Unless you're a keen observer of the forest products business, you might have been surprised this month to see that the bidders for Longview Fibre Co. and its 587,000 acres of timberland were two obscure Portland investment companies.
Who are these guys with their $1.72 billion offer?
Turns out that The Campbell Group, which wants Longview's trees, is one of the largest private timberland owners in the country. And its partner in the Longview bid, Obsidian Finance Group, is led by a coterie of lawyers who once cut deals for now-defunct Willamette Industries.
The forest products industry is changing quickly, if quietly, and several Portland companies are in the thick of it.
"Just as oil and gas fund managers are concentrated in Dallas, Houston and Denver, and high-tech fund managers are concentrated in Silicon Valley, Portland is a natural location for timberland fund managers," said Matt Donegan, who, as co-president of Forest Capital Partners, is among those fund managers.
Historically, old-school timber giants such as International Paper Co. and Louisiana-Pacific Corp. managed vast empires that included both mills and forestland. But tax and business changes over the past decade encouraged specialization, and companies increasingly split ownership of the trees from production in the mills.
Enter privately held timber-investment management organizations, or TIMOs, which are quickly overtaking traditional publicly traded companies as owners of the nation's timberland.
Obsidian, although a part of the offer for Longview Fibre, is not a TIMO. It's a three-year-old private equity firm that consults and leads its own strategic acquisitions -- often turnaround jobs and post-bankruptcy restructuring. But the fact that Obsidian and Campbell hope to break apart the company fits into the larger industry trend.
Campbell would get Longview Fibre's trees, and Obsidian would take its pulp-and-paper mill in Longview, Wash., its 15 corrugated box plants across the country, and its Leavenworth, Wash., sawmill.
Favorable tax treatment
At their peak, International Paper, Louisiana-Pacific, Georgia-Pacific Corp. and Boise Cascade Corp. owned more than 25 million acres. TIMOs and other nonmanufacturing firms now own nearly all of those lands, with the exception of International Paper's holdings, which are being auctioned off. TIMOs are expected to be among the highest bidders.
Pension funds are the biggest investors in TIMOs nationwide, as they seek a hard asset that seems less volatile than stocks and that works well as a long-term investment. Federal tax rulings in recent years have allowed nonprofit endowments to invest in TIMOs with the same favorable tax treatment they have with stock-market investments, adding to the investors seeking timberland.
The Portland area appears to be one of three regions, along with Boston and Atlanta, that draw these timber finance groups .
Aside from Forest Capital and The Campbell Group, a regional office of Hancock Timber Resource Group is in Vancouver. With $5.2 billion under management at the end of 2005, Boston-based Hancock is the world's largest TIMO.
The Northwest could see more growth in such firms if more deals were to be had in the region, Donegan said. In the past decade, fund managers have bought eight tracts larger than 20,000 acres in the Northwest, compared with dozens of such deals in the Southeast, New England and Great Lakes areas, he said.
But the TIMO trend worries some who say that it could make forest ownership more distant, less transparent and perhaps less inclined towards conservation.
When some TIMOs invest, they break up large tracts of hundreds of thousands of acres into smaller parcels, sometimes one per investor, said Toby Atterbury, a Beaverton-based timberland consultant. Each investor may have different goals over the years, some of which may include real estate development, he said.
"So the timber companies have worked for hundreds of years to build these tree farms in Oregon and Washington," Atterbury said. "Now, that is being broken up. . . . Is it going to get the same treatment? It's a question."
Investors think long term
"The investor would want to build long-term value and would want the asset to perform in accordance with how they were contemplating investing in it: looking on a long-term, sustainable basis," Gilleland said.
The Campbell Group attributes a very small portion of the value of its Northwest timberlands to real estate development, Gilleland said.
For one, the region has relatively tight land-use laws compared with Southeastern states, restricting development opportunities. And unlike suburban Atlanta, where population growth is pushing new homes into former forests, the areas of prime forestland are relatively isolated from the fastest-growing communities, he said.
But with the Supreme Court upholding Measure 37, Oregon's land-use laws are in flux.
Eric Hovee, an economic consultant who has worked for the Oregon Forest Resources Institute, said privately held TIMOs are less transparent than their publicly traded predecessors when it comes to making decisions about their land.
"With this form of ownership being much more responsive to financial market objectives, there's some risk that local communities are more vulnerable to changes they have less control over," Hovee said.
Longview Fibre, for example, is led by managers with personal history in the Southwest Washington town that gave the company its name. Such companies, Hovee said, have tended to manage with an eye toward relations with the public and local government officials, not just investors.
With TIMOs, Hovee said, "the willingness to invest more in Oregon is played off against how their portfolio in New Zealand is doing."
"Companies like Weyerhaeuser are doing that in their own way already, but it is a different ballgame for a Roseburg (Forest Products Co.) or a Longview Fibre," Hovee said.
The Campbell Group's Gilleland said public pension funds and endowments, which make up many of TIMO investors, are just as interested in public stewardship as other investors.
But there is diversity among investors, as well as TIMOs, Hovee said.
"It's a new type of player," Hovee said. "The question right now isn't so much, 'Is that player good or bad?' It's too early to know, and we'll probably see a mix."The Oregonian
