Paper Excellence Group is poised to expand in Canada’s forestry industry by diversifying into the lumber sector with its contentious takeover of Resolute Forest Products. B.C.-based Paper Excellence has focused in the past on pulp and paper, but the real prize is Montreal-based Resolute’s lumber assets. Wood products such as softwood lumber accounted for nearly 45% of Resolute’s revenue from Canadian and U.S. operations in the first nine months of 2022.

Canada’s Competition Bureau said that it approved the proposed acquisition of Resolute, subject to conditions, specifically that Paper Excellence’s wholly owned Domtar Corp. division sell its pulp mill in Dryden, Ont., and divest Resolute’s pulp and paper mill in Thunder Bay. It stipulated that two separate buyers will be required for the Dryden and Thunder Bay mills. The divestments will ensure that healthy competition is maintained to allow for fair pricing of wood fibre supplies at private timberlands in northwest Ontario, the competition watchdog said.

Paper Excellence said that it is fully committed to its US$1.6-billion bid for Resolute, undaunted by slumping lumber markets and undeterred by lingering concerns from environmentalists over corporate concentration. “Acquiring Resolute will allow us to diversify our products and clients, thanks to Resolute’s expertise in lumber and tissue,” Paper Excellence said in a statement. “This is a perfect complement to our current activities.”

The suitor launched its friendly takeover bid last July by offering US$20.50 a share in cash for Resolute, which has a wide range of assets that include lumber sawmills and tissue manufacturing, as well as mills that produce pulp and paper.

While lumber prices have slid since the summer, Paper Excellence said it is taking a long-term view. “We see growth opportunities in the North American market, as housing construction will continue to drive demand for lumber,” Paper Excellence said. “We also have the resources to convert less-profitable operations to respond to emerging market needs.” For example, Paper Excellence said that with demand for newsprint declining, it is considering eventually halting Resolute’s Gatineau newsprint mill in Quebec and converting the site to instead manufacture packaging paper.

“The transaction remains on course to close in the first half of 2023, subject to the satisfaction or waiver of the other conditions,” Paper Excellence said.

Despite the divestment plans, environmental groups such as Greenpeace Canada continue to raise concerns about Paper Excellence having too much influence over Canada’s forests. Greenpeace Canada said that it is worried about the Competition Bureau’s recent consent agreement for Paper Excellence to forge ahead with its takeover plans, subject to pacts to sell the two Ontario mills after the merger closes.

Shane Moffatt, head of Greenpeace Canada’s nature and food campaign, said stronger laws are needed to protect forests and other ecosystems across Canada. He said he is troubled by Paper Excellence’s controversial ownership structure that traces back to Indonesia’s wealthy Widjaja family, especially billionaire Jackson Widjaja, conglomerate Sinar Mas and its subsidiary Asia Pulp & Paper.

“It’s not at all clear how committed they are to reform,” Mr. Moffatt said in an e-mail. “The company’s connections to global giant Sinar Mas/Asia Pulp & Paper, infamous for deforestation and social conflict, are furthermore clear grounds for concern.”

Paper Excellence, which acquired Domtar in 2021 for US$2.8-billion, is playing down worries about corporate ties overseas, insisting it operates independently in Canada. “Paper Excellence has been operating in Canada since 2006, and we have owned Domtar now for more than a year,” Paper Excellence said. “We think that our track record as a good corporate citizen speaks for itself.”

Mr. Kursman said environmental groups have unfairly targeted Canada’s forestry industry. “I am certainly not going to let them define us,” he said.

John Cooney, equity analyst at ERA Forest Products Research, said it remains to be seen whether bigger will be better in the case of plans to fold Resolute into Paper Excellence’s Domtar division. He said the Competition Bureau rightly viewed corporate concentration as a valid issue in scrutinizing Paper Excellence, which took steps early in the takeover process to shop Domtar’s Dryden mill. In October, Paper Excellence and Resolute jointly announced the planned sale of the Thunder Bay mill. Although not required by the Competition Bureau, Paper Excellence is exploring the possibility of selling Domtar’s Espanola pulp and paper mill in Ontario. Resolute’s Saint-Félicien pulp mill in Quebec would be retained by Paper Excellence, which already owns Domtar’s Windsor pulp and paper mill in Quebec.

In 2023, Resolute shareholders would be winners financially, Mr. Cooney said. “Other forest product company stocks have seen a lot of difficulties, but the takeover price for Resolute is attractive,” he said.

Resolute’s share price has soared 72% since the takeover bid was announced in July. In sharp contrast, the share prices of B.C.-based forestry companies have tumbled amid depressed lumber markets, with West Fraser Timber Co. Ltd. falling 20% and Interfor Corp. declining 26% since mid-July.

Two-by-fours made from Western spruce, pine and fir sold during the week of January 6 for US$352 for 1,000 board feet, compared with US$670 just six months ago and well below record highs that surpassed US$1,600 in May, 2021, according to Vancouver-based industry newsletter Madison’s Lumber Reporter.

Source: Globe and Mail