Monday, April 30, 2007

Mergers changing face of forest industry

Mergers changing face of forest industry
A survey shows B.C. is at the forefront of a process that is creating regionalized businesses

Gordon Hamilton
Vancouver Sun

Thursday, April 26, 2007

Mergers and acquisitions -- some of the largest of which involve Canadian companies -- are tearing down the vertically integrated global forest industry and rebuilding it as regionalized, specialty businesses, according to a new PricewaterhouseCoopers survey.

And British Columbia is at the forefront of this industry-wide transformation, where financial players -- such as New York's Third Avenue Management and B.C. billionaire Jim Pattison -- are influencing the new direction, said PwC partner Craig Campbell, who contributed to the report.

"Ownership has very much changed. It's not only visible in the name changes on the front gate, but also back in the share registers," Campbell said in an interview Wednesday.

The PwC survey, titled Branching Out, identifies Montreal-based Domtar Inc.'s $3.3-billion US consolidation with American giant Weyerhaeuser's fine paper business as the second-largest deal in the world last year, and suggests that Weyerhaeuser is not finished hiving off assets.

Weyerhaeuser operates three sawmills in the B.C. Interior. Its Kamloops pulp mill became part of the new Domtar. The report says Weyerhaeuser is North America's largest remaining vertically integrated player and is coming under mounting pressure to restructure its remaining assets.

"They will be looking at all their assets. Canada and B.C. would be front and centre in terms of what they are evaluating," Campbell said.

West Fraser Timber Co.'s $325-million US purchase of International Paper's southern U.S. sawmills, and Cascade's $476-million acquisition from Domtar of a 50-per-cent stake in Norampac, are in the top 10 North American deals of 2006.

The largest deal was International Paper's $5-billion US sale last December of 1.6 million hectares of southern U.S. forestlands to institutional timberland investors. International Paper has led the transformation away from large, vertically integrated companies, and today is a product specialist, focused on packaging and uncoated fine papers. It has a global reach, branching out into China, Brazil and Russia.

The new emerging business model has separated forestlands from manufacturing, selling them to timber investment management organizations. Pulp and paper companies are being uncoupled from sawmills and other wood products businesses.

In B.C., Weyerhaeuser's former coastal assets have been uncoupled; the private timberlands going into privately-owned Island Timberlands. The sawmills and Crown tenures were merged with Western Forest Products. The driving force behind the restructuring on the Coast was Brookfield Asset Management and its Tricap Restructuring Fund.

In the Interior, Canfor Corp. uncoupled its pulp assets from the sawmills last July, creating Canfor Pulp Income fund, which trades separately.

"The root cause of this is under-performance across the industry and when you have an under-performing industry, you get these financial players having a look, scratching their heads and asking 'why is this industry chronically under-performing?'"

The trend for the financial players is to sell off non-core assets and focus on core assets, he said. The next step after uncoupling assets, is horizontal consolidation across the different stages of the value chain, a model International Paper has already adopted.

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