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