West Fraser Timber Co. Ltd. (“West Fraser” or the “Company”) (TSX and NYSE: WFG) has announced it has entered into an agreement to acquire the Angelina Forest Products lumber mill located in Lufkin, Texas for approximately $300 million, subject to certain post-closing adjustments. The transaction is anticipated to close following successful completion of U.S. regulatory reviews and satisfaction of customary conditions. Management will provide an update and further details about the transaction on West Fraser’s third quarter earnings call on October 28, 2021. All dollar amounts in this news release are expressed in U.S. dollars unless noted otherwise.
The new turn-key facility, which produces southern yellow pine (“SYP”) lumber products, began construction in 2018, commenced operations in late 2019 and is expected to progress toward full production capacity of approximately 305 million board feet over the next three to four years. The transaction includes approximately $4 million of target working capital and approximately $24 million of supplemental tax attributes that are expected to result in a direct cash flow benefit to West Fraser.
Strategic Rationale and Synergies
The acquisition is another important step in West Fraser’s continued expansion of its U.S. lumber operations. The new, highly efficient facility is expected to be a top quartile mill that will integrate with and support our existing East Texas lumber and OSB business. Anticipated to be among the lowest cost operations in the Company’s lumber mill portfolio, the Lufkin mill is strategically located near low-cost and abundant fibre as well as large and growing end-markets and its additional lumber production will allow West Fraser to better serve the Company’s growing customer base in Texas and the southern U.S. Upon completion of this transaction, West Fraser will have combined Canadian and U.S. lumber production capacity of approximately 7.0 billion board feet, with U.S. capacity of SYP lumber representing approximately 50% of the Company’s capacity.
“We look forward to welcoming the Lufkin mill employees to West Fraser. The management team at Angelina Forest Products has done a commendable job developing the Lufkin team and operations, and we believe this modern, high-margin facility will enhance our existing U.S. platform of lumber mills and help us to better meet the growing demand for our lumber products in Texas and the U.S. South,” said West Fraser’s President and CEO, Ray Ferris. “With this acquisition, we will be able to quickly capitalize on a fully-invested and high-quality manufacturing facility. This includes a trained labour force and the local community and logistics infrastructure to support the mill’s supply chain, distribution and outlet for residuals. Further, we are able to immediately reap the cash flow benefits of our investment while significantly reducing the associated risks of greenfield construction, execution and start-up.”
West Fraser intends to finance the acquisition with cash on hand. Annual synergies of approximately $13 million are anticipated to be achieved within two years with minimal capital requirements. These synergies are expected to be realized through continued capacity utilization improvement, implementation of best practices and the coordinated transportation, logistics and procurement benefits derived from West Fraser’s distribution scale and existing production facilities in the region.
It is anticipated that after the cash tax benefits described above, the post-synergy mid-cycle Adjusted EBITDA multiple at full production will be approximately 6.4x and the transaction is expected to generate an internal rate of return (“IRR”) of approximately 13%. Based on recent industry announcements and West Fraser’s latest internal analysis, the cost to construct a greenfield lumber mill of the scale and quality of the Lufkin mill plus working capital investment and the foregone cash flows anticipated during the construction and ramp up phases are expected to exceed the purchase price for this top quartile facility.
The Company
West Fraser is a diversified wood products company with more than 60 facilities in Canada, the United States, the United Kingdom, and Europe. From responsibly sourced and sustainably managed forest resources, the Company produces lumber, engineered wood products (OSB, LVL, MDF, plywood, and particleboard), pulp, newsprint, wood chips, other residuals and renewable energy.
