On November 19, 2020, West Fraser Timber Co. Ltd. (TSX: WFT) and Norbord Inc. (TSX: OSB) announced that they have entered into a strategic business combination under which West Fraser will acquire all of the outstanding common shares of Norbord in an all-stock transaction valued at approximately CAD 4.0 billion. Following closing, the combined company will operate as West Fraser. Upon closing current West Fraser shareholders will own approximately 56% of the company, with current Norbord shareholders owning approximately 44%.

Swap ratio: Norbord shareholders will receive 0.675 of a West Fraser share for each Norbord share, which equates to CAD 48.33 per Norbord common share, based on the closing price of West Fraser common shares on November 19, 2020.

Key benefits of the Merger

• More stable cash flows and increased resilience: The transaction will add a strong cash flow generating OSB business to West Fraser's existing portfolio, with increased scale, and diversity across products and end uses, geographies, and markets will firmly establish West Fraser as a leader in the global wood products industry.
• Enhanced capital markets profile: Based on combined last twelve months (LTM) revenues of CAD 8 billion along (LTM) Adjusted EBITDA of CAD1.7 billion West Fraser will become a leader among its peers.
• Expanded, higher value, customer relationships: With a combined home and building construction product offering that includes a wide range of lumber and OSB panel applications, as well as other engineered wood products, the combined company is more relevant, efficient and valuable for its principal pro-dealer, homebuilder, and building construction customer segments.
• Unlocks and de-risks strategic growth potential: The combined business will have the operational platform and financial capacity to accelerate growth in the North American lumber and industrial panels segments, as well as in both lumber and OSB in Europe.
• Merger synergies to enhance cost leadership: The companies are already leaders on costs and Adjusted EBITDA margins in their respective segments, and the transaction is expected to improve that performance through meaningful synergies of up to CAD 80 million annually from fibre supply chain simplification, shared purchasing programs, transportation optimization, leveraging technology to improve reliability and productivity, and more efficient capital allocation. These synergies are expected to be achieved within two years of closing.

 Stock Recommendation (OSB):

As the swap ratios indicate that the Norbord shareholders will receive 0.675 of a West Fraser share for each Norbord share, based on this calculation the equation stands at CAD 48.33 per Norbord common share, at the closing price of West Fraser common shares at CAD 71.66 as on November 19, 2020.

Valuation Methodology (Illustrative): EV to EBITDA

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

We have valued the stock using EV to EBITDA based valuation and arrived at low double-digit downside (in % terms). We have considered Canfor Corp, Interfor Corp and Western Forest Product etc., as a peer group.

The stock of OSB was trading at CAD 48.3 at the business close on November 19, 2020, which is equivalent to proposed swap value. Hence, we recommend the investor to ‘Sell’ the stock and take out the profit at the closing price CAD 48.3 on November 19, 2020.

Stock Recommendation (WFT)

The deals look more favourable to West Fraser Timber Co. Ltd. s this transaction will add a healthy cash flow generating OSB business to West Fraser's existing portfolio.

Valuation Methodology (Illustrative): EV to EBITDA

(Note: All forecasted figures and peers have been taken from Thomson Reuters)

We have valued the stock using EV to EBITDA based valuation and arrived at a target price offering high single digit (in % terms) potential. We have considered industry (paper & forest product) median for the valuation purpose. Therefore, we have given a “Hold” recommendation on WFT at the closing price of CAD 71.61 as on November 19, 2020.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

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