Post by
retiredcf on Jul 20, 2022 9:29am
CIBC
EQUITY RESEARCH
July 19, 2022 Flash Research
WEST FRASER TIMBER CO. LTD.
West Fraser In Play – First Glance
Impact: Positive.
Kronospan And CVC Reportedly Make Joint Bid For WFG: On Tuesday
morning, Reuters reported that Kronospan (Europe’s leading panel
producer) and private equity firm CVC Capital have submitted a joint
expression of interest to acquire West Fraser. While the article did not
provide any proposed valuation parameters, WFG shares are trading 21%
higher in pre-market trading. Our base case price target of C$124/share did
not embed any M&A premium.
Potential Transaction Value For West Fraser: If one were to value WFG
based on its historical trading range on mid-cycle EBITDA (~6.0x), that would
suggest a valuation of C$142/share (based on our mid-cycle EBITDA
forecast of $1.6 billion) before giving any consideration for synergies. We
assume mid-cycle SPF lumber prices of $500/mfbm and trend North Central
OSB prices of $320/msf. If we assumed a bid valued the company in line with
current capacity replacement economics ($800/mfbm for lumber and
$600/msf for panels), that would imply a valuation as high as C$175/share.
Deal Considerations: While Kronospan is one of West Fraser’s largest
shareholders (8.2MM shares or 9.4% of common shares via Banasino
Investments), the Ketcham Family controls the Class B shares. Our
understanding is the family would need to be supportive for any proposed
transaction to succeed as a majority of both classes are required to approve
certain transactions. Given Kronospan does not have operating assets in
North America, we do not see any anti-trust obstacles in Canada or the U.S.
(though the BC government would have an effective veto given it needs to
approve any change of ownership in tenure). Given the BC government’s
focus on job preservation, we do not see any reason for the province to
object to a European buyer that is unlikely to alter WFG’s forestry practices
and employment levels in the province over the near term. While the deal
may face more anti-trust scrutiny in Europe on the OSB side (given
Kronospan’s 40% share of the continent’s OSB market and WFG’s 12%
share), we suspect any potential obstacles there could be overcome with
some limited asset sales if necessary.
Read-throughs For Canadian Peers: We expect WFG’s larger Canadian
commodity lumber peers, Interfor and Canfor, to trade higher this morning as
the Kronospan/PE offer for West Fraser highlights the value of wood
products assets.