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Norske Skog Canada Ltd. said Monday it will acquire Pacifica Papers Inc. in a stock-and-cash deal aimed at creating North America's third biggest newsprint and specialty papers company.

The combined company will have 2.7 million tonnes of pulp and paper capacity, boasting annual sales of $2.5-billion.

The two companies confirmed late last week that they were in talks to combine their businesses. In a release Monday, both said their boards are now recommending that shareholders approve the transaction.

Under Monday's proposal, shareholders would get 2.1 Norske Skog Canada shares for each Pacifica share. They can also opt for one Norske Skog share and $7.50 cash for each Pacifica share. The acquisition will be completed through a court-approved plan of arrangement.

Norske Skog Canada said it will also make a special distribution of $12 per share to its existing common shareholders through a separate plan of arrangement.

On Friday, Pacifica stock closed down 39 cents at $12.56 on the Toronto Stock Exchange, while Norske Skog Canada shares finished at $18, up 40 cents.

Shareholders of the two companies are to vote on the proposal in May.

As a result of the acquisition, Norske Skog said it expects to save about $60-million annually through synergies. The acquisition, it said, will also be accretive to earnings in the first 12 months after the deal closes, although it didn't offer any specific figures.

Russell Horner, Norske Skog's president and chief executive, said the proximity of that company's Vancouver Island mills to Pacifica's Port Alberni and Powell River operations made the transaction particularly attractive, offering synergies that no two other companies could achieve.

Norske Skog also operates pulp and paper mills at Crofton and Campbell River. As previously announced, the company is looking at selling its third operation, Mackenzie Pulp, which is located in the northern interior of British Columbia.

"With four mills located within a 100-mile radius on the lower South Coast, we will be creating a global scale, value-adding business that will benefit our stakeholders and the Province of B.C.," Mr. Horner said in a statement.

"At the same time, the special distribution rewards our existing shareholders who have been patiently waiting for the company to make a move. The company also retains the financial ability to grow through internal and external investments."

Norske Skog, formerly called Fletcher Challenge Canada Ltd., is majority owned by Norway's Norske Skogindustrier ASA. As a result of the Pacifica acquisition, Norse Skog Canada said the Norwegian company's interest would fall below the current 50.8 per cent, although it will maintain a "strong affiliation" with its Canadian counterpart.

Pacifica has 1,800 employees while Norske Skog has 2,100.

Monday's deal marks a continued consolidation in the industry, which has seen companies in Canada, the United States and Europe join forces to cut costs and become more efficient to compete amid intense competition.

In Canada, Montreal's Abitibi-Consolidated Inc. bought Donohue Inc. last year, creating one of the world's biggest paper companies. Meanwhile, U.S. industry giants like International Paper have recently completed multibillion-dollar acquisitions to become even more dominant in key markets.

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