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Big Deals

It was a year of big deals in the Canadian forest industry, with global competition one of the driving forces in the conolidation of the industry. And there's more to come, say industry analysts.

By Paul MacDonald
Copyright 1998. Contact publisher for permission to use.

As the Canadian forest industry enters 1999, it is in various states of repair, or in the case of the coastal forest industry in British Columbia, in complete disrepair. The state of the Canadian industry, in some regions doing quite fine and in other regions on the sick list, was one of the underlying reasons for the changes that occurred during the past year, most notably the large company takeovers, say forest industry analysts. Brace yourself, however - there's more to come.

Add to that the larger trend of corporate mergers and takeovers throughout North America and it makes for some pretty interesting times in the industry. Canadians will soon get a first-hand look at consolidation at the consumer level if the proposed merger of Canada's largest banks goes ahead. But the forest industry has also been working away at becoming bigger and more globally competitive.

Provided the deal is right, and the corporate " fit" between the companies and their respective operations and mills is workable, substantial benefits can be seen in production efficiencies and combining marketing and distribution efforts when forest companies combine operations. It's usually around merger time that company executives trot out that much-used phrase, "synergy", that will supposedly exist between the merging companies.

One of the biggest deals on the business calendar during the past year was Domtar's purchase of EB Eddy for more than $800 million. The industry has been buying up companies under the banner of being globally competitive. The Domtar deal makes the combined company the seventh largest maker of fine papers in North America and the largest Canadian maker of fine papers. It results in Domtar owning a total of 18 sawmills in Quebec and Ontario, with total production in excess of 1.2 billion board feet.

The Domtar/E B Eddy deal is part of the larger global picture of forest industry consolidation, rather than any phenomenon related to Ontario, Quebec or Canada, says Marie Rauter, president of the Ontario Forest Industries Association. "It's part of competing in a global market-place," she says. "Companies are looking at their core businesses and how to move them forward."

E B Eddy

The purchase of EB Eddy by Domtar was one of the biggest deals of the past year in the Canadian forest industry. The takeover gives Domtar total lumber production of more than 1.2 billion board feet.

Vancouver forest industry consultant Russell Taylor concurs, noting there were a number of consolidations between Finnish and Swedish forest companies during the past year, and several deals done with European forest companies. "It really is all about doing business globally and economies of scale," he says.

Russell says the consolidation that is occurring - both in Canada and globally - is being driven more by the pulp and paper side of the business, and securing access to fibre, rather than the lumber side.

Just exactly what impact all this wheeling and dealing has on the lumber production of Canadian forest companies will be covered in the February issue of Logging and Sawmilling Journal by Taylor's company, R.E. Taylor and Associates, which compiles LSJ's list of the Top 30 Canadian lumber producers.

Not all the action has been in central Canada, however. This past September, Vancouver-based Weldwood of Canada acquired Alberta's Sunpine Forest Products, which has a laminated veneer lumber plant and sawmill, as well as substantial timber holdings. Sunpine produces 180 million board feet of lumber a year.

There's little mystery why Weldwood looked to Alberta to make a further investment in the forest industry, rather than BC. While BC's Forest Practices Code has been tamed somewhat by changes that Forests Minister Dave Zimhelt says will help forest companies, the companies that operate in BC still face much higher stumpage charges and much more regulation in terms of harvesting wood, compared to Alberta operators.

All this makes Alberta look good, certainly from a BC perspective. There were even rumours that Canfor Corporation, a major BC lumber producer with assets on the BC Coast and Interior, and some operations in Alberta, was thinking of moving its head office right out of BC to Alberta.

In British Columbia, industry watchers are patiently waiting for a shoe to drop, in terms of consolidation. Coastal producers have been hammered by the collapse in Asian markets, notably Japan, and their share prices are low, making them ripe for cheap takeovers. Overall, it has been a brutal year for BC forest companies, with many temporary shutdowns, and some permanent closures, due to market conditions.

But unlike previous downturns, the BC forest industry is going through structural changes this time around, changes that will leave fewer mills operating. Presumably the mills that are left operating will be in stronger competitive positions in terms of production costs.

