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Domtar to create largest fine paper company in North America through combination with Weyerhaeuser's fine paper business

Press release from the issuing company

MONTREAL, Aug. 23 -- Domtar Inc. today announced the creation of the largest manufacturer and marketer of uncoated freesheet paper in North America and the second largest in the world. Domtar has signed a definitive agreement to combine with Weyerhaeuser's fine paper business and related assets. The new company, to be called Domtar, will have its Head Office in Montreal, Quebec, while the Headquarters of Operations will be in Fort Mill, South Carolina. The transaction has been approved by the Boards of Directors of both companies. "With this transaction, we are transforming Domtar into one of the world's leading paper companies, presenting shareholders with new opportunities and creating a stronger company for employees and customers," said Raymond Royer, Domtar's President and Chief Executive Officer, who will lead the new company in the same capacity. "We are proactively enhancing the quality of our asset mix and taking decisive action to assure our future in a consolidating industry. In addition to more than doubling Domtar's current paper production capacity, this compelling strategic and operational fit will make the new company financially stronger with prominent brands, a lower cost base and the necessary scale and scope to succeed in the highly competitive global marketplace", added Mr. Royer. Based on annualized Q2 2006 unaudited results for Domtar (excluding Norampac) and for Weyerhaeuser's fine paper business, Domtar estimates the new company would generate approximately US$6.5 billion in sales and US$730 million in EBITDA, before synergies. The new company will have an enterprise value exceeding US$6 billion. The "New Domtar" The backbone of the new company will be six highly efficient world-class uncoated freesheet mills that will provide two-thirds of its more than five million tons of capacity. These mills, combined with a solid mix of specialty facilities, will make the new company one of the most efficient and cost-competitive paper companies in North America. The company will have an expanded North American reach and a wide range of well-known business and commercial printing paper brands. With greater access to volume, increased depth of product offerings, and better service through a wider geographic footprint, the company will be in a position to meet the needs of large and small customers alike throughout Canada and the United States. It will maintain the environmental leadership shown by both Domtar and Weyerhaeuser, notably through added capacity to expand its environmentally and socially responsible papers such as the EarthChoice product line. (For more details on the new company see the "Fact Sheet" issued with this news release.) Leadership Team Mr. Royer, as President and CEO, will lead an organization of nearly 14,000 employees with a management team composed of executives from Domtar and Weyerhaeuser paper operations. This team includes Marvin Cooper, currently Weyerhaeuser's Senior Vice-President, Cellulose Fiber & White Paper, Containerboard Manufacturing and Engineering, who will become Chief Operating Officer of the new company. Domtar's current Senior Vice-President and Chief Financial Officer, Daniel Buron, will be the Chief Financial Officer. Harold MacKay, counsel and former chairman and senior partner at the Regina, Canada-based law firm of MacPherson Leslie and Tyerman LLP, and an international advisor to Weyerhaeuser's Board of Directors, will become non-executive Chairman of the new company's 13-member Board of Directors - seven of whom will be nominated by Weyerhaeuser and six by Domtar. Mr. MacKay will resign his Weyerhaeuser advisory role before becoming Chairman of the "new Domtar". Synergies It is anticipated that the new company will achieve approximately US$200 million in annualized synergies within two years, created by a combination of process optimization resulting in lower operating costs, reductions in transportation, logistics and purchasing costs, implementation of best-in-class business practices and sales and administrative cost reductions. The cost to implement these synergies is anticipated to be approximately US$100 million. Transaction Structure Under the terms of the transaction, which is structured as a "Reverse Morris Trust", Weyerhaeuser's fine paper business, consisting of 10 primary pulp and paper mills (seven in the United States and three in Canada), converting, forming and warehousing facilities and two sawmills will be transferred into a newly formed company for stock and a cash payment of US$1.35 billion to be provided by the new company through borrowings under a credit facility. Weyerhaeuser will distribute the shares of the new company to its shareholders in either a spin-off or split-off transaction at its own discretion. (A spin-off would provide a pro-rata distribution of shares to Weyerhaeuser shareholders. A split-off would allow Weyerhaeuser shareholders the opportunity to exchange Weyerhaeuser shares for stock in the new paper business.) Domtar will combine with the newly formed company to create the "new Domtar". The combination will take place under a Plan of Arrangement. Under the Plan of Arrangement: 1. All shares of Domtar will be automatically exchanged - on a one-for-one basis - for common shares of a Canadian subsidiary of the "new Domtar". 2. Following that, Domtar shareholders who are taxable Canadian residents can either exchange these shares for common shares in the "new Domtar" (which will be traded on the New York Stock Exchange and on the Toronto Stock Exchange) or they can receive the "new Domtar" Canadian subsidiary exchangeable shares (which will be traded on the Toronto Stock Exchange). The exchangeable shares are the economic equivalent of the common shares of the "new Domtar", with equal dividend entitlement and voting rights at the level of the "new Domtar". The exchangeable shares are exchangeable at any time at the option of the holder into the "new Domtar" common shares on a one-for-one basis. 3. For taxable Canadian residents who choose the exchangeable shares, the transaction will be tax deferred. However, if they select to receive shares directly in the "new Domtar", the transaction is taxable. 4. Non-Canadian residents who are Domtar shareholders will automatically receive common shares in the "new Domtar" and for them the transaction will be taxable. 5. The transaction is expected to be tax deferred to all U.S. holders of Weyerhaeuser shares. At the time of the closing, the combined company will be owned approximately 55% by former Weyerhaeuser shareholders and 45% by former Domtar shareholders. The combination is subject to approvals by the shareholders of Domtar by a special resolution, the Superior Court of Quebec, appropriate regulatory and other authorities, as well as customary closing conditions. The transaction is expected to close in the first quarter of 2007. Domtar and Weyerhaeuser will continue to operate separately until the transaction closes.