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What is Plum Creek’s End Game?

By Beacon Staff

With Plum Creek Timber laying off hundreds this year, dismantling its Ksanka and perhaps Pablo mills, and closing on the “conservation sale” to taxpayers of one-third of its Montana timberlands since 2001, the question begs: How much longer will Montana’s largest forest products company remain in Montana?

To guess the future, it helps to know the past. Plum Creek started after World War II as a family-owned mill in Columbia Falls. In the late 1960s, like many railroads looking to diversify away from the lousy business of running trains, Northern Pacific Railway bought the mill. NP, of course, owned lots of land-grant forests, so selling itself wood made business sense.

Railroading was still a lousy business in 1987, when NP successor Burlington Northern Railroad (BN) “spun off” its non-rail assets into Burlington Resources. More honestly, the railroad was spun off from the sexier assets.

In 1989, a limited public partnership called Plum Creek Timber (PCL) was formed for the purpose of buying 1.4 million acres of timberland and associated sawmills from Burlington Resources. In the 1990s, PCL bought more land, in Montana, the Southeast and Maine, accumulating about 3.8 million total acres of timberland by 1999.

Also in 1999, Plum Creek pulled off one of the greatest business coups in history. PCL was the first major integrated wood products company to re-incorporate as a Real Estate Investment Trust, or REIT. Why? Taxes. For shareholders of REITs and their land-only Timberland Investment Management Organization (TIMO) counterparts, the federal tax hit is only 15 percent on profits versus 40 percent for other corporate entities.

PCL’s directors also cleverly protected themselves and their new business toy with anti-takeover provisions in a new REIT corporate charter. PCL’s enemies were thereby blocked from using a hostile merger to co-opt Plum Creek’s tax advantages.

As for “friendly” mergers, in the fall of 2001, Plum Creek merged with The Timber Company (TGP), the land-management arm of Georgia-Pacific Corporation. The deal involved 5 million acres of Georgia-Pacific’s commercial timberland, placing PCL second behind International Paper in total United States land ownership.

Pioneering the REIT game was magic for Plum Creek, which became a Wall Street money magnet. According to the Wall Street Journal, from 1999 to 2004, PCL “net income more than quadrupled to $362 million.”

This success triggered a wild copycat frenzy by America’s timber industry to disintegrate itself into REITs and TIMOs, with at least 20 million acres changing hands in huge chunks – and the scramble isn’t over.

So “where” is Plum Creek today? With 85 percent of its land in 17 other states around the U.S., PCL’s investments, and interests, are obviously no longer centered on Montana “home ground.”

Equally important: Precisely what is PCL today? Consider that PCL bought millions of acres, but has no sawmills outside Montana. Why not? Under REIT law, no more than 20 percent of assets can be manufacturing assets. Furthermore, REITs that generate more than 10 percent of their income (profit) from manufacturing lose the REIT tax benefits.

In short, federal law prohibits REITs from manufacturing as a main source of income. REITs and TIMOs focus instead on generating capital-gains income either by selling trees, or selling dirt. Ergo, real estate.

Why is the law that way? Congress wanted to prevent industrial firms from using REIT incorporation as a tax dodge.

Nonetheless, Plum Creek retained its sawmills for a very good reason – to mill liquid cash out of solid Montana trees. Monetizing Montana wood with infrastructure it controls is, or was, the most cost-effective way Plum Creek could generate the cash the company needed to assemble its real-estate empire.

And what an empire! In less than 15 years, Plum Creek leapt from being a bit player in the Northwest, to top star on the national stage, a spectacular achievement by any standard.

What can Plum Creek possibly do to top that? Or are events now in the end game? Wall Streeters are surely asking … and so must Montanans.

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