Domtar and Weyerhaeuser merge.

Two forestry giants have come together in a $3.3 billion US deal that will find Domtar Inc. merging with the fine paper arm of Weyerhaeuser Co. to form the second-largest manufacturer and marketer of uncoated freesheet paper in the world.

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The deal, announced on Wednesday, August 23, sees Domtar Inc.'s shareholders with a 45 per cent ownership stake in the new company, which is to be known simply as Domtar. Weyerhaeuser's shareholders will obtain a 55 per cent stake.

Domtar expects that the new company will have nearly $6.5 billion US in annual sales, with an enterprise value in excess of $6 billion.

With head offices in Montreal and operating headquarters in Fort Mill, South Carolina, the new Domtar will be considered a U.S. entity, though shareholders in its Canadian subsidiary will have the same dividend entitlement and voting rights.

Strong emphasis is being placed on six specific uncoated freesheet mills which are being touted as key, low-cost facilities for the new company, as they are expected to generate two-thirds of its projected five million tons of capacity, alongside a variety of specialty manufacturers. These key facilities include the paper mill in Windsor, Quebec as well as various American mills in Kingsport, Ashdown, Johnsonburg, Bennettsville and Hawesville.

While other mills are not considered to be part of the new company's "backbone", neither Domtar nor Weyerhaeuser expect any job loss, asset sales or capacity closures as a result of this merger. In a conference call with financial analysts on Wednesday morning, Raymond Royer, Domtar's current president and CEO, stated that the move more than doubles his company's paper-production capacity and provides them with a considerable footprint within the United States. In turn, this will make for a larger customer base, allowing existing plants to remain open.

"We believe that we will be able to introduce additional products, and of course, create better productivity and efficiency," he said. "At the same time, we believe that we will also be able to add to the list of customers because of the just-in-time delivery with a much broader line of products and also with the combination of environmental papers that we have started to introduce."

Royer went on to say that the new Domtar will be in a much better position to compete within the industry than either the existing Domtar or Weyerhaeuser could on their own, and such, represents a prime opportunity for both.

Under the terms of the deal, Weyerhaeuser will transfer its fine paper assets to the new Domtar in exchange for a $1.35 billion US cash payment as well as stock that will be distributed to current shareholders. Existing Domtar shares will be exchanged on a one-for-one basis for common shares in the new company, with potential stock involvement in its Canadian subsidiary.

The new company and its 14,000 employees will be led by Royer, who will head up the new Domtar until 2008, to help ensure its smooth transformation, while a replacement is decided upon by its new board of directors. This board will be composed of a blend of the two existing companies, with the new 13-member board consisting of seven individuals nominated by Weyerhaeuser and six by Domtar.

Chairing the new board will be Harold MacKay, a Regina lawyer and international advisor to Weyerhaeuser's board of directors, who will resign his current advisor role prior to becoming chairman.

The new COO position will be filled by Marvin Cooper, Weyerhaeuser senior vice president, Cellulose Fiber & White Paper, Containerboard Manufacturing and Engineering.

The two companies anticipate that the arrangement will create nearly $200 million US in annualized synergies as a result of various process optimizations that will serve to reduce costs across the board. The one-shot cost of implementing these synergies is expected to be approximately $100 million US.

The deal is expected to close in the first quarter of 2007, pending approval from a variety of sources such as Domtar's shareholders, the Superior Court of Quebec, and various regulatory authorities. Until such time, Domtar Inc. and Weyerhaeuser will continue to operate independently.

By NICK STEWART

Northern Ontario Business