This past weekend the market was struck by the announcement that Weyerhaeuser (NYSE:WY) and Plum Creek (NYSE:PCL) are merging. The two entities will become one larger company under the Weyerhaeuser name. Weyerhaeuser shareholders will maintain the majority 65 percent of the share pool. The company will be based out of Seattle, Washington.
Both of these REITs have the largest market capitalization in the timber sector, each owning over six million acres in the United States. They say that scale will end up leading to annual cost savings of US$100 million. Of course this news has led to rumors of potential layoffs. Although Weyerhaeuser already enjoys presence in the Southern US, the acquisition of Plum Creek will certainly strengthen their footprint in the region. Consequently, the company will be in a far better position in the domestic market and housing recovery.
The timber category trailed other REIT sectors in the second quarter, as we have talked about several times in our weekly reports. This is due to the fact that the housing market has not recovered as soon as initially predicted. In addition, the strengthening of the U.S. Dollar has resulted in more expensive US timber abroad and made Canadian lumber far more competitive. Also, Chinese markets have failed to absorb supply, resulting in increased inventory at their ports. Different from the third quarter, results in the second quarter were not good.
The Q2 weak results combined with the selloff in August decreased timber REIT stocks as a whole. Timber stocks were down 14 percent year to date as of last Friday. Weyerhaeuser stock was down 15 percent and Plum Creek stock decreased by 6 percent. CatchMark Timber Trust (NYSE:CTT) was the only flat timber REIT stock this year.
Those factors have certainly put a lot of pressure on the timber industry. As we can tell, it has led to major action. In an environment where timber prices are put to the test, operational synergy is just one of many reasons that a merger of this size makes business sense. In the end, the costs need to decrease, and the performance must increase.
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