Consolidation the answer for Plum Creek Timber

Home Channel News, August 7, 2000

Real estate investment trust set to buy Georgia-Pacific 's Timber Co. for $4 billion

SEATTLE-- Forest products suppliers may be starting to jockey for position as demand for their products among home builders and some dealers softens.

For some, consolidation is the answer. Plum Creek Timber, a real estate investment trust based here, announced on July 18 that it had signed a definitive agreement with Georgia Pacific to acquire The Timber Co., an operating group that G-P spun off in 1997 which owns and manages 4.7 million acres of timberland.

The agreement, which is subject to approval by each company's shareholders and by the Internal Revenue Service, is valued at around $4 billion. Timber Co. shareholders would receive 1.37 shares of Plum Creek's stock (which closed July 18 at $27.1875 per share) for each share of Timber Company stock they own. (Timber Co.'s stock closed at $24.75 per share July 18.) As part of this deal, Plum Creek would also assume $1 billion of Timber Co.'s debt. The transaction is expected to be tax-free for G-P and for shareholders of Plum Creek and Timber Co.

The merger would create the second-largest timberlands owner in the United States. (International Paper remains the largest owner of timberlands, with 12.5 million acres.) Plum Creek would own more than 7.9 million acres in 19 states, including 286,000 acres in Oregon, a state where Plum Creek had no assets, according to the Portland Oregonian, a daily newspaper. Rick Holley, Plum Creek's president and CEO, told analysts the afternoon of the transaction's announcement that his company valued Timber Co.'s timber assets at slightly under $800 per acre. According to filings with the Securities and Exchange Commission, the merged company is projected to generate $567 million in cash flow this fiscal year.

This consolidation of ownership, though, worries some environmental groups that for years have criticized Plum Creek severely for its forest management practices. The Oregonian quoted a Plum Creek spokesperson who insisted his company has been working to change its environmental practices.

Becomes 'consumer' directed

Holley will run the merged entity, although the actual operations of Timber Co. may. not change all that much. Timber Co. president and CEO Donald Glass is expected to be named chief operating officer of the merged entity. And Plum Creek said in a prepared statement that it intends to retain "substantially all" of Timber Co.'s employees as well as its offices in Atlanta.

Plum Creek would assume a 10-year supply agreement between Timber Co. and G-P, the Atlanta-based building products giant that is in the midst of a dramatic corporate realignment in terms of the portfolio of assets it operates. Only days before this deal was announced, G-P said it would pay $11 billion in cash and assumption of debt to acquire the Fort James Corp., a large paper maker. This deal would make G-P the country's largest tissue products manufacturer.

In an interview with CNBC, GP chairman Pete Correll said that the Fort James transaction was indicative of the direction his company is taking. "I think it's a big step in the transformation of Georgia Pacific from a commodity-based company to a company that has brands and deals directly with the consumer."

About its divestiture of Timber Co., Correll stated that the spinoff of that entity three years ago "demonstrated that manufacturers don't have to own timberlands to be competitive. We can proficiently procure wood and fiber for our manufacturing base independently on the open market."

G-P, which was founded as a company out of a lumberyard in 1927, has indicated that it could close some of its mills that don't fit its new corporate strategy.

Holley estimated that a larger Plum Creek Timber would ultimately have a market equity capitalization of around $5 billion. (The company's equity value, as of July 14, was $3.86 billion) He also expected the merger to produce cost savings of $15 million through "synergies" he did not elaborate upon.

Through the six months ended July 1, Timber Co. reported $204 million in sales, down 26.9 percent from the same period a year ago. More than 60 percent of the lumber it sold went to G-P. Timber Co.'s net income in the first half of the year was off 49.3 percent to $74 million. During that period, the company had returned $119 million to its shareholders through stock repurchases and dividends.

Plum Creek Timber converted on July 1, 1999, from being a Master Limited Partnership into a Real Estate Investment Trust, so comparisons between its latest two fiscal periods are not apples to apples because, under REIT accounting principals, they don't include revenue from unconsolidated subsidiaries. Through six months ended June 30, the company reported that its revenue was off 69 percent to $112 million; however, including its unconsolidated subsidiaries, its sales were off only 1.8 percent to $356.1 million. In the first half of the year, Plum Creek's net income rose 88.8 percent to $101.6 million.