Even though TimberWest Forest Corp. has the next 60 days to shop around for a better deal than the one offered by British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, it seems unlikely that one will materialize - at least outside of other pension funds.
On Monday, the two pension funds agreed to pay about $1-billion for the timber producer, which has been struggling since 2008. The collapse of the U.S. housing market and ensuing recession and financial crisis forced TimberWest to discontinue its generous cash dividend. The stapled units, which resemble income trust units, fell to a low of just $2.30 in early 2009.
Despite the volatility, many investors still see timber as an ideal asset: It tends to be uncorrelated with the stock market; and, more importantly, timber is unique in that when prices are low companies can opt to let their trees keep growing and become more valuable in the process.
Trouble is, TimberWest didn't really have the luxury of letting its trees grow because it had short-term financial obligations, including cash dividends. However, pension funds and university endowment funds (such as Harvard's) are ideal owners because they have the luxury of time: They tend to take long-term views on their investments because they do not have short-term financial commitments. So, if timber prices are in the dumps, these owners can indeed just wait out the slump.
Hancock Timber Resource Group, the Boston-based timberland portfolio manager, puts it this way on its website: "A unique characteristic of timberland is that it functions as both a factory and a warehouse. In other words, timber can be grown and then 'stored on the stump.' This gives investors the flexibility of harvesting trees when timber prices are up, and delaying harvests when prices are down."
According to HTRG, institutional investments in timberland was worth some $40-billion at the end of 2007. Given timber's ideal profile for long-term investors, the offer for TimberWest seems like a natural fit.