West Fraser has too much cash

Forestry company is so flush, it is offering a $1 billion share buyback

Record high lumber prices leave West Fraser with big cash surplus. | Shutterstock

Record high lumber prices and a recent $4 billion acquisition have left West Fraser Timber Co. (TSX,NYSE:WFG) so flush with cash, it is offering a $1 billion substantial issuer bid.

Substantial issuer bids are offered by companies when they suddenly have an excess of cash on their balance sheets, according to Gowling WLG.

“As a result of ongoing consolidations in a number of industries where issuers are selling off assets or as a result of successful operations, some issuers are facing the challenge of having excess cash sitting on their balance sheets with no reasonably priced alternatives for deployment,” Gowling explains. “In those circumstances, an issuer might consider a normal course issuer bid or, where there is sufficient cash to be distributed, a substantial issuer bid.”

The company will use a “modified Dutch auction” in which it will buy shares from shareholders at a premium to current market prices.

It has set the price range for the auction at $85 to $98 per share. West Fraser’s share prices closed at $86.83 per share July 6. But they have spiked more than 5% on today’s announcement to $91.30 per share, as of 12:30 p.m. EST.

High demand for lumber in both the U.S. and Canada, and a shortage of supply, have sent lumber prices through the roof in recent months, reflected in big earnings for lumber producers 

West Fraser has also grown substantially since last year, following the $4 billion acquisition of Norbord Inc., which was completed in February this year. That acquisition and high lumber prices have roughly doubled West Fraser’s earnings and cash compared to 2020.

According to West Fraser’s most recent financial statements (which now reports in U.S. dollars), the newly expanded company had first quarter earnings of US$2.3 billion, compared with US$1.3 billion in the fourth quarter of 2020, and US$890 million in the first quarter of 2020.

That has left it with cash and equivalents of US$.1.4 billion in the first quarter of this year, compared with US$461 million in Q4 2020 and US$66 million in Q1 2020.

The auction will run from July 12 to August 17, “unless extended or withdrawn,” the company says in a news release.

While having a good cash balance is a positive sign, investors may read excess cash on balance sheets as an indication the company is not reinvesting enough. But companies like West Fraser, which has grown substantially in recent years with the acquisition of a number of American sawmills, may actually find themselves in a position where there are few good companies or assets available to buy.

West Fraser says up to 10% of the total issued and outstanding shares are up for auction. Shareholders are under no obligation to participate in the auction.

“Any shareholders who do not deposit their shares (or whose shares are not repurchased under the offer) will realize a proportionate increase in their equity interest in the company,” West Fraser notes.

nbennett@biv.com

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