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The Domtar Pulp Mill and a church in Dryden, Ontario, on Nov. 24, 2019.

David Jackson/The Globe and Mail

One of Western Canada’s largest paper producers is bidding for East Coast rival Domtar Corp. , the latest sign of consolidation in the booming forest products industry.

Domtar disclosed it is in takeover talks with Paper Excellence, a private company based in Richmond, B.C., a deal that could be worth more than US$3-billion. The potential transaction would create one of the world’s largest pulp and paper companies, and was first reported on Monday by Bloomberg. In a press release, Domtar said: “These discussions may or may not result in an agreement.”

“While it is always difficult to predict if a transaction will take place, we believe it is more probable than not,” analyst Benoit Laprade of Scotia Capital said on Tuesday in a report on Domtar. He said: “The company is in play, and therefore any potential buyer now has the opportunity to react.”

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Paper Excellence may pay up to US$55 a share for Domtar, said Mr. Laprade, which would value the company at US$3.2-billion. The price of Domtar stock, which is listed on the New York and Toronto exchanges, rose 19 per cent on Tuesday to close at US$48.30 on the NYSE.

A successful takeover of Domtar would follow on West Fraser Timber Co. Ltd.’s $4-billion purchase of Norbord Inc., which closed in February, and a rally in cyclical forest product stocks driven by soaring commodity prices. Paper Excellence is bidding for Domtar at a time when pulp prices are rising and analysts predict the sector will consolidate around its strongest players.

Over the past decade, Domtar maintained market leadership in lower-quality, uncoated paper that analysts refer to as “commodity paper” while expanding production of items with higher profit margins, such as fluff pulp, which is used to make disposable diapers and feminine hygiene products. In a recent report, analyst Paul Quinn of RBC Capital Markets highlighted two rival U.S. paper companies – Packaging Corp. of America and Westrock – as potential buyers of Domtar. Mr. Quinn said: “Domtar has been able to leverage cash flows from a declining business to relatively more attractive markets such as specialty papers and fluff pulp.”

Domtar’s earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to jump from US$344-million last year to more than US$500-million in each of the next two years, according to Mr. Quinn. Domtar owns seven paper mills and six pulp facilities in Ontario, Quebec, B.C., and the eastern United States, and has 10,000 employees.

Paper Excellence is controlled by Jackson Widjaja, a third-generation member of a billionaire Indonesian family that also owns one of Asia’s largest pulp and paper companies. It was founded in 1912 in Powell River, with construction of Western Canada’s first newsprint mill.

The company went through a series of foreign owners, and was known over the years as Fletcher Challenge Canada Ltd. (New Zealand-controlled) and Norske Skog Canada Ltd. (Norwegian-controlled ). The name changed to Catalyst Paper Corp. in 2005, and Paper Excellence acquired the company in 2019. Paper Excellence has eight Canadian facilities and 3,000 employees in B.C., Saskatchewan and Nova Scotia.

Domtar traces its Canadian roots to Nova Scotia in 1903, when the Dominion Tar and Chemical Co. Ltd. launched a business that treated railway ties and wharf pilings with coal tar to prevent rotting. By 1965, the company had moved into paper products and changed its name to Domtar. Many of J.K. Rowling’s Harry Potter books sold in North America were printed on paper from a Domtar mill in Pennsylvania.

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Next year, Domtar plans to enter the packaging market by completing conversion of a paper mill in Tennessee to a facility that makes lightweight containerboard for cardboard boxes.

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