Summary
In announcing its 90 percent dividend cut, International Paper (IP) also cited the implementation of a common forest industry strategy in times of financial distress: the selling of timberlands. While IP has a potential deal in place to sell 143,000 acres, the terms are (1) contingent upon financing and (2) seemingly aggressive in a current timberland market that has seen three major potential deals withdrawn from the market or terminated.
Analysis
Liquidating timberlands to generate cash and pay down debt has long been a common strategy used by publicly-traded forest industry industrials. What is the current appetite for timberlands and what is the expected value generation for IP?
Although timberland is a relatively safe investment, it is a long-term investment that ties up cash and many institutional investors have locked in the timberland element of their portfolios right now. Still, in announcing the terms of selling 143,000 acres of timberlands in the US South, IP would receive the equivalent of over $1,900 per acre ($220 million in cash, $55 million in equity). However, the deal is contingent on the buyer raising sufficient financing. Unless the acres have strong alternative use potential (i.e. development) in certain areas, the transaction is not a sure thing. Our timberland transaction database indicates a $1,406 weighted average per acre value for industrial/institutional timberland sales in the South over the past five years. Assuming this reflects IPs 143,000 acres, that would generate just over $200 million. More recent transactions have priced out closer to $1,700.
However, the timberland market has shown cracks. Forest Capital Partners withdrew its 1.8 million acres from the market last quarter. St. Joe terminated its 67,000 acre sale in Florida. And GMO Renewable Resources has pulled its 326,000 acres in the US South from the market, as well.
