Weyerhaeuser Adds to PNW Position, Taps Good Fit for CEO

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Weyerhaeuser made a flurry of announcements over the weekend, including its biggest timberland acquisition in recent memory, the appointment of a new CEO, and the intention to pursue strategic alternatives for the homebuilding business. Collectively, the incremental news is positive. The timberland deal doesn’t come cheap relative to recent transactions, but given the high quality of the Pacific Northwest acreage (majority Douglas fir, very mature trees), some premium over typical pricing was probably warranted. New CEO Doyle Simons seems like a good fit, given his solid record in the same role at Temple-Inland. Before selling out to International Paper, Simons had delivered strong margin improvement by way of operational efficiencies and could conceivably do the same with Weyerhaeuser’s gargantuan wood product business.

Finally, the prospective sale of the homebuilding unit makes strategic sense and would come at a good time, given elevated valuations in the industry. Our $31 fair value estimate is unchanged pending some future announcement regarding the fate of the homebuilding segment. Our economic moat rating of none is also unchanged.

The announced purchase of 645,000 acres in the Pacific Northwest adds to Weyerhaeuser’s strong position in the region, where it already owns 1,960,000 acres in Oregon and Washington. The acquired lands are situated close to existing Weyerhaeuser properties, which the firm believes ought to facilitate $20 million in overhead, logistics, and marketing synergies.

The deal makes a good deal of strategic sense. The region is already home to the most valuable timberland in the country, and we expect three key structural developments in the U.S. log market will play in its favor in the decade to come, increasing the value gap versus other U.S. timberland regions. First, the Pacific Northwest will be the biggest beneficiary of the devastation wrought by the mountain pine beetle in British Columbia. Historically, British Columbia had been a key supplier to the United States, but going forward, the province’s annual harvest is likely to fall 50% from prebeetle levels. This should engender a much tighter supply situation (and higher log prices) in the markets British Columbia has traditionally served: the same markets served by Weyerhaeuser’s Pacific Coast timberlands. Second, the Pacific Northwest is the only U.S. tree-growing region that can viably meet growing log demand from China, a country with a chronic domestic log shortage. Finally, the secular decline in U.S. paper demand will have little impact on the region. Before the housing slump, pulpwood logs destined for paper accounted for only 6% of Pacific Northwest harvest volume, versus 43% in the South.

The land doesn’t come cheap in relative terms, at $2.65 billion or $4,100 per acre. The majority of transactions in the region have been consummated in the $3,000-$4,000 band. But the quality of this acreage probably merits a premium, which makes the purchase price reasonable, in our view. The timberland is predominantly west of the Cascade range (entailing higher growth rates and better access to export markets), is primarily composed of highvalue Douglas fir trees, and is home to very mature trees. All told, these assets should be more expensive than the typical Pacific Northwest land.

Finally, CEO elect Simons looks like a good fit to take the reins from Fulton. Simons’ most relevant experience was as CEO of corrugated box maker Temple-Inland from 2008 until early 2012, when it was acquired by International Paper. Simons spearheaded Temple-Inland’s box plant transformation, which essentially entailed an overhaul of the firm’s production system, which ultimately generated improved operating efficiency and financial results. This achievement would seem to make him a logical candidate for the top job at Weyerhaeuser, where the vast wood product business (lumber and panel manufacturing) had been underperforming until the fairly recent surge in lumber and panel prices.

 

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