Closed capital markets forced Potlatch (NYSE:PCH) to revise its plans, but management believes the company should be able to complete the spinoff of its pulp business before the end of the year.
Potlatch's Parts
Potlatch is a real estate investment trust (REIT) that owns 1.7 million acres of land in Arkansas, Idaho, Minnesota and Wisconsin. The company's other businesses include:
- Wood Products - sells lumber, plywood and particleboard from eight manufacturing facilities in the U.S.;
- Pulp and Paperboard - produces bleached paperboard and pulp in four facilities in the U.S.; and
- Consumer Products - produces household tissue products in five facilities in the U.S. and comprises 55% of the total private label tissue product market.
Spinning Off The Pulp
Earlier in 2008, Potlatch announced that it was exploring a possible spinoff of its pulp-based businesses. Final separation was approved by its Board of Directors in July 2008 and the new entity was named Clearwater Paper.
The spinoff was designed to allow the company's separate businesses to focus more intently on their core functions. The old Potlatch would retain the company's 1.7 million acres of timberland and be a pure play timber REIT, while Clearwater Paper would get the Consumer Products and Pulp and Paperboard businesses, which comprised $1.2 billion in revenues in 2007. In the spinoff, the Wood Products sector would be split between the two entities, with the facility in Lewiston, Idaho going to Clearwater Paper, which shares a common location with a pulp mill.
Potlatch CEO Michael Covey said, "This spinoff will enable the management and board of both Potlatch and Clearwater Paper to have a sharper focus on their core businesses. Additionally, as two stand-alone entities with sound operations and talented management teams, both companies will be better positioned to manage and grow their businesses, leverage their distinct competitive strengths, attract and retain key employees and pursue value-creation opportunities such as acquisitions over the long-term." (To find out whether or not an executive has what it takes, read Is Your CEO Street Savvy?)
Spinning Off The Pulp 2.0: Closed Capital Markets
During the July 2008 conference call, management at Potlatch discussed the capital structure of the new entity. Clearwater would receive $175 million in unsecured debt and an asset-backed revolver with $75 million of capacity to meet short-term liquidity needs. At the time, Potlatch said it anticipated a BB rating on Clearwater's debt and that a completion date of mid-November was planned.
Since the July call, the world has changed dramatically and non-investment grade and investment grade companies alike are finding it difficult to access capital markets. The company admitted that the $175 million unsecured notes plan was no longer viable since "credit markets (are) currently in disarray." Thus, Potlatch used its October conference call to announce a two-step program to capitalize the new company. (To learn more about ratings, read What does investment grade mean?)
- Clearwater Paper will increase its asset-backed revolver to $120 million, request $50 million and remit the cash to the former parent company.
- Clearwater Paper will assume $100 million in credit sensitive debentures that mature in December 2009.
The ratio is planned at one share of Clearwater Paper for every 2.5 shares owned by Potlatch.
The credit sensitive debentures have a coupon that varies with the rating established by Standard & Poor's and Moody's. Currently, companies with a Ba1 rating from Moody's would pay a 12.5% coupon. If Clearwater Paper cannot roll over the debt in December 2009 when it matures, Potlatch management has stated that Potlatch will pay off the debt and take a note from Clearwater.
It is difficult to determine whether or not the spinoff will create value, given the tatters of the capital markets at present. Plum Creek Timber (NYSE:PCL) and Rayonier (NYSE:RYN) both have held up fairly well year-to-date, with Plum Creek down 25% and Rayonier down 35%. In addition, the Claymore/Clear Global Timber Index (NYSEArca:CUT) exchange-traded fund (ETF) is off a much greater 59%, although it should be noted that the ETF contains numerous other paper companies.
Bottom Line
The proposed spinoff by Potlatch of its pulp-based businesses is heading to a close before the end of the year, as management adapts its plans to deal with difficult capital markets. (Read more about spinoffs and other corporate actions at Cashing in on Corporate Restructuring.)
