Forest Products
All I want for Christmas is... what's left?
Our view: It has been a record year for Lumber M&A activity, with >$2.2 billion of transactions during 2021 alone (more than the prior five years combined). We highlighted several potential M&A opportunities in a note last December (link), including the more "obvious" opportunities involving situations where there was either a private equity owner or non-strategic owner likely to sell. Now that many of these have already occurred, a common question we receive from investors is, “what's left” to buy? In this note, we highlight some of the most attractive Lumber consolidation opportunities and which public companies would be most likely to be interested if the assets were to become available.
Why more consolidation?
We think the consolidation will make Lumber a more attractive business over time. In OSB markets, we have slowly seen increased consolidation result in higher average margins and a more rapid industry response to periods of low OSB prices. While it has taken longer to consolidate the lumber industry, we expect that West Fraser, Canfor, Interfor, and Weyerhaeuser will continue to play a key role in making the lumber business more attractive (although the last two years have left little to complain about).
For lumber producers, we think that geographic diversification is top of mind given that changing political and natural environments can negatively impact operations. Of the major producing regions, we view the US South as the most attractive region for growth followed by Alberta, the Pacific Northwest, and Eastern Canada. For producers with operations in British Columbia, the urgency to diversify production outside the high-risk province will be greater. We think that Canfor and potentially West Fraser could look to further diversify lumber production by expanding in Europe.
Finally, we expect that larger and publicly traded lumber producers will look to reduce volatility. Prior to its acquisition by West Fraser, Norbord notably introduced a "variable operating schedule" to match its own supply to market demand. This has prevented too much OSB from being produced despite record prices. We expect that as the Lumber industry becomes more consolidated, industry margins will become less volatile.
What's left?
US South. Given the elevated valuations on recent US South transactions and premiums vs. other regions, we think that privately owned US South sawmills could look to monetize. Although ownership of US South sawmills has increased over the years (we estimate ~46% of US South capacity is now owned by publicly traded lumber producers), there is still a long runway for consolidation with ~13.5 bbf of US South capacity operated by privately held producers. Producers in the region that we think would be the most attractive acquisition targets include: 1) Anthony Timberlands; 2) Biewer Lumber; 3) Collum's Lumber; 4) Jordan Lumber; 5) Langdale Forest Products; 6) Mission Forest Products; 7) Rex Lumber; 8) Two Rivers Lumber; 9) Vicksburg Forest Products; and, 10) The Westervelt Company.
Other North America. Despite recent consolidation, we think there are still some attractive acquisition opportunities outside the US South. We think some of the most attractive acquisition targets in other regions could include: 1) Alta Forest Products; 2) GreenFirst Forest Products; 3) RSG Forest Products; 4) Stimson Lumber; and, 5) Vanderwell. Idaho Timber, with operations in several regions, could also be attractive given its larger size.
Europe. We expect that both Canfor and West Fraser will look to grow in Europe over the next few years, with a particular focus on Scandinavia and Western Europe. In Scandinavia, we think ATA Timber, Derome Timber, SCA's Wood Division, Setra Group, or Versowood could be a good fit. In Europe, HS Timber, Ilim Timber, Mayr-Melnhof Holz, Pfeifer Holding, and the Rettenmeier Group could be attractive.
Over the past year, M&A activity has heated up in the wood products industry, with notable acquisitions in North America including:
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Canfor’s acquisition of Millar Western’s lumber assets for $329 million
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Interfor’s acquisition of EACOM Timber Corporation for ~$385 million
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West Fraser’s acquisition of Georgia-Pacific’s Allendale OSB mill for $350 million
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West Fraser’s acquisition of Angelina Forest Products for $276 million
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Sierra Pacific’s acquisition of Seneca Sawmill Company for an undisclosed amount
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Interfor’s acquisition of five Georgia-Pacific sawmills for $375 million
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GreenFirst Forest Product’s acquisition of Rayonier Advanced Material’s lumber and
newsprint assets for $214 million
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Interfor’s acquisition of WestRock’s Summerville sawmill for $59 million
In Europe, there has also been increased consolidation with recent acquisitions including:
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Segezha Group’s acquisition of Inter Forest Rus for $608 million
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Binderholz’s acquisition of BSW Timber for an undisclosed amount
Last year, we put forward our Top 10 Wood Products M&A Ideas (link). While we didn’t have the best hit rate, three transactions (Interfor acquires an Eastern Canadian platform, Rayonier Advanced sells its lumber and newsprint assets, and the inverse of Georgia-Pacific acquiresInterfor) did occur during the year and both Interfor’s acquisition of WestRock’s Summerville sawmill and Canfor’s acquisition of Millar Western were in our “other” ideas.
This year, we are taking a different approach. Instead, we outline the most attractive remaining wood product assets in North America and Europe that we think would be attractive acquisition targets if available for a fair price. We continue to believe that the lumber industry in particular is in need of further consolidation. We believe that M&A activity is likely to remain elevated in the near-term given large cash balances and elevated FCF generation.
The ability to deploy capital varies across our coverage universe. In our view, Canfor has the greatest ability to deploy capital with >C$1 billion of cash on hand. Other companies that we view as likely to engage in M&A activity include West Fraser Timber, Mercer International, Interfor, and Resolute Forest Products.