The rise and fall (and rise again?) of the Reverse Morris Trust (RMT)

Implications: Think back to about a decade ago, things in the Integrated Forest Products were going well. The Mega take over’s and Corporate Raids were pretty much over – Sir James Goldsmiths et al. had raided Crown Zellerback, and forced Champion International to "White Night" Saint Regis to avoid being dismantled. 1995 was a record year for paper and pulp profits, with 1996 being very strong also. Lumber had a record year in 1994 and was string again in 1996. There was always the ENGOs to deal with, and some rumblings were being heard from Wall Street on "unlocking timber values". Georgia Pacific was making a strong effort to deflect this growing concern over Fee ownership. If you might recall, GP had issued "letter stock" of its timber lands. This was met by luke warm excitement as investment community investors found it hard to believe that GP and others could "transfer" Fee timber to it’s own mills at a truly fair rate. GP then gave up more control and formed the Timber Company (Timber).

Analysis: This organization promised to make transfer pricing more transparent and fair, with less control on GPs side.

After a period of time, GP and Plum Creek announced a "merger" of the Timber Company and Plum Creek, and were employing a little known financial instrument called the Reverse Morris Trust. The RMT was established in 1966, as a tool to encourage mergers. It had seen seldom use, and the announcement took others by surprise. There were a few "hoops" to jump through but the payoff was a tax free merger for all parties involved. The rules were that the acquiring company had to be smaller in both dollar value and size. So GP was to be acquired by Plum Creek. GP had to take the current operations and split it into 2 parts a keeper pile and a sell pile. So GP put the Timber Company in the sell pile and the remainder became the new GP. The Timber Company ceased to exist, as the GP timberlands were then folded into Plum Creek. In this time frame, Smuckers used the RMT in a large merger, and you will sometimes see the RMT referred to as the Smuckers Rule. The IRS became uneasy with the rule and made changes that kept others from employing the financial tool. In about 2002, the IRS relaxed the RMT, leaving the door open a crack for it's use.  

How easy would it be for WY to employ a RMT?, and others?

Assuming the company being acquired would by WY, the Keep Pile would by the paper and pulp mills, and the sell pile are the timberlands. We would need a smaller company in both size and dollars to take on the WY timberlands. I am not sure if a TIMO would work as a TIMO does not really own the lands, they manage for someone else (Retirement funds, etc), This would leave current REITS and the few Fee ownership companies left. That would probably boil down to Plum Creek, Rayonier, or MWV (still owns substantial Fee timberlands- but is on a clear exit strategy). Another option would be to create a ownership with the correct attributes to do the RMT. The former WY would then own very little Fee Timberlands - and would then need to negotiate a Timber SUpply Agreement to ensure that a good portion of that fiber is captured by the WY mills. Let's not forget we need to update a lot of legal timberlands records prior to completion. Since the possible partners are for the most part REITs, at least that part of the transaction would be easier to implement.