Ainsworth Lumber Co.'s $457-million (U.S.) acquisition of three oriented strandboard plants in Minnesota from Potlatch Corp. is a substantial wager on prices for the building material staying high, analysts say.
The transaction will make Ainsworth North America's fourth-largest producer of the plywood substitute known as OSB, company officials said during a conference call with analysts yesterday.
"It's an excellent fit with our business and our marketing and operating strategy," said Michael Ainsworth, the company's executive vice-president.
He said one of the advantages of the Potlatch mills in Minnesota is their proximity to Ainsworth's OSB plant in Barwick, Ont., about 440 kilometres north of Minneapolis.
Ainsworth acquired the Barwick plant when it bought Voyageur Panel Ltd. for $193-million in May from its owners, Boise Cascade Corp., Abitibi-Consolidated Inc. and two American insurance companies.
Ainsworth is buying the Potlatch plants at a time when strong demand from the U.S. housing market and lack of new supply has sent OSB prices soaring to $405 for 1,000 square feet in the United States from an average of $159 for 1,000 square feet in 2002.
Analysts say the deal could prove risky if prices were to weaken further in the near future.
"This one is definitely in the high-risk category," said Kevin Mason of Equity Research Assoc. in Gibsons, B.C.
Credit rating agency Standard & Poor's reacted to news of the acquisition by putting Ainsworth on credit watch with "negative" implications.
S&P said it wants to take a look at the impact of additional debt on Ainsworth "in a less robust pricing environment.
"Although the deal would improve Ainsworth's product diversity, and geographical balance, there is a concern about the Potlatch assets' effect on Ainsworth's overall cost position and the credit ratings could be lowered," S&P said.
Mr. Ainsworth said the Minnesota acquisition will be funded with cash on hand and new senior secured debt.
But he declined to say how much of the purchase will be funded from cash on hand. At the end of June, Ainsworth had $470.6-million in senior secured debt outstanding and $100-million in cash.
When it is completed, the latest acquisition will boost Ainsworth's annual OSB output by 65 per cent to 3.3 billion square feet annually. It already has OSB mills in British Columbia, Alberta and Ontario.
Ainsworth shares fell 75 cents to $31.50 on the Toronto Stock Exchange yesterday.
Analysts said the Potlatch deal is another sign that the forest sector is consolidating along specific product lines. But Ainsworth said it has not planning any more acquisitions.
"Going forward, unless we see a continuation of very high OSB prices for a prolonged period of time, I think what you can expect to from us here forward is debt reduction," Mr. Ainsworth said.
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