Our View: As DJ Khaled would say, "Another One". As far as acquisitions go, we think that Interfor paid a reasonable price considering how strong lumber markets are. At US$521/mfbm, the purchase price is well below replacement cost of ~US$650-700/mfbm and the mills have been more profitable than Interfor as a whole. In addition, we think that Interfor could eventually invest capital at the mills to increase productivity and reduce costs.
[This version of the note corrects the acquisition multiple.]
Interfor has reached an agreement to acquire four sawmills from Georgia Pacific – The four sawmills have a combined annual lumber production capacity of 720 mmfbm and will be acquired for US$375 million including working capital (or ~US$521/mfbm). The acquired assets generated US $53 million of EBITDA in Q1 alone, which would work out to a ~1.8x acquisition multiple on an annualized basis, but we caution against using current results to value lumber companies given the extraordinary pricing environment. Interfor intends to fund the acquisition with cash on hand, which is expected to close in Q3/21.
Sawmill details – The sawmills are located in: 1) Bay Springs, Mississippi [140 mmfbm]; 2) Fayette, Alabama [160 mmfbm]; 3) DeQuincy, Louisiana [200 mmfbm]; and, 4) Philomath, Oregon [220 mmfbm]. The sawmills at Bay Springs, Fayette, and Philomath are currently operating on a full shift basis, while the DeQuincy sawmill has been idled since May 2020 near the beginning of the COVID-19 pandemic. Interfor is evaluating a strategy and options for the DeQuincy sawmill, including re-start plans. The acquired assets generated $643 of EBITDA per mfbm during Q1, well ahead of Interfor at $589 per mfbm.
Getting bigger – Once the transaction has closed, we believe Interfor will be firmly entrenched as the fourth largest lumber producer in North America, with 3.9 bbf of capacity (behind only West Fraser, Canfor, and Weyerhaeuser). In addition, 57% of Interfor's production will be in the US South (from 55% previously) while 20% with be in the Pacific Northwest and 23% will be in BC. While we gave the company some flak for shrinking the asset base in 2019/2020, we give management credit for proactively finding opportunities to grow the company in an accretive way in 2021. As a reminder, Interfor also acquired a sawmill in Summerville, South Carolina earlier this year (click here for more details).
The balance sheet remains strong – Despite the US$375 million acquisition and $130 million special dividend to be paid, Interfor will only have ~$200 million of net debt on a pro-forma basis as of April 2021. This will leave net debt to invested capital at 13% and available liquidity at $500 million. With lumber prices still at record levels, we think that Interfor will continue to generate significant FCF over the coming quarters.