"In a perfect world I could see the Tembec, Fortress dissolving pulp entity being very interesting," Chad Wasilenkoff said during an interview as part of a tour with shareholders, analysts and the media.
Fortress (TSX:FTP) first has to work out the bugs at its facility in Thurso, Que., and then open another facility in Lebel-sur-Quevillon, Que. But he said other options are possible once both are operating at full capacity in about two years and churning out a total of 450,000 annual tonnes of the material used mostly to make rayon and viscose for the textile industry.
"We're not in discussions and I couldn't see it happening in the short-term, but multiple years out it would make a great Canadian powerhouse in the global dissolving pulp space."
A Fortress-Tembec company could produce 900,000 to one million tonnes of special dissolving pulp annually.
Wasilenkoff said the entity would be a good mix and generate a lot of synergies. He said it would be interesting to unite the companies and then break the new one into two entities - one with the four dissolving pulp mills and another with the other mills that make high-yield pulp and other products.
How a deal would be structured is impossible to determine at this point. But he said Tembec has a great management team that is also trying to upgrade its operations in part by spending $190 million to replace three old, low-pressure boilers with one new device, adding up to 40MW of incremental electricity output at its key facility in Temiscaming, Que.
A total of $59 million has been spent on the Temiscaming specialty cellulose project as of the end of the quarter.
"What they have accomplished is no small feat by any stretch and they have migrated into these specialty grades with challenging assets so my hat's off to that team."
Tembec (TSX:TMB) didn't respond to requests for comment.
Paul Quinn of RBC Capital Markets said the merger of the two Canadian companies makes sense. He floated the idea a year ago about either Fortress or Buckeye Technologies Inc. making a run at Tembec.
"It was definitely accretive to Fortress at the time and probably still would be at this point," he said from Vancouver.
But he said many Tembec investors, especially those remaining from the debt restructuring of a few years ago, would likely hold out for a large premium.
Tembec is capital constrained because of its modernization projects, which it said Thursday have been slowed by about six months due to higher construction costs in Quebec. A nearly 80 per cent drop in Fortress Papers' share price over the last year has also strained its liquidity for the time.
But Quinn said Fortress can also look to Europe where it operates a thriving wallpaper business and a more challenged security paper business used to make bank notes.
"If he can repackage those or monetize them in some way that would free up a significant amount of liquidity and he might be able to take a look at something like Tembec."
In the meantime, Quinn said Fortress has to deliver on its promises to transform the two Quebec mills.
"They set some very high bars to reach operationally and they haven't achieved them, so they've over-promised the market and they've under delivered and that's the issue," he added.
"I think they can get there, but it's going to take a few more quarters."
Fortress' shares hit a new 52-week low on Thursday before closing at $7 in trading on the Toronto Stock Exchange and staying there Friday.
Several analysts downgraded Fortress after it lost $18.9 million in the third quarter on $73 million of sales.
Benoit Laprade of Scotiabank lowered his target price of Fortress shares to $15.75 from $24 to take into account the slower ramp-up at Thurso, the loss of price protection for three major Chinese customers and concerns about improved security papers performance.
But Wasilenkoff insisted the company is "making progress."