Following investor dig, Potlatch to buy Deltic Timber in all-stock deal, report says

After staving off an investor-led push to be put on the auction block for nearly nine months, El Dorado-based Deltic Timber Corp. has succumbed to an all-stock deal to be acquired by larger rival and one of the larger timberland owners in Arkansas, according to a story published by the Wall Street Journal (WSJ) on Sunday.

Based on information from people familiar with the deal, Spokane, Wash.-based real estate investment trust (REIT) Potlatch Corp. is nearing a deal to purchase the South Arkansas timberland and real estate firm in an all stock deal that values both companies together at $3.3 billion. Once the deal closes and receives approval from both companies’ board of directors, Potlatch shareholders are set to own around 65% of the combined company, to be named PotlatchDeltic, WSJ reported.

For its part, Deltic shareholders are to receive 1.8 common shares of Potlatch for each share of Deltic that they own, according to people familiar with the deal. Based on Friday’s closing prices, that would amount to a roughly 7% premium for Deltic shareholders. Potlatch shares closed at $53, giving the company a market value of $2.2 billion. Deltic closed at $89.12, putting its value at $1.1 billion.

Although Potlatch is one of the largest timberland owners in Arkansas with nearly 410,000 acres of forestland across the state. Timber harvested in Arkansas is sold to the Potlatch mill in Warren, and to other area lumber and paper manufacturers, company officials said.

Deltic owns 530,000 acres of timberland, operates two sawmills and is engaged in real estate development, primarily in West Little Rock’s Chenal Valley. After splitting off from parent Murphy Oil Corp. in 1996, Deltic has primarily operated in Arkansas and north Louisiana.

REIT WAY
According to the WSJ, a Potlatch-Deltic combination would own nearly 2 million acres, with 1.1 million in the U.S. South, 600,000 in Idaho and 150,000 in Minnesota. Like many timberland giants such as Weyerhaeuser and Rayonier, Potlatch’s REIT structure allows it to pass on tax-deferred profits to shareholders.

As a result of the deal, WSJ reported, Deltic will attain REIT status, giving the new company a more-favorable tax structure. After converting to a REIT, Deltic’s accumulated earnings, estimated at $250 million, will be distributed to the combined company’s shareholders through a dividend, 80% in stock and the rest in cash by the end of next year, people familiar with the deal said.
Once approved, the companies anticipate about $50 million in synergies from the deal.

Mike Covey, chairman and chief executive of Potlatch, will serve in those roles at the combined company. Deltic CEO John Enlow will run the integration and serve as vice chairman, according to WSJ.

News of the Potlatch acquisition comes nearly two months after Talk Business & Politics reported that privately held Southeastern Asset Management Inc. led by Memphis billionaire Mason Hawkins had criticized Deltic Timber’s board of directors and revamped executive team for not seriously seeking “strategic alternatives” to sell the El Dorado-based timberland concern to a larger rival.

“We have learned that at least one highly reputable industrial party has made an unsolicited proposal to merge with Deltic in exchange for stock in the acquiring company,” Southeastern said in a Aug. 25 Scheduled 13D filing with the U.S. Securities and Exchange Commission. “While (we’ve) been willing to enter into an agreement with Deltic to help the Issuer evaluate this proposal, it has become clear after many attempts that Deltic is not serious about engaging with Southeastern at a substantive level.”

That caustic SEC filing caused Deltic Timber officials to counter that it was “making significant progress evaluating the (company’s) assets, competitive position, and market risks and opportunities … is now assessing a comprehensive range of strategic alternatives.” At the time, Deltic’s board of directors said it had not set a timetable for completion of its strategic alternatives process and would not provide assurances of any given specific outcome.

“Given the confidential nature of the discussions the company is undertaking, providing more detailed information at this time would be disruptive to developing the full range of potential outcomes. When the company is prepared to provide an update to the process, it intends to inform all shareholders at the same time,” Deltic said after hiring Wall Street giant Goldman Sachs as its financial advisor and New York City-based Davis Polk & Wardwell LLP as its legal representative.

The back-and-forth between Deltic and Southeastern has been ongoing since a first Schedule 13D filing on Feb. 22, when the Memphis-based investment giant said it wanted to play a bigger role and possibly participate in talks to help Deltic build “intrinsic value per share or to cause the company’s true economic value to be recognized.”

Deltic has since hired Enlow as its new CEO, fired its former chief financial officer Kenneth Mann for misappropriating company assets for personal use, and extended the tenure of Robert Nolan as board chairman beyond the company’s mandatory retirement age of 75. All those changes came after the unexpected resignation of longtime President and CEO Ray Dillon in December.

Southeastern, which holds a 15% stake in the former Murphy Oil spin-off, has said in the past an acquisition by a larger (REIT) with “superior, experience corporate leadership” would have prevented a change of control situation that led to possible misuse of company assets by the former CFO.

Potlatch is expected to report its third quarter earnings on Tuesday (Oct. 24), followed by Deltic Timber nearly a week later on Nov. 2. According to a Reuters news report on Sunday, a Potlatch-Deltic deal could be announced as early as Monday.