Weyerhaeuser tax break may not stop pressure from Wall Street to restructure

WASHINGTON — A $182 million tax break for Weyerhaeuser, tucked inside the farm bill, was expected to help the century-old timber company fend off a major restructuring sought by Wall Street that could have forced it to sell off its mills and increase logging on its forest lands.

But Weyerhaeuser officials cautioned there are no guarantees the restructuring still won't happen.

Analysts believe the tax relief might not be enough to protect Weyerhaeuser. Its days could be numbered as the nation's last major integrated timber company — growing its own trees and milling them into lumber and other forest products.

Like Boeing, Microsoft, Nordstrom and Starbucks, Federal Way-based Weyerhaeuser is a quintessential Northwest company. Its roots run deep in a region where logging and mill work for decades was a way of life.

The company owns 1.1 million acres of prime timberland in Washington state and roughly the same in Oregon.

Nationwide, it owns 6.4 million acres, much of it across the Deep South, from East Texas to North Carolina.

The company also owns or manages vast forest acreages in Canada and South America.

Weyerhaeuser already has slimmed down.

It sold off its fine-paper business in 2007 and is now selling its containerboard-packaging operations in a deal that could be worth $6 billion. Its work force has dropped from 50,000 to 25,000.

Besides the timberland, the company still owns 28 softwood lumber mills in the United States and Canada, where it produces lumber, plywood and other manufactured products; five pulp mills, with a worldwide buyer's list; and a real-estate division operating in 10 states.

But continued pressure from Wall Street could force even more changes.

"They are the last of a breed," said Steven Chercover, an analyst with D.A. Davidson in Portland.

"The world has changed, and Weyerhaeuser has to change with it."

Most of the nation's major timber companies have converted their timberlands into real estate investment trusts, or REITs.

Wall Street loves REITs because they slash a company's tax bill, with the bulk of profits passed directly to stockholders, who have to pay the taxes.

Weyerhaeuser so far has been reluctant to form a REIT because under complicated federal laws it might have to divest itself of all operations not connected with actually growing and harvesting trees. The company has prided itself on being integrated.

Weyerhaeuser is taxed at a 35 percent corporate rate. Companies that have formed REITs, like Seattle's Plum Creek Timber, have reduced their tax bills to virtually zero, though stockholders still have a 15 percent capital-gains tax.

For more than a year, Weyerhaeuser lobbied for a change in the tax code to level the playing field and allow it to remain a fully integrated company.

Initially a separate bill was introduced, the Timber Revitalization and Economic Enhancement (TREE) Act. The act nearly was attached to energy legislation that passed Congress in December but was dropped during last-minute negotiations.

Weyerhaeuser officials, including Chairman Steve Rogel, continued to lobby lawmakers face to face, telling them the company's survival was at stake.

In the days after Weyerhaeuser reported a first quarter $148 million loss May 2, Rogel, along with Chief Executive Daniel Fulton, urged lawmakers to include the measure as a provision in the farm bill.

"We are facing an extremely difficult financial situation," the two wrote.

"Passage of the farm bill would be a significant factor to help us improve future financial returns. We believe the TREE Act is a key to our options for the next 100 years."

On the House side, Rep. Norm Dicks, D-Bremerton, lobbied Ways and Means Committee Chairman Charles Rangel, D-N.Y., and the Democratic leadership.

In the Senate, Washington's two Democratic senators, Patty Murray and Maria Cantwell, worked with the chairman of the Senate Finance Committee, Montana Sen. Max Baucus.

According to some reports, Baucus' support was cemented when the tax burden for Plum Creek and other timber companies with REITs was also eased. Plum Creek has major holdings in Montana.

"With the housing slowdown and global competition taking a toll, this provision will protect thousands of family wage jobs in Washington state," said Murray.

In the end, the legislation was included in the farm bill, which survived a presidential veto last week. Weyerhaeuser and some small timber companies will see their tax rate reduced from 35 percent to about 17 percent, congressional aides said.

"The TREE Act provides a level playing field," said Frank Mendizabal, a Weyerhaeuser spokesman.

"But Wall Street doesn't want an integrated company," he said.

"Strategy drives structure, and we haven't settled on any strategy. There may or may not be changes. There's not much we can say at this point."

Paul Latta, an analyst with McAdams Wright and Ragen in Seattle, said he expected the new tax language could make Weyerhaeuser "slightly more resistant" to forming a REIT. But he said the tax relief was not necessarily permanent.

"This could take some of the pressure off restructuring, but the emphasis is on the word 'some,' " Latta said. "But Wall Street isn't really looking at earnings, they are looking at assets. We will wait and see."