Lumber ready for shipping sits stacked at the West Fraser Timber Co. sawmill in Quesnel, B.C., in 2015.David Ryder/The Globe and Mail
West Fraser Timber Co. Ltd. WFG-T has at least US$706-million in lumber duty deposits in the United States in what would be a valuable bonus for a potential suitor.
Vancouver-based West Fraser has been paying U.S. duties on its lumber shipments south of the border over the past five years in the latest round of the long-running Canada-U.S. softwood trade dispute.
The amount of money deposited by West Fraser with the U.S. Department of Commerce has steadily grown so large that it would be attractive to any prospective buyer willing to bet that a sizable majority of those funds will likely be refunded eventually, as has been the case in past rounds of the cross-border fight.
West Fraser Timber shares roiled after takeover speculation
West Fraser’s share price rose 5.5 per cent to $130.68 on the Toronto Stock Exchange on Wednesday, one day after the forestry company said it has met with two Europe-based firms interested in a joint takeover.
But West Fraser, Canada’s largest lumber producer, said it did not receive any proposal and there are no ongoing discussions over the terms of any transaction with Kronospan, a wood-based panel maker in Europe, and CVC Capital Partners, a private equity firm.
West Fraser’s closing share price on the TSX on Wednesday is just shy of its record intraday high of $132.91 set on Tuesday after Reuters reported that Kronospan and CVC Capital are interested in acquiring the forestry company.
The 2006 Canada-U.S. softwood agreement expired in October, 2015, with no replacement. In the latest round of the trade dispute, Canadian producers have been paying U.S. lumber duties since April, 2017.
Richmond, B.C.-based Paper Excellence Group announced a friendly takeover offer for Resolute Forest Products Inc. on July 6 for nearly US$1.6-billion in equity value. The transaction also has a bonus feature of a “contingent value right” that entitles the holder to future refunds on about US$500-million of lumber duty deposits already paid by Montreal-based Resolute.
Canadian Imperial Bank of Commerce Capital Markets Inc. estimates Canadian producers have paid deposits for U.S. duties totalling nearly US$5.8-billion since 2017.
After a preliminary investigation earlier this year, the Commerce Department said it plans to levy tariffs of 11.64 per cent against most Canadian lumber producers exporting to the United States starting this autumn, compared with the current 17.91 per cent. The reduced tariffs would consist of 6.88 per cent in countervailing duties (CVD) for what the U.S. calls Canadian subsidies, and 4.76 per cent in anti-dumping duties (ADD).
But West Fraser, whose duty rate currently totals 11.14 per cent, is the only company that will not benefit from the lower rates. Its combined U.S. tariffs are slated to rise to 13.09 per cent this autumn.
“Notwithstanding the deposit rates assigned under the investigations, our final liability for CVD and ADD will not be determined until each annual administrative review process is complete and related appeal processes are concluded,” West Fraser said in its first-quarter financial report issued in April.
Industry analysts expect West Fraser to provide an updated dollar amount for lumber duties deposited in the United States when it releases its second-quarter results next week. Chief executive Ray Ferris is scheduled to speak with analysts during the quarterly conference call on July 28.
Last year, West Fraser completed its acquisition of Toronto-based Norbord Inc., the world’s largest producer of oriented strand board (OSB), an engineered panel product that Mr. Ferris has said fits well with his company’s lumber, plywood and medium-density fibreboard products.
CIBC Capital Markets analyst Hamir Patel said if Kronospan and CVC Capital make a joint bid for West Fraser, that potential deal could face antitrust scrutiny in Europe, given Kronospan’s 40-per-cent share of the continent’s OSB market and West Fraser’s 12-per-cent share. “We suspect any potential obstacles there could be overcome with some limited asset sales if necessary,” Mr. Patel said in a research note.
B.C. billionaire Jim Pattison owns more than 8.9 million West Fraser common shares, or a 10.2-per-cent interest, and he also has a 52-per-cent stake in Canfor Corp., Canada’s second-largest lumber producer. In late 2019, Mr. Pattison abandoned his plans to take Canfor private, after minority shareholders narrowly rejected his cash offer.
Wales-based Kronospan, through Banasino Investments Ltd., holds 9.4 per cent of West Fraser common shares.
West Fraser, founded in 1955 in Quesnel, B.C., by three Ketcham brothers from Seattle, has grown over the decades to become one of the world’s largest forestry companies.
Hank Ketcham, West Fraser’s chair and former chief executive, recently held almost 396,000 common shares and class B stock. The 72-year-old Mr. Ketcham is the son of Pete Ketcham, who co-founded the company with his brothers, Bill and Sam.
Scotia Capital Inc. analyst Benoit Laprade estimates that heirs to the founding Ketcham family own nearly 9 per cent of West Fraser common shares and also at least 91 per cent of the 2.3 million class B shares. “Should a separate vote for each class of shares be required, the family would have a de facto veto on any transaction,” Mr. Laprade said in a research note.
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