Pattison raises stakes in lumber interests

His stake in Canfor -- which now amounts to more than 19 per cent -- and a 21-per-cent interest in Slocan Forest Products Ltd. of Richmond, B.C., has positioned the 73-year-old entrepreneur to benefit from any future consolidation activity in the sector, according to a fellow investor.

Reached at his Vancouver office, Mr. Pattison would not comment on his Canfor or Slocan holdings, which are held by his personal investment firm Great Pacific Capital Corp. Combined, they represent an investment now worth about $175-million.

Mr. Pattison's Slocan holdings were the subject of widespread speculation well before it was disclosed in June, 2001, that he had acquired more than 10 per cent of Vancouver-based Canfor.

Montreal money manager Stephen Jarislowsky said he and Mr. Pattison have taken large positions in Slocan and other lumber sector companies in hopes of benefiting from consolidation that they expect to occur in the industry.

Analysts, however, speculated that Mr. Pattison may have to wait for a resolution of the softwood lumber trade dispute with the United States, a development which could serve as a catalyst for mergers in the forest industry.

A three-way merger involving Slocan, Canfor and Vancouver's West Fraser Timber Co. Ltd. "is something that has been on people's minds," Mr. Jarislowsky said, adding that he and Mr. Pattison are "more or less partners in the Slocan deal."

"Creating a giant lumber company has always been Jimmy's dream," said Canfor chairman Peter Bentley, who has been in regular talks with Mr. Pattison about his investment in Canfor and plans to offer him a seat on the board.

"He's a good man and we'd love to have him," Mr. Bentley said.

However, analysts say West Fraser has shown little interest in a three-way combination that would create a forestry giant with annual sales of $4.4-billion. With the capacity to produce 6.5 billion board feet annually, it would rank among the world's largest lumber producers.

They also doubt that Slocan and Canfor could contemplate a merger ahead of a resolution to the Canada-U.S. softwood dispute, which requires them to pay duties averaging 27.2 per cent to ship timber into the United States.

Despite low-key efforts by the B.C. government and U.S. giant Weyerhaeuser Co. to find a way to restart negotiations, a resolution appears to be nowhere in sight.

"Until the trade war is resolved, companies in the industry who are mulling possible acquisitions will find it virtually impossible to properly value assets they might be thinking of buying or selling, said Mark Bishop of Raymond James.

For those reasons, analysts are surprised to see Mr. Pattison closing in on a 20-per-cent stake in Canfor. "The only thing that I can see driving this right now is an optimism about a resolution [to the softwood lumber war] that would be a catalyst for consolidation," Mr. Bishop said.

If the softwood dispute is not resolved quickly, Mr. Pattison could face a dilemma as he tries to decide what to do with his stock.

"He can't sell his shares," said Reid Carter, a forestry analyst with National Bank Financial in Vancouver "The day he is seen to be a seller, the stock will get hit really hard," he said.

Mr. Carter said Mr. Pattison's recent stock market purchases, including the 988,100 Canfor shares he bought last week, indicate that he has elected to buy at the lowest available price in order to reduce his average costs.

Mr. Carter said he meets with Mr. Pattison about once a month to discuss his investments and estimates that he has paid an average of $9.50 each for his Canfor shares, which fell 15 cents to $8 yesterday on the Toronto Stock Exchange.

Mr. Pattison is thought to have paid an average of $7.30 a share for his stake in Slocan, which closed at $7.20, down 21 cents.

Meanwhile, Mr. Pattison is not alone in having to wait for his forest sector investments to pay off.

Other major investors such as U.S. mutual fund giant Fidelity Management & Research Co. and funds managed by Mr. Jarislowsky face a similar dilemma as they try to decide how to benefit from their investments.

Jarislowsky Fraser Ltd. of Montreal has 18.4-per-cent stake worth $160-million in West Fraser Timber, which fell 49 cents to $35.25 yesterday on the TSX, and just under 20 per cent of Slocan, company documents show.

In recent statements, Fidelity said certain fund accounts for which it serves as investment adviser hold 9.5 per cent of Slocan.

But like Mr. Pattison, they may have to be patient, analysts say.

"Longer term, the [share] valuations in these companies look relatively attractive if you are a patient investor with a one-and-a-half- to two-year time frame," one forestry analyst said.

"I just have a hard time believing that that is Pattison's horizon right now," the analyst said. That view, he said, is based on the B.C. billionaire's previous track record for being aggressive in forcing change at any company in which he becomes a major investor.

"But it is difficult to see how he can step in and change the valuations when the overriding issue facing the company is the oversupply situation and the softwood trade dispute," he said.

As a result, Mr. Pattison is expected to continue buying low, holding on and waiting for the situation to improve.