What's Looming Over Boise Cascade

Suppose you control a big forest-products company. Business is pretty good, but higher energy costs threaten margins. Worse, an accounting scandal has led to the departure of your top customer's CEO. And now a big investor in that No. 1 customer is agitating to get it auctioned or busted up. You might want to trim your interest in the forest-products company, right?

So it's easy to see why Boise Cascade is preparing to sell stock in an initial public offering. Controlled by the large, Chicago-based private-equity firm Madison Dearborn Partners, Boise Cascade finds itself linked to OfficeMax (OMX ) and its ongoing travails. Behind Staples (SPLS ) and Office Depot (ODP ), OfficeMax is a weak No. 3 in office supplies. In March, even as it looked for a new chief executive, OfficeMax had to restate 2004 financial results. Boise Cascade has not yet said how much equity it aims to float or at what price. But its Securities & Exchange Commission filing spells out the company's many ties to OfficeMax -- a tangled relationship that should give investors pause before bidding on this IPO.

FOUNDED IN 1988, OfficeMax grew swiftly but by 2003 was persistently lagging behind its two bigger rivals. That December it wound up being bought by Boise Cascade, then a venerable public company known best for its interests in paper and wood products. But since 1964 it also had been in the wholesale stationery biz via its Boise Office Solutions unit -- hence OfficeMax's allure. After merging the stationery operations, last fall the unit adopted OfficeMax as its corporate name and sold control of the paper and wood-products businesses to a group led by Madison Dearborn. Those businesses kept the Boise Cascade name.

Now take a breath -- the tale gets even more twisted. Turns out this was one of those divorces where the parties insist on remaining friends. OfficeMax kept a minority stake in Boise Cascade and also agreed to buy all of the cut-to-size paper it needs in North America from Boise Cascade through 2012. For the nine months ended on Sept. 30, those sales came to $434 million -- about 10% of Boise Cascade's total revenue. In addition, before the divorce, OfficeMax agreed to take over Boise Cascade's pension and post-retirement benefit obligations to former employees while also funding a big chunk of Boise Cascade's ongoing pension obligations. So Boise Cascade is escaping any 2005 payment to its pension plan. OfficeMax also stayed on the hook for Boise Cascade's past environmental liabilities. With these benefits and more, Boise Cascade is nicely profitable.

As for OfficeMax, since the breakup it has gone from trouble to more trouble. In March it reported that the operating margin at its stores had narrowed to 0.5% last year from 2.2% in 2003. It also is being challenged by K Capital Partners, a Boston fund with 6.2% of OfficeMax. It's exploring a breakup or sale to realize what it sees as the company's full intrinsic value. If OfficeMax were to dissolve or change directions, would that force Boise Cascade on the ropes? No. But, as Boise's SEC filing notes: "Any significant deterioration in OfficeMax's financial condition or our relationship with OfficeMax may result in OfficeMax's failure to satisfy its contractual obligations to us and, as a result, could have a material adverse effect on our business, financial condition, and operating results."

OfficeMax looms, then, as a large imponderable over the future of Boise Cascade. Give Boise Cascade's current owners your sympathy -- but hold on to your money.

By Robert Barker

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