::The Center for Paper Business and Industry Studies::

060825 Deutsche Bank Report - Dr. Paper's Weekly Wrap Up

Deutsche Bank - Equity Research

WY combining its UFS assets with DTC in cash & stock deal valued at
$3.3B. WY contributes 3MM tons UFS, 800k tons market pulp, and 240K
tons LWC. Good deal for both, but especially for DTC. Co's see
$200MM in synergies. No mention of closures.

International Paper sold Impacel (BZ) for $415MM to Stora Enso.
Deal includes 200K+ tpy LWC, 125K acres (75K planted) of land,
83MMbf of lumber. Valuation looks a bit lighter than expected, but
restructuring continues. Is IP close to a UFS deal in BZ?

Some weak industry data. P&W shipments fell 3.4% y/y in July. (CFS
down 5.3% y/y and UFS down 1.7% y/y.) Newsprint consumption @ US
dailies fell 9.0% y/y. For moment producers have pricing power, but
will a weaker 2H economy bring an autumn cooling?

060825 Deutsche Bank Report - Dr. Paper's Quarterly: An autumn cooling?

As Labor Day approaches, the big issue for paper companies? Will
autumn bring a cooling in the industry recovery? In most pulp &
paper markets, the last few quarters have seen a healthy cyclical
rebound. Demand has improved modestly, operating rates have been
driven upward by better volumes & reduced supplies, and prices have
strengthened. In categories like market pulp, uncoated paper and
containerboard, prices are at their highest levels in a decade.
However, most stocks have languished. One big reason is that rising
costs have dampened much of the margin improvement from higher
prices. Mid-90's prices aren't producing mid-90's margins.
Moreover, firms with exposure to building products have been hurt by
the sharp drop in lumber & panel prices. However, the biggest issue
in the stocks is concern about whether the recovery is sustainable.
With the economy easing, industry volume growth is destined to
slow. Supply discipline will likely be required to keep markets
tight.

We remain extremely cautious on wood products exposure, believing
that the combination of new supply and lower demand have set stage
for 2-3 yr downturn. We are cautiously optimistic on paper, with
the biggest issue being the fall-out from economic slowing. We
especially like some of white paper (GLT, DTC, IP) and
containerboard names. In packaging, valuations look compelling on
certain out-of-favor names, such as O-I.

060824 Deutsche Bank Report - July Newsprint Numbers

Deutsche Bank - Equity Research

July newsprint statistics show continued erosion in consumption
(down 9.0% at US dailies). Inventories rose a bit more than normal
for July, and the 45 days of supply at the US dailies are the most
in about a year.

The consumption decline in July was slightly worse than recent
trend. Consumption at the US dailies was off 9.0% y/y, and there
were the same number of Sundays this year as last, making this an
apples to apples comparison. According to estimates from the Pulp &
Paper Products Council, “total” US consumption fell 8.5% y/y (YTD -
6.0%).

Offshore shipments remain weak. Total NA offshore shipments fell
5.6% y/y (YTD -15.7%). Volumes to Europe remain especially soft,
down 44.5% YTD. Volumes to Latin America are the bright spot.

Operating rates remain fairly high, but they have eased from the
very high levels of a few months ago. In July, Canadian mills ran
at 93% and US mills at 94% for an NA average of 93%. By comparison,
in May, the operating rates in Canada & the US were 95% and 97%
respectively, for an NA average of 96%. The strong CN$ continues to
squeeze CN mills.

The strong operating rate led to slightly greater than normal m/m
inventory increase. Mill and publisher inventories normally
increase from June to July by 37K tons; this year there was an
increase of 56k tons, a negative variance of 19K tons. The last few
months have seen some negative inventory variances, but they still
remain relatively lean by historical standards. Days of supply at
the U.S. dailies increased from 44 to 45 days.

The strong CN$ remains a huge issue, since 60% of NA newsprint is
produced in Canada. Most of the CN-produced newsprint is sold in
US$. High electricity & fuel costs are also major issues.
Producers are out with another $40/ton hike attempt for August 1,
but the trade papers have not recognized any part of this initiative
to date. The list price of $675/mton represents an impressive
improvement over the mid-$400's level of mid-2002. However, with
the sharp rise in the CN$ & other input costs, margins remain
unsatisfactory. We maintain our Hold ratings on Bowater & Abitibi.

060823 Deutsche Bank Report - Weyerhaeuser Combines Assets with Domtar

Deutsche Bank - Equity Research

Weyerhaeuser announces disposition of white paper assets.
WY will combine its uncoated free sheet and related assets with
Domtar. In exchange, WY shareholders will receive $1.35B in cash,
as well as 55% ownership in the new Domtar. Based on the pre-
announcement stock price of Domtar, the transaction value is $3.3B.

Did Weyerhaeuser get the better of the deal?
WY's assets generated pro forma EBITDA of $380MM. Based on a
transaction value of $3.3B, the EV/EBITDA multiple appears to be
8.6x. On the same basis, Domtar generated pro forma EBITDA of
$444MM, and it has an EV of $3.6B, suggesting an EV/EBITDA multiple
of 8.1x. WY's higher multiple on a similar set of assets suggests
that it got the better of the deal.

Domtar also got a good deal
The deal gives Domtar increased scale and an increased proportion of
US-based assets relative to Canadian assets, which is a positive in
today's strong CN$ environment. Also, the transaction value looks
reasonable to us even before the potential benefits of synergies and
cyclically improving prices are factored in. Once those potential
benefits are considered, the deal may eventually prove highly
beneficial to Domtar shareholders.

Valuation/Risk
Our WY price target is based on a multiple of 6.2X EV/Normalized
EBITDA. We use the EV/EBITDA metric to eliminate differences
arising between paper co's with varying debt levels. Like any paper
company, the primary risk involves the economy. Industrial activity
levels influence demand for packaging grades, and employment levels
affects the demand for white office paper. We also have concerns
about interest rate risk in building materials and real estate, as
well as some operational/strategic questions in pulp, paper and
packaging.

060823 Deutsche Bank Report - COMPANY ALERT - Weyerhaeuser

Deutsche Bank - Equity Research

In a widely anticipated deal, Weyerhaeuser has agreed to combine its
uncoated free sheet assets with Domtar. According to the terms of
the deal, WY shareholders will receive $1.35B in cash, as well as
55% ownership in the new Domtar. According to the press release,
the current price of Domtar stock implies a transaction value of
$3.3B. Approximately $200MM in annual synergies are expected.

We think this is good news for WY shareholders. The transaction
value of $3.3B is higher than the $2.5-3.0B that we were
estimating. While cash is only part of the consideration, the new
Domtar should be liquid enough to allow conversion of shares into
cash without too much leakage. For Domtar, the deal creates much
greater scale as well as additional mix shift of assets into the
US. Realization of expected synergies will be key. There is a
joint conference call at 9:30 am ET, 888-221-5699. WY will hold
another conference call at 11:00 am ET at the same number.