Vancouver-based Interfor (TSX:IFP.A) made the jump to North America's fifth largest lumber company this week in announcing a cash-and-shares agreement to purchase two sawmills and a remanufacturing plant in the U.S. South.
The $180 million deal to buy Georgia's Tolleson Lumber Co. comes within less than a year of three other sawmill acquisitions in the U.S. South and transforms the company from a regional to a continental lumber producer, Interfor president Duncan Davies said Tuesday.
"We've got what we call a continental platform," Davies said of the purchase agreement.
"We are really excited about what this does for us as a company. It gives us a continental footprint as opposed to being a regional player."
"It makes us a bigger player with a broader product line."
Davies said the acquisition does not mark the end of Interfor's plans to expand into the U.S.
"Our intention is to continue to grow the business," he said. "We are very interested in growing in the U.S. South."
Tolleson's two mills, in Perry and Preston, Georgia, have a lumber capacity of 400 million board feet a year, bringing Interfor's total lumber production capacity to 2.6 billion board feet per year. Only West Fraser, Canfor, Weyerhaeuser and Georgia Pacific are larger. Interfor is currently ranked eighth largest in North America by capacity.
Under the terms of the deal, Interfor is paying current owner Ilim Timber of Russia, $129.9 million for the two mills, plus 3.68 million Interfor shares. Ilim will have a a 5.5 per cent stake in Interfor once the deal closes.
Ilim and Interfor are also considering other initiatives together, from importing European lumber to co-operating in exports in other offshore markets. Davies said nothing specific has been discussed "but there should be some pretty interesting opportunities."
The cash and share arrangement gives Ilim continued exposure to the recovery of the U.S. market, Davies said. Ilim will also have one seat on Interfor's board of directors.
Davies said the acquisition made sense both strategically and financially. Interfor's three U.S. South mills are also in Georgia, creating an estimated $5 million-per-year saving in synergies. Tolleson's mills are also low-cost performers and will begin adding cash to Interfor's bottom line once the deal closes.
The price Interfor paid probably represents a premium to what Ilim Timber paid for the Tolleson mills when it bought the Georgia lumber producer in 2011, said RBC Capital Markets analyst Paul Quinn. But he said the deal marks a significant transformation for Interfor, which was essentially a small coastal B.C. company until a few years ago, when it started buying mills in the B.C. Interior and the U.S.
"This is a huge transformation. As a B.C. company, what a success story to be able to take that culture and swing it into different geographies. They are not all the same markets, they are not all the same customers," he said.
Quinn, who raised his target on Interfor to $19 a share up from $16, said investors appear to like the deal. Interfor shares closed Tuesday at $17.48, up $2.28 since Friday. The deal was announced over the holiday weekend.
For Davies, the deal has a personal side as well. Ten years ago, Tolleson CEO Rusty Wood headed the U.S. lumber lobby that was fighting Canadian lumber producers in the bitter softwood lumber war.
Davies and Wood met often during the dispute and developed a respect for each other despite their opposing views. Wood will remain with Interfor in an advisory capacity once the deal closes towards the end of the current quarter.
"We have joked about the fact that here we are, 10 years after, and we are coming together in one company working together," Davies said. "I am excited about what Rusty is going to be able to bring to the table for our company as we continue to go forward and grow our business in the U.S."
