Lumber manufacturers, recovering from the disruption caused by the COVID-19 pandemic, are now betting on record low mortgage rates and a shift to work from home to encourage people to buy new homes, as well as to undertake do-it-yourself tasks.
The deal helps West Fraser diversify into oriented strand board (OSB) as Norbord is the world's largest producer of the engineered wood used for flooring, wall and roof sheathing.
West Fraser, which will apply to list its shares on the New York Stock Exchange, intends to retain Norbord's 17 plants in North America and Europe.
"Our two top picks combining makes a lot of sense as it provides West Fraser an opportunity to expand into another attractive category in wood products (OSB) by acquiring the leading producer with a very similar culture," CIBC Capital Markets analyst Hamir Patel said.
The combined business should see less earnings volatility as lumber and OSB have different peak and trough cycles, he said.
Norbord shareholders will receive 0.675 of a West Fraser share for each held, or C$49.35 per share based on West Fraser's Wednesday closing price. That represents a premium of 13.6% to Norbord stock's last close.
Norbord's Toronto- and U.S.-listed shares rose about 8%, while West Fraser's stock fell 4.9%.
The deal is expected to help save about C$80 million annually within two years after close, likely in the first quarter of 2021.
Brookfield Asset Management Inc, Norbord's top investor holding 43% of shares, has agreed to vote in favor of the deal.
Some affiliates of members of the Ketcham family, which founded West Fraser, will vote about 19% of outstanding shares for the transaction.
(Reporting by Arundhati Sarkar in Bengaluru; Editing by Amy Caren Daniel and Sriraj Kalluvila)
By Arundhati Sarkar and Rithika Krishna