Quebec takes sides in forestry battle by loaning Mercer to buy Fibrek

MONTREAL - The Quebec government is taking sides in the takeover battle for pulp producer Fibrek Inc. (TSX:FBK) by helping fund a Vancouver-based forestry company's $170-million bid against a competing offer from Resolute Forest Products (TSX:ABH).

Mercer International (TSX:MRI.U) confirmed Friday that "government supported institutions" will provide loans for the cash portion of its bid.

Mercer's bid includes $1.30 per share to a maximum of $70 million in cash and the rest in stock.

The company's chief financial officer, David Gandossi, said the world's largest producer of NBSK pulp decided to seek public support because of the limited time available to respond to the offer by Resolute, whose $130-million hostile bid has been rejected by Fibrek as too low.

"There's sometimes not enough time to use normal market levers to make things happen," Gandossi told The Canadian Press.

He declined to identify the government agency concerned, but Investissement Quebec confirmed that it has been in talks with Fibrek, which like Resolute, is based in Quebec.

"We are in discussions to ensure the continued existence of the company (Fibrek)," said spokeswoman Chantal Corbeil.

Gandossi said it was attracted to Fibrek's mill in St-Felicien, Que., because of its access to black spruce, which is 40 per cent FSC certified, and a trained workforce.

"It's one of the few mills in the world that we could imagine would ever be available for sale of that calibre."

Mercer has not provided any job guarantees in exchange for the government support but has no plans to cut jobs. It will likely sell Fibrek's U.S. operations, which convert recycled fibres.

Fibrek president and CEO Pierre Gabriel Cote said Mercer is an attractive partner because it is solely involved in NBSK pulp, which everybody is bullish on for future markets.

"They're not whatsoever in newsprint or solid wood," he said in a dig at Resolute, North America's largest producer of newsprint, which is facing falling global demand.

"Their market is basically looking good for the future so I think that's where the value is."

The two companies also have no overlapping operations, with Mercer operating two mills in Germany and one in British Columbia, and Fibrek having a mill in Quebec and two in the eastern United States.

Although Mercer's bid tops the $130-million offer by Resolute Forest Products (TSX:ABH), the former AbitibiBowater, the maximum cash portion is identical at $70 million.

Fibrek (TSX:FBK) had rejected the Resolute bid as too low and as an "insider" offer,since Resolute has extensive operational knowledge of the company's Saint-Felicien mill in Quebec, which it built and formerly owned.

In addition, Resolute is Fibrek's largest wood chip supplier.

Although Fibrek has described Resolute's $1 per share offer too low, it has agreed to give Mercer 32.3 million special warrants at that price, along with an $8.5-million break fee if the deal isn't consummated.

Fibrek described Mercer's bid as superior, with a premium of 81 per cent over the closing price the day before the announcement of the unsolicited Resolute bid.

But a source close to the companies said the difference between the two bids comes down to the forecasted values of Resolute and Mercer shares.

"Mercer stock is not equal to Abitibi stock. Abitibi has no net debt, (and) is trading at less than half its book value so they're just not comparable," said the official, who didn't want to be identified.

While Mercer's stock has dipped with the economic slowdown, Gandossi said the company is in a growing market segment while newsprint and lumber are in decline.

He added that Mercer believes it would be a much better owner of the mill than Resolute, which he said has been told by regional officials to back off on its efforts.

"It's too much concentration in one hand there and I think it's a real worry for the independent sawmillers in the region for Abitibi (Resolute) to own that pulp mill."

Resolute wouldn't say if it plans to increase its offer or walk away from the battle until it sees the documents filed by Mercer and Fibrek.

"Based on our review we will evaluate our options," said spokesman Seth Kursman.

Fibrek shares closed up nearly 17 per cent to $1.32 in Friday trading, while Resolute shares were off three cents at $15.10. Mercer shares were down 51 cents, or 5.85 per cent, at $8.21 .

Friday's friendly deal came a day after Quebec securities regulators quashed Fibrek's poison pill defence against the Resolute bid, which expires next Monday.

In a separate development Friday, Fibrek said it was shutting down its Fairmont mill in West Virginia for about five weeks, beginning Feb. 20, to reduce inventories because of a current market slump.

The move will cut about 25,000 tonnes of recycled pulp from production. The Fairmont Mill has an annual capacity of 215,000 tonnes of pulp.

Fibrek produces high-quality virgin and recycled kraft pulp at three mills in Quebec, West Virginia and Michigan. It has a combined annual production capacity of 760,000 tonnes and approximately 500 employees.