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An article just released by Standard & Poor's Ratings Services predicted that mergers and acquisitions among forest product companies will continue to increase over the next few quarters due to strong balance sheets and attractive financing terms. But this M&A activity will largely be contained to the paperboard and packing sectors, according to "Top Investor Questions For The U.S. And Canadian Forest Products Sector In 2011." Consolidation in the “highly fragmented” building products sector is unlikely to occur over the next 12 months, the report said, without a recovery in housing.
"We expect most of our ratings on industry players to remain stable, in light of a gradual economic recovery in the U.S. and moderate recovery in new residential construction in 2011 after a steep and prolonged downturn," said Standard & Poor's credit analyst Tobias Crabtree.
Most U.S. and Canadian forest product companies have modest debt maturities over the next two to three years, and S&P is not particularly concerned about their credit worthiness. But in its “risk assessment” for each category over the next 12 months, converted wood products -- which takes in most lumber, panel and engineered wood product suppliers -- were given a “higher-than-average” risk. This was due to the highly cyclical housing market; substantial industry overcapacity; and fragmented supply base, especially in lumber. Timber, on the other hand, was categorized as a “lower-than-average” investment risk because of harvest flexibility, market diversity and long-term reductions in Canadian supply.