Susan Hare
If the pension funds behind the $1.03-billion takeover bid for TimberWest Forest Corp. are successful in their pursuit, they will have the flexibility to adopt a strategy that isn't exactly common for acquisitions: scaling back production.
Typically, private buyouts are struck so that fund managers can slash costs or restructure companies to make them more profitable. Or the companies are left alone because the revenues are already promising and the buyer simply wants a steady steam of cash flows. Yet British Columbia Investment Management Corp. and Public Sector Pension Investment Board could cut back TimberWest's production, which would slash revenues.
That may sound a bit wonky, but it makes sense. Trees are TimberWest's best assets -- the company also owns real estate on Vancouver Island -- and their asset value goes up the bigger the trees get. As a public company, TimberWest is subject to the whims of quarterly earnings; as a private company, the trees can grow for as long the pension funds want. The pension funds can also keep growing them until timber is very pricey, and then chop them for much more revenue per unit.
PSP also noted that timber is inflation sensitive, so its price goes up when the cost of a basket of goods increases. In a sense it's just like real estate, which sees higher rents over time. Moreover, lumber helps to diversify the buyers' portfolios.
PSP has been eyeing the asset for about a year, spokesman Mark Boutet said, while BCIMC has owned the company's convertible debentures since February, 2009. If the securities already owned were converted today, BCIMC would have a 22.5 per cent stake in TimberWest. Although PSP is new to the company, the two pension funds have worked closely together on other projects, so teaming up was a no-brainer.
Yet the two funds may not get the assets. TimberWest has negotiated a 60 day shopping period and better bids may surface -- though they would get an $18-million break fee if that happened.
BMO advised TimberWest on the sale and UBS provided an independent valuation. McCarthy Tétrault LLP served as legal counsel.
Tim Kiladze