Weyerhaeuser Goes After MacBlo

If the takeover deal gets the necessary approvals, a combined Weyerhaeuser/MB would be the largest producer of lumber in Canada.

In a blockbuster move that surprised most people in the forestry industry, American forestry giant Weyerhaeuser announced in late June that it had reached an agreement to acquire Vancouver-based MacMillan Bloedel, one of Canada’s largest forest companies, in a deal worth $3.6 billion.

There has been much speculation about a consolidation within the BC forest industry, but it was generally thought that MacMillan Bloedel would likely be one of the companies doing the acquiring, rather than being acquired itself.

Already a major industry player, the move will further support Weyerhaeuser’s position in the global forest products market, giving it sales of $19.5 billion once MacBlo operations are absorbed. Even before this deal, Weyerhaeuser, based in Federal Way, Washington, was already the world’s largest producer of softwood lumber and market pulp, and the second largest manufacturer of oriented strand board.

This consolidation would create by far the largest lumber producer in Canada. Working with the numbers from Logging and Sawmilling Journal’s list of the Top 30 Softwood Lumber Producers, a combined Weyerhaeuser/MB operation would have lumber production well in excess of two billion board feet, easily outdistancing Slocan Forest Products, the current leader with production of 1.5 billion board feet.

This latest move continues a trend of consolidation and change within the Canadian forest industry over the last several years. Abitibi-Consolidated was formed two years ago from the merger of Abitibi-Price and Stone Consolidated, and last year Domtar took over EB Eddy and American forest company Bowater bought Avenor in a $2.5- billion deal. Resources giant Noranda recently spun off its forestry subsidiary into a separate company, Nexfor.

It’s clear that there’s still more industry consolidation to come. The week following the Weyerhaeuser/MacBlo deal, Louisiana Pacific, another American forestry giant, offered $600 million for Quebec-based Le Groupe Forex. Louisiana Pacific is a leading producer of oriented strand board (OSB) and Forex is the leading Canadian producer of OSB. Forex operations include three OSB facilities and two sawmills.

Prior to the proposed takeover of MacMillan Bloedel, Weyerhaeuser’s Canadian operations were already significant to its parent company. Canadian manufacturing represented 34 per cent of all softwood lumber output, 58 per cent of oriented strand board capacity and about 17 per cent of all Weyerhaeuser pulp and paper production.

Weyerhaeuser called the deal an "excel-lent strategic combination" for the company. "We are acquiring modern and well-maintained manufacturing facilities through-out Canada and the United States that fit naturally with our operations, plus we add some of the highest quality timberlands in Canada and the Southern US," said Steven R. Rogel, Weyerhaeuser chairman, president and chief executive officer.

"We’re merging with a company that also has been focusing on improving its operations to enhance shareholder return and employee safety," Rogel says. While Rogel did use the term "merging", it is clear that this is nothing less than a straightforward takeover of MB and the Weyerhaeuser name will sit atop all former MB operations.

MB President and CEO Tom Stephens has noted that combining the two companies will create an industry colossus. "We believe that this combination will create the powerhouse in the industry," says Stephens.

"While we were not seeking a merger of this nature, the terms of this agreement pro-vide an attractive premium to our share-holders, plus the opportunity to maintain an interest in the clear leader in the business. The value created for MacMillan Bloedel shareholders is a reflection of the benefits of the restructuring and transformation pro-gram underway over the last 18 months.

"MacMillan Bloedel’s people will be joining one of the world’s most highly respected companies that puts a priority on safety and is strongly committed to the environment," Stephens added.

While MB had been hard hit by a downturn in its traditionally strong Asian lumber markets in the last two years, the company had undergone a large-scale re-organization in the last year and a half under Stephens’ leadership. The company had reported better than expected financial results in the latest quarter.

Weyerhaeuser says it expects to realize approximately $219 million in annual benefits through savings in transportation and distribution, improving purchasing practices, increasing the balance in its manufacturing system and streamlining operations as a result of the takeover.

Expected to close this fall, the transaction is subject to normal regulatory approvals in the United States and Canada and court approval in Canada.

While the combination of operations could be viewed as complementary—in that MB’s operations and timberlands are primarily on the BC coast and Weyerhaeuser’s BC operations are in the Interior—it should by no means be considered a done deal. The takeover has to be approved by British Columbia’s NDP government, which has turned down large forestry mergers in the past. But BC Premier Glen Clark’s initial reaction was that it was "impressive" to see the confidence Weyerhaeuser has in BC.

Weyerhaeuser has a few things going in its favour in the deal. The company has a long-term base in the province, showing its commitment to BC through the ups and downs of the industry cycle. Since its operations to date have been in the BC Interior, it has been able to steer clear of the environmental confrontations that have hit the forest companies on the coast and the bad PR that accompanied these actions.

With its head office being just down the coast in Seattle, Weyerhaeuser arguably stands a better chance than, say, if the takeover had been proposed by an eastern Canadian company. The thought of an industrial icon like MB being run from Toronto or Montreal might have been too much for many British Columbians, who already feel too many industries are run from eastern Canada. In 1978, eastern-based Canadian Pacific and Domtar both took a run at MB, only to be rebuffed by then Premier Bill Bennett, who declared: "This province is not for sale."

If it indeed goes ahead, the transaction would add a significant new chapter to Weyerhaeuser’s involvement in Canada, which dates back 35 years.

Of its 35,000 North American employees 5,900 currently work for Weyerhaeuser Canada, which is headquartered in Vancouver. Weyerhaeuser manages 10.9 million acres of publicly owned forestland through long-term licenses in western Canada.

The company operates:

• Six sawmills in British Columbia’s southern interior, three sawmills in Alberta, one in Saskatchewan and two in Ontario. Combined annual capacity of all sawmills, which employ 1,700, is about 1.2 billion board feet. Lumber products include North American construction and appearance grades, J-grade for Japan and machine stress-rated, and performance-rated lumber for the truss industry.
• Three engineered panel products facilities, an engineered oriented strand board product using aspen fibre is manufactured at three processing facilities exceeds 800 million square feet (3/8-inch basis) annually. If the deal goes through, it will extinguish a proud name that has deep roots in the British Columbia forest industry, and indeed in the development of BC. MacMillan Bloedel currently employs 9,500 people—5,500 in Canada—and its operations include:
• Six lumber mills, many producing high-value specialty lumber from Western red cedar and other specialty grades in BC, two sawmills in Ontario, one sawmill in Saskatchewan and one in Alabama.
• Three oriented strand board facilities with an annual capacity of 1.1 billion square feet (3/8" basis). A new Saskatchewan OSB mill, currently under construction (see details on this project in the special Saskatchewan Forestry Expo Show Guide in this issue of Logging and Sawmilling Journal), will add 570 million square feet (3/8 basis).

The agreement also includes two plywood facilities in eastern Canada and one in Alabama.

2.8 million hectares of productive timberlands, of which a small part—173,000 hectares—is held in the United States.