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Paper Excellence commits to takeover of Resolute despite lumber slump

VANCOUVER (From news reports) -- Paper Excellence Group, a private company controlled by an Indonesian billionaire, is poised to expand in Canada's forestry industry by diversifying into the lumber sector with its contentious takeover of Resolute Forest Products Inc.

Richmond, 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 per cent of Resolute's revenue from Canadian and U.S. operations in the first nine months of 2022.

Canada's Competition Bureau said last week 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.

Paper Excellence said this week 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.

As a sweetener to the takeover offer, Resolute shareholders would also receive a "contingent value right" for each share tied to anticipated refunds of a large portion of U.S. duties on Canadian softwood lumber sold south of the border. Resolute has accumulated US$500-million in lumber duty deposits in the United States from 2017 to mid-2022.

In a 259-page notice to its shareholders before a special meeting in late October, Resolute estimated the present value of those rights could be US$2.94 a share, raising the total worth of each Resolute share to as much as US$23.44 a share.

Resolute shareholders at the Oct. 31 special meeting voted overwhelmingly in favour of the takeover offer from Paper Excellence, which would inherit an estimated US$1.1-billion in pension liabilities from Resolute.

But with the transaction subject to other conditions being met, such as approval from the U.S. Department of Justice, Resolute stock is still trading below US$23.44 a share. Resolute's share price rose 1 per cent to close at US$21.50 on Friday on the New York Stock Exchange.

"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.

If Paper Excellence were allowed to retain the mills in Dryden and Thunder Bay, it would have substantially lessened competition in the production of northern bleached softwood kraft (NBSK) pulp in the geographic region for NBSK in Central Canada and Atlantic Canada, the bureau said. It stipulated that two separate buyers will be required for the Dryden and Thunder Bay mills.

NBSK goes into products such as paper towels, packaging and toilet paper. The bureau has guidelines designed to prevent any single player from having more than 35 per cent of the market share in NBSK in a geographic region.

The divestments will also 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.

In one of Resolute's other business lines at the Thunder Bay site, the company produces uncoated groundwood paper, notably newsprint.

"Any company that buys the Thunder Bay pulp and paper mill will be incredibly fortunate. It's an excellent facility," said Seth Kursman, Resolute's vice-president of corporate communications and sustainability.

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 this week 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 per cent since the takeover bid was announced six months ago. 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 per cent and Interfor Corp. declining 26 per cent since mid-July.

Two-by-fours made from Western spruce, pine and fir sold this week 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.

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