San Francisco-based New Forests is planning a new wave of deals, targeting up to $1.7 billion of Australia’s state-owned pine forests ahead of an expected surge in demand from China and the US. Source: The Australian
The company said that it had closed a new $707 million investment fund for timber assets in Australia and New Zealand.
It pulled in $490 million in a similar fundraiser four years ago that it used to buy privately owned forests and sawmills.
New Forests chief executive David Brand told The Wall Street Journal he planned to use the new war chest to target 250,000 hectares of plantations owned by the New South Wales and Western Australia governments, even though they may be unwilling to sell.
Most of the state-owned forests were planted after World War II, amid a panic over timber shortages after large swathes of domestic softwood were felled to build military installations, and later for reconstruction.
Australian forests now provide far too much softwood for the domestic market.
Companies such as New Forests and rivals like US investment fund Global Forest Partners in recent years were lured to Australia by a once-in-a-lifetime pipeline of deals after many of the nation’s private plantation companies collapsed following a disastrous flirtation with a tax-shrinking strategy.
Most of those companies and their assets have been sold, and investors are turning their attention back to state-owned assets.
New South Wales’ and Western Australia’s assets have been on the block, tentatively, since 2012, when Infrastructure Australia recommended that they be sold after a broad review of infrastructure with the potential to be privatized.
Neither New South Wales or Western Australia has moved to sell their plantations, but Brand said both are expected to follow the path of other states that have done so over the past two decades.
“Victoria sold theirs in 1998, Tasmania sold theirs into a joint venture, Queensland sold theirs, and last was South Australia,” Brand said. “There’s just Western Australia and New South Wales left.”
Supporting Brand’s case, Infrastructure Australia said two years ago that Western Australia and New South Wales were too cash-strapped to invest in growing their forestry assets and that they should consider selling them.
A spokeswoman for New South Wales’ Treasurer said it had no plans to sell the Forestry Corporation, which owns most of the state’s timber assets. The Western Australian government didn’t return a request for comment.
Still, there are signs that New South Wales, for one, may be looking to offload its timber assets.
Forestry Corporation was formed just last year, created as a corporate entity with an independent board and a new set of union agreements, possibly in an attempt to improve its financial performance ahead of a potential sale.
The pine forests across both states could be worth as much as $1.7 billion, based on the $670 million purchase of 100,000 hectares of timber assets in South Australia by Portland-based Campbell Group LLC in 2012.
New Forests’ Brand said he expected a huge surge in demand from China and the US for Australian and New Zealand hardwoods and softwoods in coming years.
China’s middle class is after more hardwood products, he said, for everything from writing materials to diapers and tissues.
Housing growth in the US and China is driving demand for softwood exports for use in frames and trusses, he said.
If New Forests failed to obtain the targeted government assets, it would buy up the few remaining private forestry assets in Australia, or companies in New Zealand’s 2-million-hectare forestry industry Brand said.
According to two people familiar with the matter, the company is already interested in buying assets belonging to Gunns and Forest Enterprises Australia Ltd, both of which went bankrupt in 2012 and 2010, respectively.
Those collapses followed the multi-billion dollar failures of Timbercorp and Great Southern in 2009, which ushered in a wave of foreign takeovers in Australia’s forestry sector after the government closed a loophole that had allowed some to claim an agricultural tax rebate.
The loophole had attracted new money that helped the companies plant new forests, but in 2007 Australia’s tax office took the view that many of the investors involved weren’t genuine farmers entitled to the rebate.
But by then the timber businesses had taken on massive debt as they raced to expand, relying on the sales of new plantation projects to pay off loans.
When new sales cratered after the tax ruling made the plantation assets unattractive to many investors, the large timber managed investment schemes collapsed under their debts.
