20 April 2006

South Africa: Sappi Sells R200m of Forests to Lereko

Johannesburg — THE world's largest glossy paper maker, Sappi, has sold a quarter of its forestry land in SA to empowerment group Lereko Property Consortium in a move that it also hoped would help it resolve 43 land claims against it.

Virtually no progress was being made with the claims, which affected 40000ha of Sappi's 360000ha of forestry land, said André Wagenaar, CEO of the group's southern African business yesterday.

"One of the objectives of the deal is to help resolve the claims," he said.

Only two or three of the 43 claims were being investigated by government at the moment, Wagenaar said.

The number of claims against the paper maker, which is one of the largest land owners in SA, had increased from 17 at the end of 2004. Wagenaar said the current number was not expected to increase substantially.

Lereko, which will pay R224m for the land, is led by African National Congress heavyweights -- former tourism and environmental affairs minister Valli Moosa and former North West premier Popo Molefe.

Sappi said the value of the empowerment deal was derived from the approximate R900m market value of Sappi's land holdings, excluding the value of standing timber.

The group said the Lereko consortium, which incorporated Sappi staff, would investigate property development opportunities, such as tourism or retail on parts of Sappi's underutilised land. Sappi's land is mainly in Mpumalanga and KwaZulu- Natal.

The development of under-used land could be of financial benefit to Sappi, the group said.

It said Lereko had the management experience and skills base to unlock the potential value. Lereko had expertise in urban and rural development in particular.

Lereko Investments, which also holds interests in Imperial Group and Sun International, owns 46% of the Lereko Property Consortium.

Sappi Worker's Trust owns 30%. Nonprofit women's group Malibongwe and financial services company AMB Capital own 10% and 14% respectively.

The empowerment deal was likely to position Sappi well against the backdrop of a forest sector empowerment charter. A draft of the charter was published a year ago.

Water Affairs and Forestry Minister Buyelwa Sonjica welcomed the deal yesterday but said such deals "need to happen across the value chain and not only on the upstream side".

Wagenaar said Sappi was not considering an empowerment equity deal at group level, as it was a global business with extensive operations in Europe and the US.

Meanwhile, Global Credit Rating said yesterday that it had placed Sappi on a ratings watch but reaffirmed its long-term domestic ZAR currency rating of A and short-term rating of A1.

The agency said global paper market conditions led to a deteriorating trend in Sappi's profitability and cash flows since 2001 and that this had led to successive declines in key credit protection ratios.

Note was also taken of that fact that the group was subject to a high level of debt financing, given its involvement in the capital intensive paper industry, the agency said.

It also said, however, that the industry cycle appeared to start turning, with capacity in the US having reduced 10% last year, while a number of major European producers recently announced permanent plant closures.

Sappi gained 2,3% on the JSE yesterday to close at R89 a share.

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