West Fraser Pacific Inland Resources sawmill in Smithers, B.C. on Feb. 24, 2020.Jimmy Jeong/The Globe and Mail
West Fraser Timber Co. Ltd.’s WFG-T share price went on a roller-coaster ride on Tuesday as investors speculated about a potential takeover of the producer of lumber and wood-based panels.
West Fraser’s stock price jumped as much as 23 per cent on the Toronto Stock Exchange in the morning, shortly after Reuters reported that two European-based firms are interested in acquiring the Vancouver-based forestry company.
The takeover fever later subsided as shares in West Fraser closed at $123.83, up $15.89 on the day, or a 15-per-cent gain. In a statement issued four hours after the TSX opened, West Fraser said it “is aware of recent market and media speculation,” and added that it previously met with Kronospan, an existing shareholder, and CVC Capital Partners, a private equity firm.
Wales-based Kronospan is a major manufacturer of wood-based panels in Europe. Kronospan, through Banasino Investments Ltd., recently owned 8.2 million West Fraser common shares, or a 9.4-per-cent stake.
West Fraser, Canada’s largest lumber producer, said it “has not received a proposal and there are no ongoing discussions regarding the terms of any transaction. The company is focused on executing on its business strategy to create shareholder value.”
In late 2020, West Fraser announced a friendly deal to buy Norbord Inc. in a $4-billion transaction that added Norbord’s global manufacturing of panels used for construction sheathing and flooring. Norbord is the world’s largest producer of oriented strand board (OSB), an engineered panel product.
B.C. billionaire Jim Pattison owns more than 8.9 million West Fraser common shares, or a 10.2-per-cent interest. Mr. Pattison, who supported West Fraser’s purchase of Norbord, also owns 52 per cent of Canada’s second-largest lumber producer, Canfor Corp.
“Lumber is a commodity and it goes up and it goes down, and they’ve had big swings in the lumber business,” Mr. Pattison said in a phone interview on Tuesday from his Vancouver office. “Over all, we are happy with our investment in Canfor and with West Fraser.”
Two-by-fours made from Western spruce, pine and fir sold for an average of US$625 for 1,000 board feet last month, compared with US$1,617.50 in May, 2021, when record highs were set, according to Vancouver-based industry newsletter Madison’s Lumber Reporter.
After completing a buyback of 11.9 million shares last month, West Fraser now has 87.5 million common shares and there are also 2.3 million class B shares. Based on Tuesday’s close on the TSX, the forestry company now boasts a market capitalization of more than $11-billion.
A major shareholder in West Fraser is Seattle-based Ketcham Investments Inc., controlled by the family of Hank Ketcham, West Fraser’s chairman and former chief executive officer.
Ketcham Investments recently owned 3.9 million West Fraser common shares and 1.7 million class B shares.
The Ketcham family would have the ability to vote separately to approve or reject any major transaction. “Certain circumstances or corporate transactions may require the approval of the holders of our common shares and class B Shares on a separate class-by-class basis,” according to West Fraser’s management information circular issued in April.
Potential buyers such as CVC Capital and Kronospan view West Fraser as three distinct units – the B.C. lumber operations, the U.S. lumber facilities and the Engineered Wood Products or EWP business in North America and Europe, according to three investment banking and legal sources. The Globe and Mail is not naming these sources because they are not authorized to speak about potential clients.
The lumber operations generated a total of US$796-million of adjusted earnings before interest, taxes depreciation and amortization (EBITDA) in the first three months of this year, while the North American and European EWP divisions posted US$808-million of adjusted EBITDA.
West Fraser’s B.C. operations, founded by three Ketcham brothers in 1955 in Quesnel, B.C., face the greatest challenges as a result of Indigenous land claims and potential government regulation, according to three investment industry sources. In contrast, the other divisions have strong growth prospects.
If successful, CVC and Kronospan or another bidder might subsequently focus on expansion in the U.S. and Europe and sell lumber operations on the West Coast to a Canadian player, such as a pension fund, to pay down debt and streamline operations, according to the investment industry sources.
Kronospan and CVC are both based in Europe, and as foreign companies, they would need federal government approval to acquire West Fraser. The investment industry sources said if West Fraser’s board made it clear the company is up for sale, a number of Canadian buyers would likely emerge, including pension plans.
Two of B.C.’s largest forest product companies – TimberWest Forest Corp. and Island Timberlands LP – are owned by a pair of pension plans: the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, which is based in Ottawa.
A successful bid for West Fraser will likely require support from two long-time shareholders: Mr. Pattison and heirs to the founding Ketcham family. Three sources who know the Ketcham family say they remain close knit and would vote as a block on any takeover offer. Mr. Pattison is known for buying and holding investments.
Luxembourg-based CVC Capital is one of the world’s largest private equity fund managers, with more than €125-billion in client assets under management, and has done a number of acquisitions in the past with domestic partners that include the Canada Pension Plan Investment Board.
Cole Smead, president and portfolio manager at Smead Capital Management based in Arizona, said West Fraser has hundreds of millions of dollars in lumber duty deposits sitting in the United States that could eventually be mostly recovered, assuming a resolution to the Canada-U.S. softwood dispute.
“There’s money sitting outside of book value out there,” said Mr. Smead, who oversees a fund holding 70,000 West Fraser shares.
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