Days after Maple Leaf Sports & Entertainment Ltd. chair Larry Tanenbaum celebrated a gritty Grey Cup victory with the Toronto Argonauts, the veteran private equity investor scored another hard-fought win in the New Brunswick woods.
After a six-year turnaround, Mr. Tanenbaum’s private equity fund Kilmer Group in recent weeks sold Chaleur Forest Products, based in Saint John, N.B., to Interfor Corp. IFP-T for a total of $400-million. For Interfor, based in Burnaby, B.C., the acquisition is part of an expansion strategy in Eastern Canada and the Southeast U.S., giving the company control of 30 per cent of New Brunswick’s Crown forests, along with the region’s most efficient lumber producer.
For Kilmer, the deal vindicated an old-school approach to private equity. Mr. Tanenbaum’s team focused on improving performance at sawmills. That’s a contrast to many fund mangers who have relied in recent years on making outsized returns by loading up a business with debt – in an era when interest rates were low and credit was easy to access – then flipping the investment to new owners.
However, interest rates have soared this year and banks have cut back on leveraged lending. Financial observers say that, going forward, making money in private equity will require a more hands-on approach.
While Mr. Tanenbaum is best known for his connections to the sporting world, his wealth largely comes from successful investments in sectors such as steel, paving, baking and bottling Coca-Cola.
In an e-mail explaining Kilmer’s investment in Chaleur, the 77-year-old billionaire said: “Value is what is derived when we strive to make things better as operationally focused investors.”
In New Brunswick, Kilmer built a business through three acquisitions, first buying the Chaleur sawmills in 2016, then purchasing Fornebu Lumber Company Inc. in 2018 and the cutting rights for Miramichi Lumber Products Inc. in 2020. As part of the Miramichi transaction, Kilmer settled debts with 70 of the company’s creditors and resolved a long-standing dispute with the provincial government.
“We cherished our working relationship with the Province of New Brunswick and found it to be a very desirable place to do business,” said Mr. Tanenbaum. The ability to successfully work through contentious issues with creditors, governments and other stakeholders is a hallmark of successful private equity investors, who frequently buy broken businesses.
Kilmer invested more than $40-million sprucing up Chaleur’s two sawmills, automating operations and buying new equipment that produces custom-cut lumber products, which no mill in the region can match. Chaleur built ties to Indigenous communities by increasing purchases from First Nations woodlots. The company also ramped up U.S. lumber sales, which now account for more than 60 per cent of revenues.
When RBC Capital Markets kicked off an auction for Chaleur in June – the investment bankers called it “Project Evergreen” – the marketing brochure offered buyers a shot at a business with 400 employees running two of “the lowest-cost mills in North America.”
Within five months, Chaleur sold for $325-million, in cash. Kilmer also received approximately US$45-million as its share of Chaleur’s countervailing and anti-dumping duty deposits with the U.S. government, along with a cash distribution prior to selling the sawmills.
“This acquisition is consistent with Interfor’s growth-focused strategy as a pure-play lumber producer and builds upon our recent expansion into Eastern Canada with further geographic diversity” said chief executive Ian Fillinger in a press release. “New Brunswick has a secure, high-quality and competitive log supply, a supportive investment environment and proximity to key Eastern markets.”
Interfor paid 6.5 times Chaleur’s earnings before interest, taxes, depreciation and amortization to buy the business, a significant premium to the valuation on Montreal-based lumber company EACOM, which Interfor acquired last year for $490-million.
While Mr. Tanenbaum didn’t disclose Kilmer’s overall profit, he said the Chaleur investment exceeded the asset manager’s target of a 20-per-cent annual return on its investments.