offer from Shell Overseas Holdings Limited and Apache Corporation (the ¡§Shell Offer¡¨) to acquire the business of FC Energy. A key component of the consideration is the cash consideration of US$3.55 per share from Shell.

The Shell Offer is unconditional and will be likely to be settled by the end of March 2001.

The Greymouth proposal has essentially the same structure as the Shell Offer, with the exception that the proposed cash consideration is US$3.85 per share. The proposed cash consideration is 8.5 % higher than the revised Shell Offer. The proposal is not in the form of a formal offer that could be accepted by Fletcher Challenge and is conditional upon Greymouth and its bankers being satisfied with a due diligence review of FC Energy.

Fletcher Challenge entered into a binding agreement to sell FC Energy¡¦s E&P assets to Shell/Apache (subject to regulatory and shareholder approvals) having completed a formal sale process. The proposal from Greymouth was unsolicited and Grant Samuel understands that Fletcher Challenge has given it due consideration in the context of its obligations under the agreement with Shell to continue to work towards completion of the Energy Transaction in good faith. Grant Samuel has been asked to comment on the proposal from Greymouth to assist FC Energy shareholders to evaluate the Shell Offer in the light of these recent developments.

Grant Samuel has no reason to believe that Greymouth is not committed to moving to be in a position to make a binding offer to Fletcher Challenge. However, the timing of its proposal has meant that there is considerable uncertainty and risk which shareholders of Fletcher Challenge are being asked to bear.


„X Shell and Apache have conducted significant due diligence. Their final offers reflected the due diligence findings. In Grant Samuel¡¦s opinion, there are matters which are highly unlikely to have been factored into Greymouth¡¦s analysis, which would only come to light during due diligence;

„X the transaction with Shell is reasonably complex. There are only very limited warranties given by Fletcher Challenge. Shell has agreed to enter into an assets and liabilities deed guaranteeing certain obligations of FC Energy. Greymouth would be required to enter into a similar deed. The Directors of Fletcher Challenge would need to be satisfied that Greymouth could meet any obligations under the deed;

„X the proposed Greymouth offer price is attractive when compared with Shell. Greymouth can give no assurance that the $3.85 price will be converted into a binding offer. Greymouth has, understandably, declined to make its bid unconditional;

„X the Greymouth proposal is leveraged and dependent upon bank finance and PennWest confirming the purchase of FC Energy¡¦s Canadian and Argentinean assets for a US$750 million;

„X there is a potential foreign exchange risk due to the time period between the settlement of the Shell Offer and the settlement date of any offer from Greymouth, which will not be less than 3 months later, and is understood to be as much as 6 months later. The foreign exchange risk applies to the cash consideration and the Capstone shares. In addition, there is a risk associated with the Capstone shares, where investors will have to wait a further period before being in a position to decide whether to sell or hold their entitlements to these shares. The Capstone share price has been reasonably volatile over the last three months;

„X Shell and Apache are able to terminate their agreement with Fletcher Challenge. Shell and Apache have invested considerable time and resources in the transaction and will not take the decision to exit lightly. However, both companies have indicated that this is a possible outcome. If Shell withdraws its offer as a result of FC Energy shareholder approval not being received and, unless another party comes forward, which appears unlikely given the time in which they have to do so, the only alternatives facing Fletcher Challenge are to list FC Energy as a stand alone company or to negotiate an agreement with Greymouth and/or other parties;

„X Greymouth is able to walk away or change the terms of its proposal. It is under no legal obligation to continue with the terms indicated in its proposal. Indeed, the Directors of Greymouth must act in the best interests of Greymouth, not the shareholders of FC Energy. They can only be expected to act commercially. The not inconsiderable uncertainty surrounding due diligence which, in Grant Samuel¡¦s opinion, should not be underestimated, combined with the volatility of capital markets and the oil and gas markets are risks which only the FC Energy shareholders are being asked to bear until when, and if, a binding offer is received from Greymouth;

„X the compensation for the risk is US$0.30 cents (NZ$0.70 cents) which is equivalent to 7.6% of the closing share price of NZ$9.13 for FC Energy shares on Friday 2 March. Since the Shell Offer was announced, the FC Energy price has traded between NZ$8.00 and NZ$9.40, a range of $1.40 per share;

„X a due diligence investigation of FC Energy may result in:

„h Greymouth not completing its takeover proposal; or
„h Greymouth reducing its offer price.

Greymouth has stated that there is a possibility that it may offer a higher price following completion of a due diligence review of FC Energy. Whilst this is possible, Grant Samuel¡¦s opinion is that some issues arising out of the complex Fletcher Challenge separation process (that may not exist were the sale of FC Energy to be a normal corporate or asset based transaction) would encourage a prospective purchaser to pay less, rather than more for FC Energy;

„X in the intervening period leading up to completion of a transaction with Greymouth, the price of oil and gas may deteriorate. There is no guarantee that Greymouth will not revise its offer price if the market for oil and gas weakens and no guarantee that Greymouth will increase its offer if market conditions improve;

„X it is not unusual for a prospective purchaser to make a conditional offer to purchase an asset without making any financial commitment, current circumstances are beyond what Grant Samuel considers to be a normal course of events. FC Energy shareholders are being asked to place at risk an offer from Shell Apache on the strength of Greymouth¡¦s statements that it is genuinely interested in purchasing FC Energy¡¦s E&P assets. It is reasonable to accept that Greymouth cannot make an unconditional offer but unreasonable to expect FC Energy shareholders place the Shell Offer at risk in return for a possible premium of 8.5% over the Shell Offer if a transaction with Greymouth is completed;

„X the transaction with Shell is complex due largely to complications arising from unwinding Fletcher Challenge¡¦s letter stock structure. It will take time to fully understand all the issues and assess any contingent liabilities that may arise before Greymouth will be willing to enter into an arrangement that replicates Shell¡¦s position. If an agreement is reached Fletcher Challenge will then need to seek approval from the High Court and shareholders for a new Scheme of Arrangement. The Shell Offer was announced on 10 October 2000 and the target for completion is some five months later. Despite Greymouth¡¦s best intentions, the complexity of the transaction is such that it will be unlikely to complete due diligence and negotiate an unconditional agreement with Fletcher Challenge by 23 March 2001;

„X if FC Energy shareholders vote against the Shell Offer they will be left with a continuation of the current Fletcher Challenge letter stock arrangement with its associated advantages and disadvantages until such time as the fate of FC Energy has been decided.


The decision to vote in favour of the Shell Offer or not is a matter for individual shareholders. The possibility of a higher offer from Greymouth may be appealing. There is a risk, arising from a number of factors, that Greymouth, despite its best intentions, will not make an offer or the offer will be less advantageous than that set out in its current proposal. This risk of these outcomes is being carried by the existing Fletcher Challenge shareholders. The proposed compensation for taking on this risk, if the shareholders vote against a sale to Shell and the agreement with Shell expires, is US$0.30 (approximately NZ$0.70). There is also the time cost of money that arises as a result of Greymouth¡¦s later settlement date to be considered.

If a bid does not eventuate from Greymouth, and the agreement with Shell has expired, Shell will be under no obligation to make a new offer.

On the other hand, if shareholders approve the Shell Offer there is virtual certainty that they will receive the Shell consideration prior to the end of March 2001.

Yours faithfully

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