Paper Excellence’s very big deal

It is a Very Big Deal.

At 10am on Thursday, July 29, at a special virtual meeting, shareholders of Domtar, a giant in the North American pulp and paper industry, will vote on whether to accept the sale of all the corporation’s issued and outstanding shares of common stock to Paper Excellence for US$55.50 per share in an “all-cash transaction” worth about US$3 billion, or CN$3.77 billion.

Paper Excellence is part of the gargantuan and opaque corporate empire of the multi-billionaire Widjaja family of Indonesia. It is also owner of the controversial Northern Pulp mill in Nova Scotia.

If the Domtar acquisition goes through, it will give Paper Excellence control over an additional 12 pulp and paper mills in North America, four of them in Canada, as well as nine “manufacturing and converting facilities” in 15 US states. Domtar has “21 manufacturing facilities located around the world” and 6,400 employees “serving more than 50 countries around the world.”

Domtar corporate offices are currently in Montreal and South Carolina, while Paper Excellence is headquartered in Richmond, BC.

According to Bloomberg, the transaction would “take U.S.-listed Domtar private” and according to the global organization Natural Resources Defense Council (NRDC) it “would put at its helm a family that’s internationally notorious for both human rights abuses and deforestation.”

Paper Excellence goes to great lengths to obscure its family ties with the Widjaja family’s Asia Pulp & Paper / Sinar Mas conglomerate, perhaps in an effort to distance itself from APP’s dismal environmental and social record. As well, APP is noted for setting a record for “Asia’s worst corporate default” when it stiffed creditors for $13.9 billion worth of “bonds, loans and trade payables” in 2001.

But as the Halifax Examiner reported here, no matter how much distance — and how many tax havens — Paper Excellence Canada Holdings may try to put between itself and the corporate empire of the Widjaja family in Indonesia, when all the dots are connected they show that Paper Excellence Canada companies (both direct and indirect subsidiaries) are all effectively owned and controlled by Sinar Mas / APP, and the Widjaja family.

The proposed acquisition of Domtar is just the latest in a series of pulp purchases for Paper Excellence, which has been busy in the last decade laying the foundation for a new paper empire in Europe, North America, and most recently, South America.

Paper Excellence is set to become “100% owner” of a pulp mill in the state of Mato Grosso do Sul in Brazil, along with 230,000 hectares of eucalyptus plantations in the state. Paper Excellence Brazil, formed in 2017, has offices in the USA, Brazil, and China.

Paper Excellence also owns and operates two controversial pulp mills in France, as the Halifax Examiner reported here and here.

In 2019, Paper Excellence acquired three mills from Catalyst Paper in British Columbia — in Crofton on Vancouver Island, Port Alberni, and Powell River.

As a result of that and earlier buying sprees in Canada, Paper Excellence now owns eight pulp and paper mills in three provinces, nine if one counts the MacKenzie mill in British Columbia, which the company closed permanently in April 2021, blaming COVID-19 and a “lack of economic fibre.”

It is telling, however, that before it closed, Paper Excellence was describing the pulp produced in MacKenzie as “some of the brightest, cleanest and strongest pulp on the market with unique characteristics of white spruce, lodge pole pine and alpine fir which thrive in the cold northern climate.”

Noteworthy is that five of the Paper Excellence pulp mills in Canada produce Northern Bleached Softwood Kraft pulp, which is an increasingly valuable kind of pulp from fibre found only in northern climes, although one of those — in Nova Scotia — is currently in hibernation.

Access to fibre appears to play an important part in Paper Excellence’s plans for “strategic growth.” Paper Excellence, through Northern Timber — an affiliate of Northern Pulp — owns 425,000 acres of woodland in Nova Scotia, and holds Crown leases on hundreds of thousands of acres, although the exact amount is not known. Emailed questions to the Department of Lands and Forestry in October 2020 about the company’s Crown leases were never answered, despite reminders.

If the Domtar acquisition goes through, Paper Excellence will gain three more mills in Canada that produce Northern Softwood Bleached Kraft pulp — the Kamloops mill in British Columbia, and the Dryden and Espanola mills in Ontario. It will also take over the Windsor mill in Quebec, which the Domtar website notes, “is the last fully integrated paper mill in Canada with 400,000 acres of forest lands surrounding the mill.”

So yes, this acquisition really is a very big deal, even if it hasn’t attracted a lot of public attention and discussion in Canada.

But that doesn’t mean that warning bells haven’t been ringing elsewhere.

