Why Is West Fraser (TSX:WFT) Acquiring Norbord (TSX:OSB)?

Summary

• West Fraser to set acquire Norbord for nearly C$ 4 billion.
• On the back of this agreement, West Fraser is expected to get listed on the New York Stock Exchange (NYSE) and retain Norbord’s 17 plants in North America and Europe.
• Norbord’s stock has soared by nearly 84 per cent in the last six months. Its current market cap is C$ 3.9 billion.
• Stocks of West Fraser have surged by almost 88 per cent. in the last six months. Its current market cap is C$ 4.75 billion.

Diversified wood product producer West Fraser Timber Co. Ltd. (TSX:WFT) and leading manufacturer of wood-based panel Norbord Inc. (TSX: OSB, NYSE: OSB) Thursday announced that they have entered into a strategic business agreement. West Fraser will acquire all outstanding common shares of Norbord in an all-stock deal valued at nearly C$ 4 billion. After the conclusion of this transaction, the combined entity will function under the ‘West Fraser’ brand name.

Norbord is the world’s largest manufacturer of the engineered wood used for carpeting, wall, and roof casing. This acquisition will help West Fraser to expand its oriented strand board (OSB) business in the Europe.

West Fraser is planning to list its stocks on the New York Stock Exchange (NYSE) and expects to retain Norbord’s 17 plants in North America and Europe. At the close of this acquisition, West Fraser will be the largest manufacturer of lumber and OSB.

Brookfield Asset Management Inc and its controlled entities, Norbord's main stockholder, has supported this agreement and agreed to vote its nearly 43 per cent of the total Norbord common shares in favour of the deal.

Norbord Inc (TSX:OSB)

Current Stock Price: C$ 48.30

The largest OSB producer has gained over 37 per cent in value year-to-date. In the last six months, the stock has soared by nearly 84 per cent. Its current market capitalization stands at approximately C$ 3.9 billion.

As per TMX data, forest products producer’s profit-to-book (P/B) ratio is 3.375, and the price-to-cash flow (P/CF) ratio is 5.90. The stock provides a positive return on equity (ROE) of 28.95 per cent and a positive return on assets (ROA) of 11.52 per cent. The company’s total debt-to-equity ratio is 0.76. Its price-to-earnings ratio is 11.40.

The basic material stock holds a current dividend yield of 4.969 per cent and pays quarterly dividend of C$ 0.60 per share. The dividend growth for five-year is 17.95 per cent.

Norbord made it to TMX’s top basic materials stocklist that has stocks across the TSX and TSXV with the largest price gains in the last 30 days.

Norbord Financial Highlights

The company recorded an adjusted EBITDA of US$ 322 million for the third quarter of 2020 (ending, compared to US$ 84 million in Q2 2020 and US$ 33 million in Q3 2019.

Norbord registered adjusted earnings of US$ 204 million in Q3 2020 against adjusted earnings of US$ 31 million in Q2 2020 and an adjusted loss of US$ 9 million in the third quarter of 2019.

At the end of third quarter, the company had unutilized liquidity of US$ 654 million, including US$ 240 million in cash and cash equivalents and US$ 414 million in unutilized credit lines. The company’s operating working capital was US$ 191 million in Q3 2020 as compared to US$ 139 million in Q3 2019. The rise was primarily due to higher accounts receivable, which were driven by higher North American OSB prices.

Norbord’s net worth was US$ 1.18 billion, and net liability to capitalization on a book basis was 27 per cent by the end of Q3 2020.

West Fraser Timber Co. Ltd. (TSX:WFT)

Current Stock Price: C$ 71.61

The softwood lumber stock has added nearly 24 per cent in value year-to-date. In the last six months, the stock has surged by almost 88 per cent. Its current market cap stands at C$ 4.75 billion.

As per TMX data, the timber company’s profit-to-book (P/B) ratio is 1.747, and the price-to-cash flow (P/CF) ratio is 5.20. The stock delivers a positive return on equity (ROE) of 13.60 per cent and a positive return on assets (ROA) of 7.62 per cent. The company’s total debt-to-equity ratio is 0.24. Its price-to-earnings ratio is 13.60. The forest product manufacturer has current earnings per share of C$ 5.36.

The basic material company holds a current dividend yield of 1.117 per cent. It pays a quarterly cash dividend of C$ 0.20 per share. The dividend growth for five-year is 28.20 per cent.

West Fraser made it to TMX’s top basic materials stocklist that lists stocks across the TSX and TSXV with the largest price gains in the last 30 days. The company has also been placed on TMX’s top price performer stocks that have outperformed the markets (TSXV and TSX) in the last 30 days.

West Fraser Financial Highlights  

In the third quarter of 2020, the company reported sales of C$ 1,690 million, an increase of 32 per cent year over year, led by higher timber prices.

The lumber segment posted operating earnings of C$ 454 million in Q3 2020. Meanwhile, the pulp and paper segment registered a loss of C$ 5 million due to lower pulp and newsprint costs.

Its plywood segment recorded earnings of C$ 47 million, mainly due to increased plywood prices and strong demand impacting the panels segment.

The company’s liquidity increased quarter over quarter by C$ 546 million to reach C$ 1,346 million in Q3 2020.