With 6.4 million acres of timberlands, Plum Creek Timber is one of the nation's largest private owners of timberland. That's why it might seem a bit curious for the company to pay $75 million for a construction materials royalty stream from Vulcan Materials . The deal calls for Plum Creek to acquire an interest in approximately 144 million tons of production of crushed stone from which it will receive royalty payment on for about 25 years.
Plum Creek won't actually be acquiring the quarries themselves; instead it will receive an estimated 10.5% royalty on the sale of the crushed stone. While at first glance the deal might seem like a bit of a stretch, it's a fairly natural extension of the company's expertise in managing natural resources.
This deal also represents another step as Plum Creek looks to diversify its revenue beyond timber. Industry peers Weyerhaeuser and Rayonier both generate more revenue from non-timberland businesses. For Weyerhaeuser, it generates just a quarter of its revenue from timber with the bulk of it coming from home building wood products and performance fibers. Rayonier on the other hand is heavily reliant on performance fibers, with 70% of its revenue coming from that division. Plum Creek sees almost half its revenue from timber with another quarter from its real estate business. Weak timber prices over the past few years have really hit Plum Creek's bottom line and it has vastly underperformed its peers over the past three years.
That's why the company is looking to grow through its small yet expanding non-timber resources business. A bulk of the revenue is from leasing its land for wind towers, as well to oil and gas companies for drilling. Another revenue generator has been in construction materials, which typically had consisted of leasing its land to be mined. The company sees investments like the Vulcan Materials deal, for producing construction materials assets, as an extension of this business.
This isn't the first time Plum Creek has struck a deal that didn't include taking ownership of the quarry assets. In 2011, it closed on a $12 million construction materials deal which saw the company acquiring 28 million tons of aggregate reserves. In exchange, it expected to receive $1.3 million in cash flow from that asset in 2012. Since that time it's been on the lookout for similar deals; it looks like it found one it liked in the deal with Vulcan Materials.
The management team at Plum Creek prides itself as being an exceptional allocator of capital on behalf of its investors. In the company's earnings release last quarter, CEO Rick Holley had this to say:
We are excited about the future, and look forward to 2013 with optimism. Disciplined capital allocation is just as important in a recovery as it is during a downturn. It remains our top priority at Plum Creek. We continually evaluate the best use of the cash we generate with the goals of delivering value to shareholders while growing the per-share value of the company over time.
For Plum Creek, the best use of cash of late hasn't been in directly purchasing timberlands. One of the company's largest timber-related transactions last year was actually the purchase of 4.7 million tons of mature southern yellow pine timber as part of a negotiated timber deed. In that deal the company paid $103 million in an eight-year investment just for the standing trees which would then be harvested.
Behind all these deals we see one main theme: Plum Creek seized an opportunity to invest in a low-risk, cash flow accretive opportunity directly adjacent to its core business. It's also another step in joining many of its industry peers in diversifying its revenue stream away from simply owning timberland. It is hopeful that for investors it's a step toward future outperformance.
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The article What's the Deal Behind This Materials Deal? originally appeared on Fool.com.
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