The Reit Stuff Complex Potlatch Deal Represents ‘New Approach To Doing Business’

If the proposed merger between Potlatch Corp. and Anderson-Tully Co. were a tree, it would look a lot more like the banyan of India than the cedar of North Idaho.

There are roots and branches everywhere.

But the goal of the deal announced three weeks ago, company officials and outside observers agree, is a taller tree.

“It’s a total new approach to doing business,” said Potlatch Chairman John Richards.

Potlatch and Anderson-Tully will blend their southern timber holdings into a new entity, Timberland Growth Corp.

Timberland will pay Anderson-Tully $410 million for 324,000 acres of mostly hardwood timber that has sustained the closely held operation since 1889.

Potlatch will spend $60 million to buy Anderson-Tully’s two sawmills and a veneer plant. Those facilities are located in Memphis, Tenn., - Anderson-Tully’s headquarters - and Vicksburg, Miss.

To pay for Anderson-Tully’s timber, Timberland Growth will issue stock as a real estate investment trust, or REIT, a first for the forestry industry. The specifics of the offering will not be known until the prospectus is filed, probably sometime this month.

Spokane-based Potlatch will participate by placing its 514,000 acres of Arkansas timberland into a limited partnership controlled by the REIT, which will also contribute its acreage to the partnership.

Potlatch will retain its sawmills in Warren and Prescott and a pulp mill at Cypress Bend, all in Arkansas.

President L. Pendleton Siegel said hardwood from the Anderson-Tully acreage will enable Potlatch to add a shift to the Warren mill.

Potlatch will hold the majority of partnership units based on its timber contribution, but the exact share depends on the stock market’s response to the Timberland offering.

Also, Potlatch will sign a long-term agreement to purchase all of the wood taken off Timberland properties. The price will be fixed by the market.

To assure arms-length dealing, Timberland will have a majority of directors not affiliated with Potlatch.

The independence accorded Timberland will determine how aggressively the market buys up the company’s stock, said Court Washburn, senior economist for the Hancock Timber Resource Group in Boston.

Hancock owns and manages timber for investors like pension funds that like the low risk and high returns possible if the resource is held long enough.

Washburn said traditional integrated timber companies that grow, harvest, process and sell their own lumber and paper have been selling off their lands because the stock market does not recognize the full value.

But they do not want to give up access to the timber off those lands, he said.

The value of the Timberland stock will be directly related to the value of the wood-supply agreements between the new company and Potlatch, he said.

In large part, that is because of the nature of REITs, which are not subject to federal taxation as long as they distribute at least 95 percent of their income to shareholders.

The greater the income from the supply agreements, the greater the dividends paid shareholders.

Washburn noted there’s an incentive for Potlatch to maximize the attractiveness of the REIT, as well.

Because they retain so small a portion of their earnings, REITs do not accumulate capital that enables them to purchase additional lands. They must issue new stock or debt to expand.

Those future issues will be better received if the initial offering maintains its value, he said.

“It’s exciting that someone is doing a timberland REIT,” said Washburn, adding that Hancock monitors all efforts by timber companies to enhance the value of their timber.

Richards said Potlatch decided to structure the deal with Anderson-Tully precisely because REITs have the potential to grow faster than an integrated timber company.

Conveniently, using a trust, a popular way of packaging other real estate investments, was opened up to timber companies by changes in federal tax law last year that were not specifically intended to help the industry.

“As soon as we saw those changes, we decided to move,” Richards said. At about the same time, the shareholders of Anderson-Tully authorized an investment banker to find a buyer for the company.

It wasn’t exactly a hard sell.

“Most people have known about the high quality of Anderson-Tully for years,” Richards said.

Siegel noted that Potlatch has not made a significant lands acquisition in decades. Holding on to timber can be a trying proposition, he said, because trees become more valuable the longer they remain standing, but the market does not always recognize the increase.

He said Timberland Growth will be an attractive alternative for landowners who want to sell their holdings because they can take limited partnership units in payment instead of cash.

Structuring the deal that way allows the seller to defer taxes, he said, and gives them a piece of a more diversified timber inventory.

But Potlatch will not be creating other REITs, he said.

Siegel added that the ‘90s have been the worst decade ever for the timber industry, especially for paper producers, because of global overcapacity.

Yet the value of timberland has increased an average of more than 18 percent per year since 1990, according to an index created by the National Foundation of Real Estate Investment Fiduciaries.

Siegel predicted Timberland Growth would begin adding to its timber holdings relatively quickly once it becomes an independent company.

Expansion by Timberland will not mean subtraction at Potlatch, Richards said.

He said the company expects to retain its remaining timber holdings in Minnesota and North Idaho, which together total more than one million acres.

Richards said the formation of Timberland Growth won’t change the way Potlatch or its North Idaho operations are managed.

The facilities at Lewiston, Pierce, St. Maries and Post Falls generate as much as 45 percent of the company’s revenues, he said. The plants employ 2,300, a total that has been relatively stable for more than a decade.

Company timberland supplies about 80 percent of the fiber needs of those plants, Siegel said.

Richards said that self-reliance will become an ever more important virtue for the forest products industry.

“When you look at what’s been going on in the U.S. and British Columbia, you can be very bullish about owning timber,” he said.

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