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Cascades acquires Domtar’s 50% interest in Norampac

SALMAN PARTNERS – DECEMBER 8, 2006

C ascades announced that it has signed an agreement to acquire Domtar Inc.’s interest in Norampac for $560 million. The company intends to finance the purchase with a $150 million public offering of subscription receipts, $50 million private placement (at the public issue price) and $360 million in increased band debt.

We like the fact that Cascades is very familiar with the Norampac operations and expect very little lost production or operation risk as a result of the acquisition. Since its inception, Norampac has effectively been managed by Cascades. Alain Lemaire, Cascades CEO, previously ran Norampac for over six years before taking on his current role. Norampac presently operates seven containerboard mills, down from eight, after indefinitely shutting its Red Rock linerboard mill in August 2006. Norampac also directly owns 46% of Metro Waste, which is Canada’s largest waste paper recovery and recycling operation. Cascades’ increased ownership in Norampac will take its interest in Metro Waste from 50% to 73%. If we look at EBITDA contribution of Cascades’ various segments over the last twelve months, on a pro forma basis, we find that the acquisition increases the company’s revenues from Norampac to 30% of total sales, from 18% previously.

We view the purchase price as fair to both parties. The implied enterprise value, based on the purchase price of $560 million, is $1.493 billion. The Norampac assets earned $130.4 million in EBITDA over the last twelve months and Cascades does not expect any synergies to arise as a result of the transaction. This equates to an EV/EBITDALTM multiple of 11.4x, which is 3.5 multiple points higher than Cascades EV/EBITDALTM of 7.9x. We note that this multiple drops to 10.8x if we take into account the closing of the Red Rock mill, as this would have increased Norampac’s EBITDA by $8 million over the period. One major concern for us is the high level of debt that Cascades will have after this acquisition. Cascades’ management estimated that their net-debt-to total capitalization would rise to 61.3%, up from 56.3% at the end of Q3 2006. We note that our estimate of EBITDA: Interest coverage drops from 3.7x to 3.3x.

The previous is an excerpt from the Salman Partners Paper & Forestry Products: Weekly Industry Digest, published on December 8, 2006. For more information, please see: www.salmanpartners.com