B.C. billionaire Jim Pattison has acquired a 10.1-per-cent stake in Canada's largest lumber producer, West Fraser Timber Co. Ltd., raising speculation about a potential merger with Canfor Corp.
The 88-year-old businessman is the biggest shareholder in the country's second-largest lumber producer, Canfor, in which he holds a 47.8-per-cent stake.
"We believe there are significant synergies in the potential combination of North America's two largest lumber producers, including but not limited to unprecedented scale and geographic diversification," RBC Dominion Securities Inc. analyst Paul Quinn said in a research note.
Through Great Pacific Capital Corp., Mr. Pattison has become the second-largest shareholder in West Fraser, holding 7,926,000 shares, according to recent regulatory filings.
The biggest shareholder in West Fraser is Seattle-based Ketcham Investments Inc., controlled by the family of Hank Ketcham, the lumber firm's chairman and former chief executive officer.
Ketcham Investments owns 8,405,946 West Fraser shares, or a 10.7-per-cent interest in the Vancouver-based forestry company.
Mr. Pattison owns more than 63.5 million shares in Vancouver-based Canfor.
Over the past dozen years, West Fraser and Canfor have diversified by acquiring sawmills in the United States. Combined, roughly two-thirds of their recent lumber capacity originated from Canada while one-third was located south of the border, according to TD Securities Inc. analyst Sean Steuart.
Those U.S. assets will help the two Canadian companies weather the storm from the Trump administration's decision in April to impose preliminary countervailing duties on softwood lumber shipped from Canada into the United States, industry experts say.
With Mr. Pattison disclosing his 10.1-per-cent stake in West Fraser, it is intriguing to recall a forestry merger that occurred 14 years ago that involved the B.C. businessman, Mr. Quinn said.
"In 2003, Mr. Pattison held large stakes in both Canfor and Slocan Forest Products, which would later merge in a $455-million deal that same year, largely driven by an informal partnership between Mr. Pattison and Stephen Jarislowsky, another prominent Canadian billionaire," the RBC analyst wrote. "Given the fragmentation of the North American lumber industry (where the top 20 producers only accounted for 58 per cent of shipments in 2016), we would argue that consolidation would make a lot of sense."
Large swaths of beetle-infested trees have been harvested in the B.C. Interior over the years, and the supply of damaged timber is declining. Consolidation makes economic sense, given the timber supply constraints in the B.C. Interior, Mr. Quinn said.
But he said Canada's Competition Bureau would be concerned about concentration, especially within the B.C. lumber market, if a Canfor-West Fraser merger were to be attempted.
"We do not see this combination coming to fruition anytime soon given the significant competitive issues associated with the Canadian lumber industry," he said.
West Fraser and Canfor are primarily lumber producers, though they also are major makers of pulp and paper.
Brent Jang