Interfor Corp T.IFP

TD

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Interfor Corp.

(IFP-T) C$36.63

IFP Acquires 16% Equity Stake in GreenFirst Forest Products Event

Yesterday after market close, Interfor announced that it has acquired a 16.2% equity stake in GreenFirst Forest Products (GFP-T, not covered) for a cash consideration of $56 million. Interfor acquired 28.7 million shares at $1.94/share - an 8% premium to yesterday's GFP closing price. The seller was Rayonier Advanced Materials Inc. (RYAM-N, not covered), the former full owner of the GreenFirst assets. GreenFirst owns seven sawmills and one paper mill in Ontario and Quebec with annual lumber capacity of 905 million board feet (755 million board feet operating now) and annual newsprint/uncoated groundwood paper capacity of 220,000 tonnes.

Impact: POTENTIALLY POSITIVE

• The $56 million consideration for the equity stake is a fraction of Interfor's available liquidity. Interfor ended 2021 with net cash of $162.9 million and available liquidity of $1.013 billion. Adjusted for the GreenFirst investment, the Q1 acquisition of EACOM, and recent share repurchases, pro forma available liquidity remains strong at $201 million.

• The investment aligns with Interfor's recent expansion into Eastern Canada via the EACOM acquisition. There is a Purchase Price Protection clause that entitles RYAM to participate in additional stock price appreciation under certain circumstances for a defined period of time. Interfor characterized the purchase as "for investment purposes"; we expect some clarity regarding potential consolidation intentions on next week's Q1/22 conference call.

• The relatively low capacity multiple reflects a challenged competitive position. Ascribing no value to the paper mill (conservative assumption), Interfor's purchase implies a lumber capacity multiple of US$364/Mfbm, a 9% discount to Interfor's acquisition of EACOM (US$398/Mfbm), and less than half of current greenfield replacement cost. We note that these sawmill assets have consistently generated below-average margins during GFP's ownership, and, before that, under RYAM's and Tembec's ownership. Over the past 20 years, this sawmill portfolio posted average EBITDA margins of 1.6% versus the North American sector average of 7.5%. Since Q2/20, a period of exceptional lumber prices, the GreenFirst sawmill portfolio's average EBITDA margin is 21.2% versus the North American average of 27.5%. GFP management is advancing initiatives intended to improve productivity and margins.