A Strategic Timberlands Deal
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, Weyerhaeuser Company (NYSE: WY) has made a good move to expand its U.S. timber portfolio by acquiring Longview Timber from Brookfield Asset Management. The total transaction was worth $2.65 billion, including the assumption of debt. Weyerhaeuser has not performed well on the market, gaining only 2.4% since the beginning of the year which is much lower than the S&P 500’s return of more than 12.6%. Should we invest in Weyerhaeuser at its current trading price? Let’s find out.
Weyerhaeuser operates as the public timber REIT, owning more than 6 million acres of timberland in the U.S. and an additional 13.9 million acres through long-term licenses in Canada. It operates in four main business segments: Timberlands, Wood Products, Cellulose Fibers and Real Estate. Most of its earnings, $322 million, or 40.9% of the total operating earnings, were generated from the Timberlands segment while the Cellulose Fibers segment ranked second with $223 million. The Wood Products and Real Estate segment contributed only $120 million and $105 million, respectively.
The strategic acquisition
With the acquisition of Longview Timber, Weyerhaeuser effectively acquired around 645,000 acres of high-quality timberland in Washington and Oregon. The deal totaled $2.65 billion, including debt structured as a stock purchase. In order to finance the deal, Weyerhaeuser intended to raise $2.45 billion (50% equity and 50% long-term debt issuance.) Weyerhaeuser saw that the acquisition was quite strategic, leveraging the company’s core competencies including logistics, marketing & merchandising.
The company expects to realize around $20 million annually in both cost and operational synergies from the deal. The acquisition will increase Weyerhaeuser’s U.S. timberland holdings to 6.6 million acres, a bit higher the holding of Plum Creek Timber (NYSE: PCL) which has around 6.3 million acres of timberland in 19 states in the U.S. Another smaller peer, Rayonier (NYSE: RYN), is considered the seventh largest private timberland owner in the U.S. with around 2.7 million acres of timberland and real estate in both the U.S. and New Zealand.
What might make investors excited is that the company raised its dividend right after the acquisition agreement. The company’s board plans to increase the quarterly dividend by 10%, from $0.20 per share to $0.22 per share. Weyerhaeuser thinks that this acquisition will enhance its ability to further raise its dividend payments to shareholders in the future. Weyerhaeuser is currently trading at $28.50 per share, with a total market cap of $15.60 billion. The market values the company at 19.25 times its forward earnings. At the current trading price, the forward dividend yield increased to 3%.
Cheapest valuation among its smaller peers
Interestingly, Weyerhaeuser is valued cheapest among its smaller peers. Plum Creek is trading at $46.70 per share, with a total market cap of around $7.6 billion. The market values Plum Creek at a much higher valuation, at 28.1 times its forward earnings. Plum Creek has around 5.2 million acres which are considered its core, while the rural land of 1.1 million acres and another 75,000 acres are in the development. Looking forward, the company intends to manage the 5.2 million acres of its core holding and divest or call for joint ventures for the rest. For the full year 2013, Plum Creek expects to generate around $1.25 to $1.50 per share in earnings per share, in line with analysts’ estimate of $1.40. Plum Creek offers its shareholders a higher dividend yield than Weyerhaeuser at 3.8%.
Rayonier also has a higher valuation. At $55.40 per share, Rayonier is worth $6.9 billion on the market. The market values Rayonier at 20.5 times its forward earnings. In the past twelve months, Rayonier generated around $370 million in operating income, or 80% of its total profits, from its Performance Fibers segment while its Real Estate and Forest Resources segments contributed $42 million and $51 million, respectively. The company has been implementing a $375 - $390 million project to convert 260,000 metric tons of absorbent materials to 190,000 metric tons of cellulose specialty material. This project will strengthen the company’s market leadership, increasing the growth of its Cellulose Specialties segment. The company reported that the project was quite attractive with 17%-20% internal rate of return, generating strong free cash flow. Rayonier also offers its shareholders a higher dividend yield than Weyerhaeuser, at 3.2%.
My Foolish take
The acquisition of Longview Timber will indeed enhance Weyerhaeuser's potential value. With its global leading positions, the lowest forward earnings valuation among its peers, a decent dividend yield, and the potential for annual operational and cost synergies, Weyerhaeuser could be a good buy for long-term investors at its current trading price.
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