Resolute Forest Products agrees to $2.7-billion takeover by Paper Excellence

The B.C. pulp and paper producer adds lumber and tissue capabilities with deal for company based in Montreal

Resolute Forest Products Inc. has agreed to be acquired by Paper Excellence Group, a privately held pulp and paper producer based in Richmond, B.C., in a US$2.7-billion deal that further consolidates the North American forestry sector.

The deal, which values Resolute at US$20.50 a share, includes debt and reflects pension liabilities. It also represents a 64-percent premium to the stock’s closing price on the New York Stock Exchange on July 5 – a remarkable offer given that the shares haven’t traded above US$20 since 2014.

“It speaks to the competitiveness and attractiveness of Canada’s forestry sector,” Remi Lalonde, chief executive officer at Resolute, said in an interview.

“We’ve made a lot of progress in the last couple of years. It has a lot to do with improving the balance sheet, making our business more competitive and then defining our strategy for growth,” Mr. Lalonde added.

The shares closed in New York at US$20.38, up US$7.89, implying that investors expect the deal will proceed. The shares also trade in Toronto, where they closed at $26.57.

Shareholders could also win out if there is a resolution to the long-running softwood lumber dispute, given that Resolute has $500-million in lumber duty deposits sitting in the United States.

The deal comes less than a year after Paper Excellence completed the US$2.8-billion takeover of Domtar Corp., and at a time when commodity prices have rebounded strongly from their pandemic lows in 2020.

In another example of recent consolidation, West Fraser Timber Co. Ltd. last year completed a $4-billion takeover of Norbord Inc., which produces oriented strand board used in construction.

Montreal-based Resolute complements Paper Excellence’s existing pulp, paper and packaging businesses but adds Resolute’s lumber and tissue capabilities.

“One big question is whether or not Paper Excellence will keep the lumber assets or monetize them. Paper Excellence is a pulp and paper company with no sawmills,” John Duncanson, timber analyst at Corton Capital’s Global Timber Fund, said in an e-mail.

One of the big winners from Wednesday’s announcement: Fairfax Financial Holdings Ltd., which held about 40 per cent of the outstanding shares of Resolute prior to the deal. Fairfax has agreed to support the transaction.

But there are other winners as well, as investors bet that consolidation will continue within the forestry sector.

“Given this deal, we believe renewed interest will exist in parts of the sector that are structurally advantaged,” Andrew Kuske, an analyst at Credit Suisse, said in a note.

In one stand-out example, the share price of Vancouver-based Mercer International Inc., a producer of market pulp, rallied more than 11 per cent.

Mr. Kuske said in a report prior to the Resolute announcement that Mercer was benefiting from robust commodity prices and favourable foreign-exchange rates. He raised his recommendation on the stock to “outperform” from “neutral.”

The deal with Paper Excellence ends a couple of turbulent years for Resolute.

The shares dipped below $2 in Toronto in 2020, soon after lockdowns in the early weeks of the pandemic shuttered much of the North American economy and skewered commodity prices.

The economic recovery, though, sent prices to multiyear highs earlier this year, generating enormous levels of cash for companies producing everything from oil to copper to lumber.

In May, Resolute reported that its first-quarter profit increased to US$210-million, up 140 per cent from the same period last year, underpinned by rising prices for lumber, pulp, paper and tissue. Cash generated by its operations rose by $147-million, which is about twice as much compared with the first quarter of 2021.

Yet some analysts believed that Resolute’s share price did not fully reflect the company’s strengths.

Hamir Patel, an analyst at CIBC Capital Markets, said in May that the share price – at US$14.90 after Resolute reported its first-quarter financial results – appeared to be attributing no value to the company’s pulp, paper and tissue businesses, but only lumber.

Mr. Lalonde said that the deal with Paper Excellence could open up new avenues for growth. One possibility: The new owners have committed to a feasibility study on the conversion of a newsprint mill to containerboard.

“We wouldn’t have done that on our own, in all likelihood,” he said, since it can be hard to convince shareholders of the need to enter a new line of business.

But containerboard is an important part of Paper Excellence’s growth strategy, he added. “So we are giving them an opportunity that we might not have pursued on our own.”

One of the big winners from Wednesday’s announcement: Fairfax Financial Holdings Ltd., which held about 40 per cent of the outstanding shares of Resolute prior to the deal. Fairfax has agreed to support the transaction.