Summary

Potlatch's recent sale of timberland in Arkansas highlight two issues relevant to investors of publicly-traded that currently own timberlands (timber REITs) or formerly owned timberlands (forest industry C-corps).  First, industry-wide debt levels became sharply and increasingly burdensome with this period of minimal demand in housing-dependent end use markets (lumber, plywood, etc).  Two, timberlands provide firms with a relatively liquid asset that can supply cash on a near term basis.  Those firms with substantive debt that divested their timberland portfolios eliminated a ready option in this period of financial distress.

Analysis

The recent struggles faced by the forest industry put into question two strategies followed by these firms. One, the massive consolidation of forest industry firms in the 1980s and 90s generated confining debt levels. This M&A drive eliminated firms such as Champion International, Fort James, Union Camp, Willamette and others as independent, publicly-traded firms.


Two, the wholesale divestitures of company-owned timberlands left firms with few "liquid" assets in times of need. These transactions were largely tax-code driven (C-corps pay corporate income tax on timber sales; timber REITs and institutional investors do not)and motivated by urgent needs to restructure balance sheets and pay down debt. Potlatch's recent sale of timberland in Arkansas is a case in point, as they have debt due in 2009 at 13% that needs retiring.

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Analyses are solely the work of the authors and have not been edited or endorsed by GLG.