More concerns have been raised about the wisdom of one of New Zealand's biggest listed-company deals in the past two years.
Graham Mackenzie, former managing director of Formica's New Zealand operation, said staff at Fletcher Building were not the only ones worried about the company's purchase of the US Formica Corporation last May.
The Business Herald on Thursday revealed senior staff had opposed the Formica deal and a complaint was lodged last April.
"It's a bloody scandal," Mackenzie said yesterday of the purchase, accusing Fletcher of over-paying, getting its timing wrong and choosing the wrong target company.
Having worked in the sector for many years, he said he knew only too well the challenges Fletcher was facing now and he feared the outcome.
"Fletchers were stitched up and this is not a matter of the sub-prime mortgage collapse," he said, criticising the US$700 million paid last year when the vendors had bought the business for only US$175 million three years before.
Mackenzie of Auckland worked for Cyanamid which sold Formica to managers but he ran Formica in New Zealand during the 1980s so watched last year's deal with keen interest.
American contacts in the sector expressed dismay at the deal, he said, particularly the price. Contacts working in the US investment banking sector were shocked at the price, even last year when the market was booming, Mackenzie said.
"This thing was flawed right from the start. My heart turned to stone when I read the article this week because this is a New Zealand company and they trumpeted what a wonderful acquisition they had made. I feel gutted about the whole thing," he said.
Mackenzie said Formica was not the US market leader in the field, a spot that was held by rival Wilsonart International.
He has never worked at Fletcher.
The deal by the country's biggest builder and a top-three NZX company made Fletcher the world's biggest laminate board maker.
Fletcher chief executive Jonathan Ling has defended the buy but admitted to Formica's poor financial performance. He blamed that partly on problems moving production from California to Ohio but said more problems related to the US sub-prime collapse and the credit crunch.
He was unable to give an update on Formica's financial outlook, saying this was inappropriate in light of this week's big capital notes issue.
Fletcher chairman Rod Deane has also stood behind the Formica deal, which he predicted last May had the capacity to be "transformational" just like the $754 million deal in September 2002 when Fletcher bought giant wallboard maker Laminex.
Critics say Formica has indeed been a transformation for Fletcher, but in a potentially calamitous way which will take some months to emerge.
Opponents fear big losses from Formica and writedowns in the June 2009 accounts to be announced in August.
Fletcher is being sued by Formica's private equity vendors Cerberus Capital Management and Oaktree Capital Management for US$21 million in the New York Supreme Court over final payments they claim are due.
The private equity duo bought the business four years ago for just US$175 million, taking it out of bankruptcy.
The two were not willing buyers but Formica's two largest unsecured creditors and assumed around US$427 million in debt.
The Formica company was founded in 1913, starting with a patented plastic-covered fabric for insulators and began making printed wood grain and marble finishes for furniture in 1927.
In 2002, it sought bankruptcy protection after a disastrous series of five ownership changes, kicking off in 1985.
WHY IT MATTERS
* Fletcher's US$700 million Formica deal was its biggest since listing in 2001.
* Fletcher has a market worth of $2.8 billion and is one of New Zealand's biggest companies.
* It employs about 18,500 people internationally.
* Its Formica purchase was at the peak of the market.
* The deal was seen as a world-beating Kiwi business victory.
* Now, it turns out alarm bells were sounded but went unheeded. Company insider says US contacts were shocked at the price Fletcher paid
Fletcher Building says market too volatile for Fielders buy
Fletcher Building has cancelled a deal to buy Adelaide-based steel-product company Fielders Australia, saying the market is too volatile.
Fletcher said it had agreed with vendors Hills Industries and FSR Investments to formally terminate the conditional deal to buy Fielders.
"The decision not to proceed with the acquisition at this time is not a reflection of the Fielders business but is indicative of the current market volatility and uncertainty in the Australian economy," said Jonathan Ling, Fletcher Building's chief executive.
Last month, Fletcher Building entered a conditional agreement to buy Fielders. Hills owns 60 per cent of it and FSR Investments has 40 per cent.
The sale was subject to due diligence, Australian regulatory approval and the approval of Fletcher's board of directors.
Fielders has annual sales of about $315.4 million and about 890 employees in Australia and Ling had praised it as a well-run business with a solid reputation for performance.
"It would complement our existing business units in Australia and New Zealand," he said.
On a brighter note, Matt Henry of Goldman Sachs JBWere this week noted Fletcher's solid foundations for a projected boom in Government infrastructure spending.
He was sticking to his "buy" advice, adding Fletcher Construction had 70 per cent of the New Zealand market share in building and the Government planned to escalate the already-growing level of fiscal support for infrastructure investment and tax relief.
"The benefits to FBU flow through the business," he said.
Fletcher shares closed at $5.70 yesterday, up 13c.