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Astride the forest

Paul Sullivan


VANCOUVER (GlobeinvestorGOLD) — British Columbia billionaire Jimmy Pattison insists his part in the creation of a B.C.-based global lumber giant was just good business practice, but long after he is gone, Canfor Corp. — now the world's second largest lumber company — will stand as a monument to his deal-making genius.

Mr. Pattison was not in the room on March 25 when Slocan Forest Products Ltd. shareholders voted to approve the takeover of their company by Canfor Corp., but his activity behind the scenes certainly made the merger possible. He read the province's business and political climate perfectly, waiting until the Liberals took over in Victoria to begin making his move, as the former NDP government had already blocked one merger attempt, back in 1995.

He bought low — both Canfor and Slocan shares were dragged down by over-capacity and redundant operations, but most significantly by the softwood lumber dispute with the United States, a dispute that saw Canadian companies paying punitive duties to retain their share of the U.S. markets.

That dispute has not been resolved, but both sides are making encouraging noises, and the momentum favors an accord. Meanwhile, Mr. Pattison, who was the principal shareholder in both companies — he owned about 20 per cent of each before the merger was finalized April 1 — will reap the rewards regardless of the status of the dispute. At today's stock prices, the deal is worth about $700-million in stock and debt. Under the agreement, every Slocan share is worth 1.3147 Canfor shares, so if you do the math, Mr. Pattison's position in the combined entity has improved considerably. And thanks to historically high lumber prices, Canfor shares are trading at $14.95 on the Toronto exchange, their highest point over the past five years.

By any yardstick, the merged company is a force to be reckoned with:

Most observers expect that the new Canfor will not stop at the merger. Mr. Shepherd told reporters at the March 25 shareholders meeting that "the world is waiting out there. I see this as a stepping stone for further growth, absolutely ... the intent is not to stand still."

Before Canfor enters an acquisition round, it will have to divest itself of one mill to make Canada's Competition Bureau happy — the Canfor sawmill in Fort St. James, which is only about 50 kilometres from the former Slocan mill in Vanderhoof. Local observers see the requirement as a bit of a blessing, as they were concerned that Canfor would close the mill anyway. Now it will be sold to Canfor's competitors, likely West Fraser Timber Co., Canada's second largest producer of softwood lumber, according to a survey in the March issue of Logging and Sawmill Journal.

The creation of this new lumber powerhouse has analysts, if not excited, at least optimistic about the stock.

According to the Thomson/First Call survey of 12 analysts, their median target is $15.85, and John Duncanson of Jennings Capital, Inc. is literally out on a limb with a target of $19.50. A recent Reuters survey had 2 analysts recommending a buy; 5 called for the stock to outperform; 3 recommended investors hold. Not one predicted the stock will underperform, and no one recommended selling. In the short term, analysts are looking for 19 cents a share on first-quarter revenue of $556-million. For the year, they're calling for 99 cents a share on sales of $2.56-billion.

Although "dimensional" lumber prices — measured cut lumber — are expected to stay above $350 through the fall, there's still a fair amount of analyst caution, as Canfor is still required to pay a 12.24-per-cent tariff on shipments south of the border. An early resolution of the dispute could well see the stock hitting the high end of the range.

One interesting wrinkle is the possibility that B.C. will cut a separate deal with the U.S. if there is no prospect of a national deal. In a massive retooling of its timber marketing practices, B.C. has moved to market-based pricing for timber harvested on Crown land. That has the approval of U.S. negotiators, and backroom discussions have already begun under the nose of the Canadian government. B.C. Forests Minister Mike de Jong says he'd still prefer a national deal, but if Canadian unity of purpose cannot be maintained, he's prepared to go it alone. And if a made-in-B.C. deal is struck, that will make B.C.-based lumber stocks — and especially the new lean and mean Canfor — instantly attractive.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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