Interfor discussed purchase of Rayonier's three Georgia sawmills before US housing collapse, president reveals, says rekindled US$80M deal will provide Interfor with further geographic diversification, additional product lines, markets

Wendy Lisney

VANCOUVER, British Columbia , January 23, 2013 (Vancouver Sun) – International Forest Products announced Tuesday it is buying three sawmills in Georgia from American forest company Rayonier in a strategic move that gives the Vancouver-based forest company a base in the southern United States.

Interfor president Duncan Davies announced the $80-million purchase in a conference call from Swainsboro, Ga., saying the opportunity and the timing are right for the Canadian lumber company.

"It's an area we have wanted to invest in for a long time," he said. "We are pretty excited going forward."

The North American forest products sector is emerging from a five-year-long downturn, the worst in memory, precipitated by the 2007 collapse of the U.S. housing market.

Up to one-third of North American lumber capacity was shut down during the downturn, which saw U.S. housing starts plummet from more than two million a year in 2005 to 554,000 in 2009. The recovery has been gradual, with starts reaching 780,000 last year. One sign that the recovery has begun is home builder confidence, which is now the highest it has been in the last six years. The acquisition will mean Interfor's production is divided 50/50 between Canada and the United States. Interfor operates three mills in the B.C. Interior, two on the Coast and four in the U.S. Pacific Northwest.

The three Rayonier mills will increase Interfor's lumber capacity by 360 million board feet a year, to two billion board feet, and give it a more diversified product line at a time when lumber markets are in the early stages of what many analysts believe will be a five-year bull market.

"We are just starting to climb out of the hole," said analyst David Elstone, of ERA Forest Products Research. At 780,000, housing starts are still well below the average of 1.5 million a year, he said.

"We still have a long way to go just to get up to an average level of demand in terms of residential construction. So they are buying just as the cycle is turning and heading upwards."

Davies said the transaction "provides Interfor with an opportunity to grow our core lumber business" in an area where the company has been looking to invest. Interfor and Rayonier have an existing business relationship in the Pacific Northwest, where Rayonier provides logs for Interfor's mills, and the two companies were talking to each other about the southern U.S. deal before the market collapse.

Interfor approached Rayonier about rekindling the talks last fall. The deal is expected to close in late February or early March.

Davies did the deal Monday evening in negotiations with Rayonier that he described as cordial. Interfor and Rayonier will continue to have a relationship, he said, noting the sawmills will provide chips for Rayonier's pulp and cellulose chemical businesses.

"The acquisition of these sawmills is on-strategy for Inter-for," he said. "It represents growth in a region with attractive fundamentals, it provides Interfor with further geographic diversification and it provides Interfor with additional product lines and markets.

"The acquisition is rightsized both from a financing perspective and from a management perspective for Interfor and we believe the timing is right to take advantage of the recovery in the U.S. housing market."

Southern yellow pine lumber, which is what the sawmills produce, has emerged from the U.S. housing market collapse as the most profitable sector in the North American lumber business. The three sawmills, in Swainsboro, Baxley and Eatonton, G a., contributed $10 million in operating income to Rayonier in 2012.

Davies said he expects the three mills to contribute 260 million board feet to Interfor's 2013 production before hitting 360 million board feet in 2014. The transaction is to be financed from the unused portion of Interfor's credit lines, which stood at $125.2 million at the end of the third quarter of 2012, said senior vice-president John Horning.

He said Interfor expects that with cash flow it is generating from its existing operations plus Rayonier, "we are going to de-lever very quickly."

Davies said the acquisition is expected to contribute to Inter-for's free cash flow from the outset.

He also suggested that after it digests the Rayonier acquisition, Interfor will remain on the lookout for other growth opportunities.

"We have an interest in growing our business overall and I think there will be some opportunities here. I don't want to get into specifics at this point, but I like to think that Interfor would be viewed as an attractive candidate by other folks looking to do something other than operate their businesses," he said.

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