The Deal: MeadWestvaco Sells U.S. Timberlands to Plum Creek

NEW YORK (TheStreet) Packaging products company MeadWestvaco (MWV) of Richmond, Va., said Monday it would sell its U.S. timberlands to Seattle timber owner Plum Creek Timber (PCL) and form joint ventures with the buyer comprised of MeadWest's development properties around Charleston, S.C., in a $1.5 billion deal.

The transaction will earn MeadWestvaco $1.1 billion, which it will mostly return to shareholders. The seller will no longer hold any timberland in the U.S. following the deal; its one remaining stand will be in the Santa Catarina state of southern Brazil.

The deal should close by the end of the year. It does not require a shareholder vote for either company.

"[This] acquisition meaningfully grows each of Plum Creek's core business segments: timber, land, and non-timber resources. It's a deal that positions us to capitalize on the growth in timber prices we see coming over the next several years from increasing demand, both domestically and internationally," said Plum Creek CEO Rick Holley on a call held to discuss the deal.

"At normalized demand levels of about 1.5 million housing starts, the U.S. South is likely to be called on to produce record levels of lumber and other wood products to help satisfy this demand. This leads directly to growing sawlog demand in the Southern region," Holley added.

MeadWestvaco executives discussed the deal Tuesday, Oct. 29.

"Looking ahead, MeadWestvaco will be even more focused on our core packaging and specialty chemicals business," said MeadWestvaco chairman and CEO John Luke on a Tuesday conference call. "It is an important step in our deliberate and strategic transformation."

Terms call for Plum Creek to acquire all of MeadWestvaco's U.S. forestlands and certain related assets, comprising approximately 501,000 acres in Alabama, Georgia, South Carolina, Virginia and West Virginia, for $934 million, of which approximately $74 million will be in cash and $860 million will be in a 10-year installment note from Plum Creek that MeadWestvaco intends to securitize or otherwise finance after closing.

The seller will retain rights to royalty and lease income for coal and wind use currently generated on 191,000 acres in West Virginia in the Marcellus Shale region.

"We expect a very easy integration of these lands into our existing portfolio. We will gain some additional efficiencies of scale by folding them into our own operations. For example, we will only be adding about 30 foresters as a result of the acquisition. That's roughly 40% fewer people than the staffing required to operate these lands independently," Holley said. "The addition of these forests will increase our annual harvest more than 15% and increase our presence in several vibrant Atlantic south markets."

MeadWestvaco and Plum Creek will enter into 25-year fiber supply agreements covering forestlands in Virginia and West Virginia to ensure a continuous supply of fiber to the seller's Covington, Va., paperboard mill.

While the intent of the timberland sale was to allow the seller to focus on its packaging and chemicals businesses, another division MeadWestvaco's community development and land management unit will gain a new investor, Plum Creek, with a newly launched partnership.

MeadWestvaco is placing 109,000 acres of diversified development lands in the Charleston, S.C., region, into the partnership as its contribution, while Plum Creek is investing $152 million. The implied value of the partnership is about $530 million, the companies said.

For that part of the venture that comprises active development projects, Plum Creek will contribute approximately $12.5 million for a 5% stake, while MeadWestvaco will hold a 95% stake. For long-term development projects, Plum Creek is putting in $140 million in cash for a 50% stake with MeadWestvaco holding the remaining 50%.

MeadWest's community development and land management business will lead the venture's activities across all development projects. Division president Kenneth Seeger will continue to head up that unit.

Plum Creek expects to finance the transaction using a combination of roughly 65% equity and 35% debt. It said it would issue about $700 million in equity and use the proceeds to pay down approximately $444 million of current debt and transaction fees, and to pay the $226 million cash portion of the acquisition and joint venture investments. It will also issue an $860-million 10-year market-rate installment note to MeadWestvaco.

Holley explained the financing wouldn't constrain Plum Creek from making future land deals as timberland investment firms put property on the market over the next three to five years.

"We think, as others do, that most of the transactions we'll see in the marketplace will continue to be smaller ones, [perhaps] 25,000-, 50,000-acre size," Holley said.

MeadWestvaco will return most proceeds obtained in the transaction to investors. The company estimates that net proceeds will be $950 million, after monetization of the installment note and payment of taxes and fees. Approximately $210 million will be used to repay an outstanding term loan in order to maintain the company's investment grade rating. An additional $75 million will be retained in the joint ventures to fund development activities. Some $665 million will remain for investors, MeadWest CFO E. Mark Rajkowiski said on the Tuesday call.

Bank of America Merrill Lynch and Goldman Sachs served advised MeadWestvaco on the deal. Gregory E. Ostling, Elliott V. Stein, Justin S. Rosenberg, and Damian L. Peterson at Wachtell, Lipton, Rosen & Katz, and Nelson Mullins Riley & Scarborough served as legal counsel. Greenhill provided an independent fairness opinion.

MeadWestvaco has a market value of $6.2 billion, while Plumb Creek Timber has a market value of $7.8 billion.

Written by Thomas Zadvydas in New York

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