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Lumber laggard

24 March 2006

Nearly a year has gone by since investor Franklin Mutual turned up with a large stake in Weyerhaeuser. Franklin noted that rivals to the US forest products firm had generated substantial value for shareholders by selling or spinning off their timber assets. So far Weyerhaeuser has refused to follow their lead. Given its lackluster stock performance, investors such as Franklin are unlikely to tolerate such stubbornness indefinitely.

Weyerhaeuser trades at a discount to the value of its assets. This year, it will earn around $688m from felling trees, according to JP Morgan. With timberland changing hands at up to 20 times pre-tax cash flow, Weyerhaeuser’s 5.7 million acres could fetch $14bn on the open market. The real estate business, which Goldman Sachs estimates will earn $835m in pre-tax profits this year, is worth another $5bn or so. Weyerhaeuser is the world’s largest producer of softwood lumber and runs a highly profitable packaging division. These businesses are valued north of $9bn by Prudential Securities.

Add up the pieces, subtract $7.5bn in company debt, and Weyerhaeuser could be worth $21bn. That’s $3bn more than its current market cap. To get there Weyerhaeuser has to unlock the value of its timber assets. Other forest products firms, such as Rayonier and Plum Creek, have done so by turning themselves into tax-advantaged REITs. That’s not such an easy move for Weyerhaeuser, whose non-timber operations are too large to put inside a REIT. The company also moans that a conversion would stick shareholders with a huge tax bill.

These arguments don’t stack up. Others have got round the tax issue. Weyerhaeuser could follow the example of Georgia Pacific, whose timber was spun off to shareholders and later merged with Plum Creek. The Georgia Pacific rump was recently acquired by Koch Industries. Instead, Weyerhaeuser prefers to stick with the old-fashioned vertically integrated ownership model. The company is so loathe to give up its timber land, that it’s lobbying Congress to reduce the corporate tax rate on timber profits. From the shareholders’ perspective, it would still be better for Weyerhaeuser to wave good-bye to its sylvan acres.


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