Weyerhaeuser paid 'upper end' price for Longview

Weyerhaeuser clung on to its investment grade rating, after unveiling the $2.65bn purchase of Longview Timber at a price described as being at the "upper end" of the market, thanks to a deal structure which relies heavily on shareholders for financing.

Moody's on Monday restated its Baa3 rating on Weyerhaeuser, the lowest notch before junk territory, flagging that of the $2.45bn the timber group was raising to pay for the deal, roughly one-half will come from shareholders.

Weyerhaeuser - which owned or managed nearly 20m acres of North American timberland before the Longview Timber acquisition, which will add 645,000 acres said it would sell up to 34.2m shares, plus some $500m in convertible preference stock, to pay for the deal, which was announced on Sunday.

Moody's said that, thanks to the financial structure, it "expects that Weyerhaeuser's adjusted debt to ebitda (earnings before interest, taxation, depreciation and amortisation) will increase by less than half a turn", implying little increase to the effective debt burden.

Importance of Douglas fir

The ratings agency also highlighted that "the acquired 645,000 acres of timberlands in the Pacific Northwest should generate immediate cashflow given the high proportion of harvestable mature Douglas fir trees".

Douglas fir is prized for its resistance to splitting and warping, its size and its stiffness, notably on the Japanese market, Weyerhaeuser's top export destination.

Indeed, Moody's said that it "expects the strong export demand for these logs coupled with the improving US housing market will allow Weyerhaeuser to restore its leverage over the next 12-18 months".

However, the ratings agency also flagged that the $4,000 per acre that Weyerhaeuser is paying for the Longview timberlands, in Oregon and Washington states, is "on the upper end of transactions in the region".

Extra $1,000 per acre

Indeed, Weyerhaeuser paid roughly $1,000 per acre more for Longview than the seller, private equity house Brookfield Asset Management, which purchased them in 2007.

However, Weyerhaeuser chief executive Dan Fulton said that the deal was justified by the unique nature of the asset, plus its high proportion of Douglas fir trees, as situation next to existing group properties, which will enable the release of synergies.

"We really believe that this purchase price is fully supported by the cash flows and aggregate, this combination of elements just makes this a very good, attractive purchase for Weyerhaeuser," he said.

Weyerhaeuser estimated the synergies at $20m a year, both from cutting out duplicated costs "capitalising on our scale which will allow us to lower harvest costs and maximise our facilities" and by improving the marketing of logs, including to the important Japanese market.

'Excellent returns'

Canada-based Brookfield said that its asset management division would receive net cash proceeds of $600m after the deal, with its infrastructure division an additional payment of $470m, after paying off debt and private fund investors.

Brookfield, which separately sold to KapStone Paper and Packaging for $1.03bn a fibre business which had been part of Longview, said that "for investors in our funds these transactions represent monetisation at excellent returns".

And it added that, despite disposing of Longview, it believed that "timberland investments provide significant benefits to institutional investment portfolios and have a strong long-term potential for growth.

"Going forward, we will continue to pursue new timberland investment opportunities through our private fund initiatives with institutional investment partners," said Reid Carter, managing partner of Brookfield Timberlands.

Share market reaction

Weyerhaeuser's acquisition was well received by stock market investors, who sent the group's shares up 2.4% to $28.97 in midday deals in New York.

RBC analysts raised to $35, from $34, their target price for Weyerhaeuser shares.

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