U.S. giant Weyerhaeuser grabs Domtar

If a tree cutter falls to a foreigner, does anybody care?

No matter how you split the pine cone, yesterday's merger of Domtar with the fine-paper operations of U.S. giant Weyerhaeuser means the axe falling on Eastern Canada's sadly spindly forest industry is increasingly held by American hands.

What's more, with Domtar, the Yanks are getting the best of an admittedly bad bunch. With control of Domtar moving south, it leaves only Abitibi-Consolidated, Tembec and Cascades solidly rooted in Eastern Canadian soil. Were they Christmas trees, only Charlie Brown could love them.

The "new" Domtar, created by stapling Weyerhaeuser's fine-paper operations to its Canadian partner's mills, will officially have a head office based in Montreal and current Domtar chief executive officer Raymond Royer will still sit atop the tree.

But all that is really just a sop to the pols -- the Quebec government, which grants timber-cutting licences, and the Caisse de dépôt et placement du Québec, Domtar's biggest shareholder with a 15.4-per-cent stake.

For now, both can claim publicly to have saved a Quebec head office. But they know full well it won't be for long.

Mr. Royer, 67, has agreed to stay on until 2008. When he leaves, his successor will almost certainly not speak English with a Quebec accent. Nor will he be based in Montreal. More likely, he or she will talk with a twang and work out of South Carolina, the site of the new Domtar's operational headquarters.

It could very well end up being Marvin Cooper, 62, the Weyerhaeuser executive vice-president who will become the U.S.-based chief operating officer of the new Domtar. Mr. Cooper is considered a star in the U.S. forest industry, turning Willamette Industries' pulp and paper operations into the envy of its peers. That led to a bonanza for Willamette's shareholders when Weyerhaeuser coughed up $6.2-billion (U.S.) to buy the company in 2002.

The new Domtar will be majority-owned by Weyerhaeuser's shareholders. It will cease to be what's known, for income tax purposes, as a "Canadian resident" company. Eighty per cent of its fine-paper production capacity will be located at mills south of the border.

All of that is not just a reflection of Weyerhaeuser's weight. Even without the merger, the Domtar Mr. Royer runs today is radically different from the company he inherited a decade ago, when he traded Bombardier's trains for Domtar's trees.

Then, Domtar's annual sales hovered around $1.8-billion (Canadian) and its mills were located entirely in Quebec and Ontario. Although it bought Ottawa-based E.B. Eddy from George Weston Ltd. in 1998, Domtar's Canadian operations have been shrinking ever since. Instead, it's been growing in the United States, where Mr. Royer bought four paper mills from Georgia-Pacific in 2001. The Ashdown, Ark., mill that it acquired then remains Domtar's biggest and most modern, spitting out 925,000 tonnes annually of uncoated freesheet, used mostly to feed copiers and printers.

Apart from Domtar's Windsor, Que., paper operations, with a 620,000-tonne capacity, its other Canadian mills are older, smaller and less efficient than anything it's got down south. And that's even after the recent closing of its 125-year-old Cornwall, Ont., mill as part of a massive cost-cutting exercise that saw Domtar slash 1,800 jobs and shut down 40 per cent of its Canadian paper-making capacity.

Capacity reduction across the paper industry is the main reason prices for uncoated freesheet have climbed steadily since 2004, to $850 (U.S.) a tonne from $625. Of course, the heady ride of the Canadian dollar has sapped most of those gains for Domtar and its Canuck peers.

So, Mr. Royer's ability to merge Domtar when the company's stock price is barely a third of its 2004 level and its prospects are hardly enviable might actually be an achievement of sorts. Mr. Royer can rightly claim to have created the continent's biggest fine-paper player.

"They didn't get a premium," conceded veteran CIBC World Markets analyst Don Roberts. "But there is still value created for shareholders. They get $200-million in synergies and a better balance sheet." So, should we care that Domtar's no longer Canadian, even though a lot of the trees it cuts are?

"If it was an industry with a future, I'd be worried," one Montreal financial executive remarked. "But it's an industry in decline." That's not good news for mill workers in Canada. But on the bright side, it will rid us sooner or later of that darn "hewers of wood" label.