Stark warnings for Domtar shareholders

On June 24, 2021, 68 organizations from around the world signed a letter to Domtar shareholders, financiers, and customers. It urged them “to oppose the proposed acquisition by Paper Excellence.”

The letter begins:

Paper Excellence presents its acquisition of Domtar as an opportunity to “accelerate Paper Excellence’s growth strategy, including entry into the attractive U.S. market.” This reputationally unsound acquisition of Domtar would arguably make Paper Excellence the most powerful company manufacturing pulp and paper in Canada. However, their press release fails to mention that the acquisition represents a serious reputational and financial risk for Domtar and for any company currently doing business with Domtar.

The acquisition will connect Domtar to the notorious conglomerate Asia Pulp & Paper (APP) of Sinar Mas Group (SMG). There is clear evidence linking APP and SMG to 30 years of deforestation, forest and peat fires, and the destruction of wildlife habitat in the 2 million hectares of land under their control. Such fires, and the company’s peat development have contributed to extensive greenhouse gas emissions. Reports also point to conflicts with local communities related to land grabbing, forest clearance, and pulpwood plantation development in Sumatra and Kalimantan, Indonesia.

Paper Excellence is related to APP and its parent company Sinar Mas Group, via their family business ownership. These, and hundreds of associated companies — many of them incorporated in tax haven countries – are tied by a complicated and opaque corporate structure, with different companies often being managed by members of the same family. Although a complex corporate structure obfuscates the connection between the Paper Excellence Group and APP, strong evidence indicates the two groups operate as a deeply integrated production-marketing conglomerate with the same family business as owner.

Money “tainted” by deforestation and human rights violations

The letter warns shareholders that if they approve the acquisition, Domtar will be “intertwined” with “companies associated with controversial and unacceptable practices.”

Specifically, this will mean:

… funds raised by Paper Excellence to facilitate the purchase are associated with unacceptable business comprising a legacy of deforestation, the reported human rights violations, and significant CO2 emissions. Domtar shareholders would be bought out with this tainted money.

The signatories of the letter “strongly advise” that:

• Domtar shareholders vote AGAINST the resolution to approve the acquisition of Domtar by Paper Excellence;
• Domtar financiers avoid supporting the acquisition with loans, insurance, financial advice or other means, and to avoid any business with companies controlled by or affiliated with the APP/SMG and its family-based conglomerate (including Paper Excellence); and
• Domtar customers use your influence to stop the acquisition, and state that you will not buy products linked to APP/SMG and its associated companies.

Blacklisted for destructive forestry practices

NRDC, one of the signatories to the letter, stated that, “the acquisition would reduce Domtar’s transparency and accountability, and would further expand a corporate empire already profiting from the global destruction of forests.” It described the merger as “bad news for Canada’s boreal forest and efforts to safeguard it from reckless logging practices.”

More recently, on July 22, the World Wide Fund for Nature (WWF) issued its own statement on the proposed acquisition of Domtar by Paper Excellence, saying the global organization has “major concerns about the proposed acquisition of Domtar by Paper Excellence, given the affiliation of Paper Excellence with Sinar Mas Group’s (SMG) Asia Pulp & Paper (SMG/APP).”

The WWF statement continues:

APP is one of very few companies still disassociated by FSC [Forest Stewardship Council], the leading global certification system for forests and forest products.  As detailed in numerous reports and articles by conservation and social civil society organizations and media over the years, APP has a legacy of over 30 years of more than 2 million hectares of deforestation, destruction of wildlife habitat, fires and greenhouse gas emissions from peat development, and conflicts with local communities related to land grabbing, forest clearance, and pulpwood plantation development in Sumatra and Kalimantan, Indonesia.  More details on APP’s history of negative environmental and social impacts are detailed in this WWF Advisory, which recommends that companies and investors avoid business relationships with SMG/APP and its affiliates until and unless APP improves its practices towards reassociation with FSC and makes true progress to remedy harms associated with deforestation and community conflicts in Indonesia.

The June letter from the 68 organizations also warns Domtar customers and financiers that if the deal goes through, it “could have a profound effect on Domtar’s growth prospects and long-term outlook.” Like WWF, the signatories note that the acquisition would link Domtar customers and financial backers to “corporate groups with severe social and environmental violations.” They continue:

The Forest Stewardship Council certification (FSC) will not shield Domtar buyers and investors from reputational risks, because it is not yet clear how the takeover would impact Domtar’s FSC certifications and commitments. The fact is that the FSC has already disassociated itself from APP/SMG, meaning that no APP/SMG tenures can be certified by FSC.

