DBRS Comments on Great Pacific Capital Corp.’s Proposal to Take Canfor Corporation Private

DBRS Limited (DBRS) notes that, on August 10, 2019, Great Pacific Capital Corp. (Great Pacific) made an unsolicited and non-binding offer to acquire all outstanding shares of Canfor Corporation (Canfor or the Company) that it does not already own for $981.7 million. Great Pacific, which is controlled by Jim Pattison, currently owns 51% of Canfor’s shares. The potential offer, which would be subject to regulatory and shareholder approval, values the Company at about $3.0 billion (including $1.0 billion of debt at the end of Q2 2019) and Great Pacific indicated that, if approved, the transaction would allow for significant administrative costs savings that would stabilize Canfor’s operations. The Company is currently facing challenging market conditions in its B.C. mills, where elevated log costs and low lumber prices have pressured its operations. DBRS understands that Canfor has created a special committee of independent directors who will prepare a response, if any, to Great Pacific’s offer.

On July 4, 2019, DBRS confirmed all ratings on Canfor at BBB (low) with Stable trends based on the expectation that current softness in the North American lumber market will not permanently affect the Company’s credit metrics and business profile. While the effect of low lumber prices, coupled with debt funding of acquisitions, has weakened the Company’s leverage metrics in the short term, the combination of recovering prices, the full-year contribution from acquired assets as well as some debt repayment will bring leverage back to levels that are commensurate with its current ratings. Canfor and some of its Canadian competitors have announced both temporary and permanent curtailments out of British Columbia as a response to challenging market conditions in the region. At this point, the full impact of these curtailments on lumber prices remains to be seen. The Company’s investment-grade rating is still supported by its low-cost operations, scale and low correlation between its lumber and pulp business lines; however, the ratings remain constrained by its exposure to U.S. trade protectionist policies and foreign-currency fluctuations caused by a currency mismatch between its cost and revenue base.

While Great Pacific’s announced proposal does not yet have any impact on Canfor’s ratings, DBRS will continue to monitor any new developments and future potential events that could affect its outlook on the Company.

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

The principal methodology is Rating Companies in the Forest Products Industry, which can be found on dbrs.com under Methodologies & Criteria.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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