Weyerhaeuser under pressure for more change

In less than two years, Weyerhaeuser has jettisoned under pressure more than $7 billion worth of businesses — vanished revenues that taken together would rank as Washington's 9th largest corporation, just behind Nordstrom.

But Weyerhaeuser's mammoth contraction is hardly over. Wall Street is demanding changes that could turn the Federal Way timber giant from a diversified manufacturer into a pared-down cash cow for investors hunting for more lucrative returns on timber and real-estate assets.

That would mark a radical turnabout for a 108-year-old company that historically has embraced risks about as quickly as a Douglas fir grows. And it would emphatically repudiate Weyerhaeuser's expansion strategy, capped by its 2002 takeover of rival Willamette Industries after a lengthy hostile pursuit.

The clamor for change from big investors could intensify Tuesday, when Weyerhaeuser is expected to report its third straight quarterly loss. The company likely will finish the year without a profit for the first time since 1991.

Already, Chief Executive Dan Fulton has warned that the downsized Weyerhaeuser still has surplus workers and that it will require "action of a magnitude we've never seen before."

Weyerhaeuser's unprecedented retrenchment amid a slumping economy raises the specter of further drastic changes at yet another major employer in the Northwest. Weyerhaeuser is one of the region's oldest and most iconic corporations, a global player with nearly 38,000 employees, including 7,000 in Washington.

The pace of home construction around the nation has fallen by half since 2006, a staggering falloff unseen in generations. That has hit hard both Weyerhaeuser's wood-products business as well as its real-estate operation, which includes Bellevue-based Quadrant Homes, Washington's largest homebuilder.

"I see a shrinking company that is a fragment of itself," said Leonard Guss, a veteran forest-products industry analyst in Woodinville who headed Weyerhaeuser's corporate marketing research in the late 1960s. "They are self-destructing."

Others disagree. Joshua Zaret, a forest- and paper-industry analyst with Longbow Research in New York, said Weyerhaeuser is undergoing a necessary reinvention.

The basic problem, as Zaret sees it, is that Weyerhaeuser's structure has fallen out of favor on Wall Street. Weyerhaeuser is among the disappearing ranks of vertically integrated timber behemoths; it is involved in virtually every step in the life cycle of a tree, from planting the seedlings to owning the railroads over which its products journey to customers.

Weyerhaeuser largely skipped the transformation that swept through the timber industry during the past decade. Competitors such as International Paper and Louisiana-Pacific sold off their land holdings to focus on manufacturing timber products from purchased logs.

Other timberland owners, including Seattle's Plum Creek, converted to real-estate investment trusts (REIT, pronounced "reet"), which do not have to pay corporate taxes and which are favored by pension funds and other investors looking for reliable returns.

"The last timber company of any meaningful size is Weyerhaeuser," Zaret said. "There is more institutional money chasing limited resources. They see timberlands as great assets."

Weyerhaeuser's management has fended off impatient investors for now, precluding a REIT conversion at least until 2010. Shares in the company have been pummeled this year, falling from $78 apiece in December to $55.78 Friday, above its recent $47 low.

Some analysts say only the hope of an eventual conversion has kept the stock from sliding further.

Weyerhaeuser spokesman Frank Mendizabal said a conversion would be a complex undertaking, and it isn't yet clear "how, whether and if" it would be good for the company.

Under federal tax laws, a REIT must generate almost all its income from real-estate-related businesses, including timberlands, and is required to distribute at least 90 percent of annual profits to shareholders. (See related story above.)

Switching from a corporation to a REIT would be a seismic transformation for any company. But for Weyerhaeuser — whose philosophy of long-term outlook has been as rooted as its trees — becoming a REIT would require a profound cultural shift, too.

That prospect dismays Thomas Power, emeritus professor of economics at the University of Montana. Power worries that as a REIT, Weyerhaeuser would face greater pressure to increase logging or otherwise extract quicker payoffs from its vast timberlands.

"Weyerhaeuser was satisfied with making returns over generations. But Wall Street won't put up with it," Power said. "It is one of the last of the old-fashioned holdouts."

In Montana, Plum Creek, the Seattle-based timber REIT, is about to forge ahead with a controversial plan to build a subdivision on a swath of mountain forestland. Plum Creek, the nation's largest private landowner, has identified a quarter of its 8 million acres of U.S. timberlands as more valuable if sold for development, recreation or other uses.

Because REITs must generate cash for investors, they are more likely than traditional timber corporations to sell land that won't produce near-term income, said Joe Taggart, a director with LandVest, a real-estate and timberland-consulting firm based in Boston.

Taggart said that all landowners, regardless of their makeup, face pressure to extract the highest prices out of their holdings. But corporations arguably can withstand it better, Taggart said, especially those with diversified businesses that can buffer them from cash-flow demands.

"If there is value to be tapped, it will be tapped," Taggart said. Still, "Weyerhaeuser can hold on for longer periods."

Even without a REIT conversion, Weyerhaeuser is already changing vastly. By fall, it will have shed at least 24,000 employees in two years by unloading a host of businesses. It spun off its fine-paper division last year, shuttered unproductive mills and agreed to sell its containerboard, packaging and recycling unit for $6 billion to International Paper.

Also up for sale is its four-vessel Westwood Shipping Line and four small railroads used to deliver newsprint, lumber and other Weyerhaeuser products as well as other companies' cargo.

Yet at the same time, Weyerhaeuser is embarking on ventures that would seem to fall decidedly outside the realm of a REIT.

For instance, it agreed to create a joint company with Chevron in February to develop biofuels from nonfood plants. More recently, Weyerhaeuser said it will work with a group of Austrian companies to create a new kind of nonwoven fabric from wood fiber.

It all adds up to uncertainty for Weyerhaeuser's remaining workers, including 2,500 at its Federal Way headquarters. The company has adopted a corporate mantra: "Trees define us." But no one yet seems sure of the exact definition.

Guss, the timber analyst and former Weyerhaeuser employee, is vexed that the implosion in the real-estate market seems to have shaken the company's belief in its core structure.

"Housing cycles are absolutely the norm in the U.S.," he said. "Weyerhaeuser survived each and every one of them."

Guss fears that selling off pieces of Weyerhaeuser is nothing less than selling off a century's worth of heritage.

Weyerhaeuser has always been all about the trees. But that world once stretched far beyond the edges of Weyerhaeuser forests, into businesses from mortgage banks to shipping lines.

Weyerhaeuser was "a company that was a grand example in many ways," he said. "But eventually, they will become nothing but timber sellers."

Kyung Song: 206-464-2423 or ksong@seattletimes.com