DBRS Morningstar Places West Fraser Timber Co. Ltd. Under Review with Developing Implications Following Agreement to Acquire Norbord Inc.

DBRS Limited (DBRS Morningstar) placed West Fraser Timber Co. Ltd.’s (West Fraser or the Company) Issuer Rating and Unsecured Debentures rating of BBB (low) Under Review with Developing Implications following the definitive agreement to acquire Norbord Inc. (Norbord) in an all-stock transaction valued at $4.0 billion (USD 3.1 billion). Following the close, the combined entity will operate as West Fraser. Under the agreement, each share of Norbord will be exchanged for 0.675 share of West Fraser. The boards of directors of both companies unanimously approved the transaction, which will be implemented by way of a plan of arrangement. In addition, Brookfield Asset Management Inc. (rated A (low) with a Stable trend by DBRS Morningstar), which owns approximately 43% of Norbord common shares, and the Ketcham family, which owns approximately 19% of West Fraser common shares, have each entered into separate voting support agreements in favour of the transaction. The transaction is expected to close in Q1 2021 subject to customary closing conditions and approvals from shareholders (a special meeting of shareholders is anticipated in January 2021), the Ontario Superior Court of Justice, and regulators. The completion of the transaction will also be subject to the listing of West Fraser common shares on the New York Stock Exchange. The plan of arrangement also includes a reciprocal termination fee of $110 million, which may be payable by either company in certain circumstances.

DBRS Morningstar notes that Norbord is the world’s largest producer of oriented strand board (OSB) and a leading global manufacturer of wood-based panels with operations in the U.S., Canada, and Europe. Norbord reported USD 508 million in adjusted EBITDA for the last 12 months ended Q3 2020 (LTM) and had USD 677 million in total lease-adjusted debt and USD 240 million in cash and cash equivalents at the end of Q3 2020. Relative to West Fraser, the combined entity’s pro forma LTM debt-to-adjusted EBITDA will modestly deteriorate to 0.95 times (x) from 0.68x. The Company expects to achieve annual synergies of up to $80 million within two years of closing from fibre supply chain rationalization, shared purchasing programs, transportation optimization, technology to improve reliability and productivity, and efficient capital allocation.

Upon successful completion, the transaction will add significantly to West Fraser’s size. Although the transaction will improve diversification, in terms of product offerings and geographic exposure, the addition of Norbord’s OSB business will further increase West Fraser’s exposure to cyclicality in the housing construction segment. DBRS Morningstar also notes that the relatively higher leverage at Norbord will modestly weaken the Company’s key credit metrics at the closing of the transaction. However, the Company has reiterated its commitment to conservative financial policy.

DBRS Morningstar expects to resolve the Under Review with Developing Implications status after further analysis, including the receipt of additional information from the Company and discussions with management. After a preliminary assessment, DBRS Morningstar anticipates that the transaction will likely have no impact on the overall ratings of West Fraser; however, DBRS Morningstar would like to get further clarity regarding the implications of the greater exposure to the North American building products market, among other matters.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Forest Products Industry (March 19, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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