Roy McIntosh, national director of the forest industry group at consulting firm KPMG, says it is just a matter of time until somebody makes a move in the BC industry in terms of a takeover. "Something is going to be happening sooner, rather than later." But he notes that deals are a lot easier to make in eastern Canada than in BC from a regulatory point of view.

"Everybody knows that there is a 20 per-cent discount on the share prices of BC companies because of that," he says.

BC's biggest forest company, MacMillan Bloedel, under president and CEO Tom Stephens, has so far bucked the consolidation trend. As part of a major restructuring plan announced in January 1998, MacMillan Bloedel sold off its paper company to an investment group for $850 million. This was followed by the sale of the company's 50 per-cent partnership in MacMillan Bathurst and its two MDF plants. It remains to be seen what role the forestry giant will take in consolidation on the solid wood side, however.

Another factor in the deals that were done in the industry in the last year has been the low value of the Canadian dollar. The low-valued dollar has been a bonus for lumber producers with product priced in US dollars, but beyond that, Canadian companies look pretty good when it's an American company doing the buying.

Avenor Forest Products

Avenor Forest Products was bought out by South Carolina-based Bowater for $2.5 billion during the year. Futher consolidation of Canada's forest industry is still to come, most notably in British Columbia.

South Carolina-based Bowater picked up Avenor Forest Products for $2.5 billion during the year and, on a smaller level, Oregon's Pope and Talbot bought Harmac Pacific for $78 million. Weldwood of Canada, which bought Alberta's Sunpine, is wholly-owned by US-based Champion International. The low value of the dollar has seemed to attract the interest of foreign companies in many industries. Canadian government data shows that US and other foreign-owned companies bought Canadian-based assets valued at $29 billion in the first nine months of 1998, far above the $17 billion during the similar period in 1997.

"There have been opportunities for US companies to buy assets cheaply because of the low value of the dollar," says industry consultant Russell Taylor.

Further investment could be on the way. Pope and Talbot has reportedly shown interest in the Celgar pulp mill in Castlegar, BC, which is in receivership. The pulp mill is one of the most modern in North America, but was weighted down with debt.

There has been little said of the takeover of these Canadian firms by American-owned companies. Not much probably could be said, considering the free trade stance and open-markets policy the Canadian forest industry has long advocated. Canadian lumber producers can only hope, however, that the new American owners of sawmills might now be able to understand the frustration of Canadian sawmillers over the softwood lumber deal with the US.

Even after the deals are done, however, the dust doesn't often settle for a while. After the Avenor deal was made, Bowater spun off assets around Dryden, Ontario - including the new Ear Falls sawmill and the Dryden stud mill - to Weyerhaeuser.

And just when you think the trend is predictable, other forest companies, besides MacMillan Bloedel, sell off operations. During the summer, Tembec sold its OSB facility to Grant Forest Products, a large OSB producer. The company has also announced that it is looking to sell its its hardwood sawmill and flooring plant in Huntsville, Ontario and a remanufacturing operation in Ontario.

There are regions that buck the trend, as well. In Nova Scotia, which has a large number of smaller sawmills, rather than the larger mills evident in other areas of the country, it was a relatively quiet year. Steve Talbot, Executive Director of the Nova Scotia Forest Products Association, says there are about 300 sawmills in the province, mostly smaller family-owned operations producing 10 to 20 million board feet a year.

"Many of the owners have very independent natures, so it's difficult to see a consolidation happening." If consolidation were to occur, there might be resulting job losses, Talbot notes, which is something the Maritimes, with the country's highest unemployment rates, hardly needs.

What effect will all this consolidation have on logging contractors working in the forests KPMG's Roy McIntosh notes that when a company takes over another company, the firm doing the deal has already determined that cost savings can be made. "I suspect that the pressure will be on logging contractors to be more efficient, as there would be on all of the company's suppliers."

John Valley, managing director of the Chase Manhattan Bank of Canada, which participates in lending to the forest industry, says there are still business opportunities on the sawmill side outside of the big companies. Forest company consolidations can offer significant benefits, says Valley, who has also been involved with the forest industry on the company side and on the government side.

"But bigger is not the only way to go," he says. "There remains a place in the market for highly efficient, and I underline the term highly efficient, small and medium producers."

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