A Canadian on Wall Street

Looks like Sino-Forest may be the target of a leveraged buy-out, which could throw a ton more debt on its balance sheet. It hasn’t stopped the stock appreciating, and it’s possible that due to their attempts to grow the timber plantation business at a high rate that the debt-equity ratio of around 1 wasn’t such a big factor; I’m still not totally accustomed to industries with a great deal of capital expenditures. I’m no expert on estimating potential valuations, although according to that article:

Macquarie Bank, Australia’s biggest investment bank, and CVC Asia, a buyout firm partly owned by Citigroup, may borrow $1 billion to take over Sino-Forest, Asia-Pacific’s second-largest timber plantation company, said the people.

That sort of implies to me that the current share price of 10.39 CAD or thereabouts, which gives Sino-Forest a market cap of about 1.43 billion CAD, is probably around a potential buyout price and not worth looking into as a buy — not that I tend to push those kinds of risk arbitrage kinds of situations anyhow, since you really need crazy amounts of leverage for them to be worthwhile, in my opinion.

Would I have purchased shares in Sino-Forest back in the fall when I first looked into this stock, in retrospect? Probably, as the only thing that really kept me from buying was the debt; as far as I can tell from the numbers, the company is consistently growing earnings, is positioned in the burgeoning Chinese market but is run by Hong Kongers with contacts in both the east and west and a more Westernized business sensibility, and given the decline in higher-operating cost lumber producers in the West, I can see some of the slack being taken up by the plantations of China and Thailand, with their faster growing seasons and cheap labour. (See here for a list, and some of its effects, of the timber plantations, however.) As many people know, leverage can be very useful if you feel you can do better than the interest payments, and considering the return on average assets and equity that Sino-Forest has been delivering recently, perhaps their debt is better than I thought at first, and perhaps naive, glance.