The signatories to the letter include four global organizations — the Environmental Paper Network, Global Forest Coalition, Natural Resources Defense Council, and Restore Our Earth — and organizations from 21 different countries. They are: Australia, Austria, Belgium, Brazil, Canada, China, Estonia, Finland, Germany, Indonesia, Italy, Japan, Portugal, Russia, South Korea, Spain, Sweden, Switzerland, The Netherlands, UK, and the USA.

While eight organizations from the USA and eight from Germany signed the letter, as did seven from Australia, six from Indonesia, and five from China, only three of the signatories are Canadian — the David Suzuki Foundation, Alberta Wilderness Association, and Stand Earth Canada — an indication perhaps of how little attention the issue has received in this country.

The Halifax Examiner reached out to WWF and Sierra Club BC for more information on Canadian opposition to and concerns about the deal, and will update this article if answers are received.

The Examiner also contacted Domtar by telephone and email, and Paper Excellence by email to ask for their response to the letter. So far, there has been no reply from either.

Competition Bureau looking into the proposed merger

The Halifax Examiner asked the Environmental Paper Network (EPN), a worldwide network of more than 140 civil society organizations, which sent out a press release about the letter, whether there had been any response from Domtar shareholders, financiers or customers since the June 24 letter was published.

Joshua Martin of EPN replied:

We have had some response from large customers, who are very concerned that they will have to change their purchasing to fulfill their sustainability commitments if Domtar is affiliated with the Sinar Mas conglomerate and Paper Excellence. They are concerned about Domtar’s FSC certification being in jeopardy. And they are concerned because WWF, as well as the other member organizations of EPN, all have marketplace alerts of Do Not Buy from companies affiliated with Sinar Mas/APP. EPN manages a database that identifies these subsidiaries and affiliates, and Domtar would be added to the list.

Martin said he could not elaborate on who the customers were, but did say there were “multiple big customers and household brand names” among them.

The Examiner also asked EPN if it had flagged the proposed acquisition to the Competition Bureau of Canada, as it would give Paper Excellence, a private company with offshore roots, control of 25% of Canada’s pulp industry if it goes ahead.

Martin’s reply:

We have not done that ourselves, and I’m not aware of it having been done yet. Just some early discussions on if there is any possibility for addressing this through the regulatory approval process.

The Examiner contacted the Competition Bureau of Canada to ask if there have been any complaints lodged about the proposed acquisition. A spokesperson said the Bureau is “reviewing the proposed merger,” but added:

The Bureau is required by law to conduct its work confidentially, including the receipt and handling of complaints. We can only confirm that we’ve received a complaint in certain circumstances such as if it is made public by another party or through the filing of court documents. For this reason, I’m unable to confirm whether the Bureau has received any complaints regarding the proposed merger, nor would it be appropriate to comment further regarding our ongoing review.

There is at least one challenge to the sale coming from Halper Sadeh LLP in New York. The online “Join An Action” notice states that Halper Sadeh is a “global investor rights law firm” and it is “investigating whether the sale of Domtar Corporation (NYSE: UFS) to Paper Excellence for $55.50 per share in cash is fair to Domtar shareholders.”

The online notice invites anyone who “purchased Domtar Corporation securities and would like to join the action to click “Join This Action” on its website.” Halper Sadeh continues:

The investigation concerns whether Domtar and its board of directors violated the federal securities laws and/or breached their fiduciary duties to shareholders by failing to, among other things: (1) obtain the best possible consideration for Domtar shareholders; (2) determine whether Paper Excellence is underpaying for Domtar; and (3) disclose all material information necessary for Domtar shareholders to adequately assess and value the merger consideration. On behalf of Domtar shareholders, Halper Sadeh LLP may seek increased consideration for shareholders, additional disclosures and information concerning the proposed transaction, or other relief and benefits.

Halper Sadeh LLP represents investors all over the world who have fallen victim to securities fraud and corporate misconduct. Our attorneys have been instrumental in implementing corporate reforms and recovering millions of dollars on behalf of defrauded investors.

The Examiner contacted Halper Sadeh for more information and is still waiting for a reply.

“Look at their actions from Sumatra to France to Nova Scotia”

Asked whether the Environmental Paper Network had any advice for Canadians about the proposed acquisition, whether there were things that people in this country should know, Martin said:

Don’t trust Paper Excellence/APP’s words and promises, look at their actions, from Sumatra to France to Nova Scotia, there’s a documented pattern of green rhetoric, poor performance, social conflict, and broken trust. If the sale goes through, it’s going to be critical that civil society and regulators scrutinize everything, hold the company accountable and drive reform, in order to protect communities from pollution, and conserve critical habitats.

