WEYERHAEUSER CO. $84 (New York symbol WY; Conservative Growth Portfolio, Resources sector; Shares outstanding: 236.5 million; Market cap: $19.9 billion; WSSF Rating: Average) is a leading forest products company, with 6.4 million acres of timberland in the United States, and 30 million acres of leased timberland in Canada. It makes a wide variety of wood products for the construction industry, as well as cardboard packaging.
In August 2006, Weyerhaeuser agreed to merge its fine-paper operations with Canadian forest products company Domtar Inc. Weyerhaeuser will own 55% of the new company, which will be North America’s largest producer of uncoated paper. Domtar will also pay Weyerhaeuser $1.35 billion.
Weyerhaeuser is giving its investors the choice of keeping their Weyerhaeuser shares, or exchanging them for stock in the new company.
Stockholders can tender all or part of their shares, subject to a limit of 11.1442 shares of Domtar per Weyerhaeuser share. Weyerhaeuser has designed the offer so that its investors will get to acquire Domtar stock at a 10% discount. The IRS will treat the swap as a tax-deferred exchange.
We feel the deal makes sense. Demand for fine paper is falling as more companies use the Internet to distribute annual reports, catalogs and other documents. The merger will give this new company the size it needs to compete with larger paper producers. Domtar is more risky than Weyerhaeuser, and does not pay a dividend, so we recommend only aggressive investors accept the offer.
Meanwhile, Weyerhaeuser earned $1.88 a share (total $450 million) in the fourth quarter of 2006, thanks to a $227 million after-tax refund of duties paid on lumber imported from Canada and a $43 million gain on the sale of an operation. It lost $0.86 a share ($211 million) a year earlier, mostly due to restructuring charges. Revenue slipped to $5.66 billion from $5.7 billion.
The stock has gained 30% since the Domtar announcement, and now trades at 25.8 times the $3.25 a share it will probably earn in 2007. That seems high, but Weyerhaeuser’s timberlands could be worth $50 per Weyerhaeuser share if it decides to spin them off. The $2.40 dividend yields 2.9%.
Weyerhaeuser is a buy.
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