Paper Excellence’s proposed acquisition of Domtar comes at an interesting time for both its Northern Pulp company, and also the Widjaja family’s greater Asia Pulp & Paper empire of which it is part. It also raises many questions.

First, who is financing it?

A July 9 BusinessWire report says that Paper Excellence has received US $1.95 billion in financing commitments “from leading financial institutions,” the proceeds of which “are expected to be used to consummate the acquisition of Domtar.”

That is still US $1 billion shy of the cost of the acquisition, and it also raises questions — put bluntly in 2019 by Sara Webb writing in Euromoney — about the apparent short memories of financial institutions that appear to have forgotten the 2001 record-setting US$13.9 billion default by the Widjaja family’s APP:

Default? What default? Asia Pulp & Paper, Sinar Mas and the Widjaja family, once pariahs of the international financial markets, have bounced back with a vengeance. Are the memories of the banks financing them too short? Or are they backing a group that can deliver on both its repurposed business and environmental credentials?

The acquisition also comes at a time when Asia Pulp & Paper is looking at a looming need for additional fibre to feed the planned expansion of its controversial Ogan Komering Ilir (OKI) pulp mill in South Sumatra, Indonesia. The OKI mill is one of the world’s largest, and Eco-Business reports that APP has applied to triple its capacity.

Even when the mill opened in 2017, it “alarmed environmentalists,” says the article. But the planned expansion of the mill, “owned by one of the world’s largest paper companies Asia Pulp & Paper (APP), will need an estimated 30.1 million tonnes of wood a year to reach capacity, up from 10 million tonnes a year now. The super-charged OKI mill will consume as much wood as all of APP’s three Indonesian mills combined.”

For comparison, the Northern Pulp mill in Nova Scotia used 1.3 million tonnes of fibre a year from woodlands in Nova Scotia, Prince Edward Island, and New Brunswick.

As Eco-Business reports, there are concerns “over where APP will source the fibre it will need for the mill to reach capacity, and the company’s questionable track record of keeping sustainability pledges.”

There is no evidence that any of the fibre for the mill would be sourced overseas by any of APP’s affiliates, but Paper Excellence does say that the pulp from Canadian mills, particularly the “high quality Northern Bleached Softwood Kraft pulps” from British Columbia are used “worldwide,” and specifies that pulp from its mill in Saskatchewan, is “used by customers primarily in Asia to make a wide variety of products from tissue to paper towels to food and board packaging.”

So it’s not out of the question that fibre or pulp from North America, including Domtar mills Paper Excellence will own if the deal goes through, will make its way to APP mills in Indonesia, hungry for fibre and strong pulp from northern softwoods.

When Paper Excellence bought the MacKenzie mill in British Columbia in 2010, Reuters reported that, “Green groups and some in the forest industry have expressed fear that Sinar Mas will mix pulp from Canada with fiber produced by destructive logging practices in Asia in a bid to label the product as more environmentally friendly.”

And then there is “insolvent” Northern Pulp

This week’s vote on the Domtar acquisition that will cost Paper Excellence $3.7 billion comes at a time when Paper Excellence is on a charm offensive trying desperately to convince Nova Scotians to believe that its subsidiary Northern Pulp has broken with its ugly past and wants to build “trust” and re-open a “completely” transformed pulp mill in Pictou County.

Paper Excellence says the refit would cost $350 million, and hints that it’s in discussions with the province on some public financing of the project, as the Examiner reported here and here, although the leaders of the provincial Liberal, Progressive Conservative, and New Democratic Parties have told CBC reporter Michael Gorman that they oppose such funding.

Nevertheless, the proposed acquisition comes when Northern Pulp, a “Paper Excellence company,” and its affiliates are pleading poor, claiming to be “insolvent” in the Supreme Court of British Columbia, where they sought creditor protection in June 2020 (The Examiner delved into the companies, their relations with APP / Sinar Mas, and the creditor protection case here and here.)

Paper Excellence / Northern Pulp refuses to guarantee pension payments for its former employees, and also asked the government of Nova Scotia — and was granted — a freeze on repayments on nearly $85 million it still owes the people of Nova Scotia.

And yet Paper Excellence is poised to spend close to $4 billion to acquire Domtar, which will give it an additional four mills in Canada, a high concentration of them in British Columbia and a good deal of control over the pulp and paper industry across the country. And for this, money appears to be no object.

Strange, that.

Equally strange is the lack of an outcry.

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