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(Reuters) - Canadian pulp producer Mercer International Inc MERC.O MRIu.TO plans to buy smaller peer Fibrek Inc FBK.TO for about C$170 million ($171.04 million), topping rival AbitibiBowater Inc's ABH.TO hostile bid by 30 percent.
Mercer's first deal in five years comes at time when weak pulp demand has dragged wood pulp futures 11 percent in the last 12 months and kraft pulp futures 12 percent in the past ten months.
"Mercer sees a pulp market that is out of favor in the near term and a chance to buy a good quality mill at a price that is fair," David Shapiro, senior analyst at Aegis Financial said.
Mercer's C$1.30 a share offer represents a 15 percent premium to Fibrek's Thursday close and will give the company access to three mills with a combined annual production capacity of 760,000 tons, helping it raise its output capacity by 50 percent.
"On a dollar per ton basis, (Fibrek's) assets are cheap," said Amer Tiwana, managing director at CRT Capital's research division.
The deal comes just days after Fibrek, which was looking for strategic alternatives, rejected AbitibiBowater's bid of about C$130 million. AbitibiBowater operates under the name of Resolute Forest Products.
"We believe this offer is preferable to AbitibiBowater's initial offer. The bid is clearly superior. We look favorably to Mercer's offer," analyst Shapiro said.
Fibrek's shareholders can choose to opt for an all cash deal, a stock deal to get 0.0903 of a Mercer share for every one Fibrek share, or a cash-and-stock deal where they could get 54 Canadian cents in cash and 0.0903 of a Mercer share in stock for every share they hold.
Fibrek said it has agreed to waive off the shareholder rights plan it had raised in the wake of AbitibiBowater's bid. The waiver is for Mercer's offer alone, it said in a statement.
Raymond James is acting as financial advisor to Mercer, while TD Securities is acting as financial advisor to Fibrek.
"This has been a challenging time for Fibrek ... we believe this offer meets our goal and provides a significant premium relative to Abitibi's unsolicited offer," Fibrek's chairman Hubert Lacroix said in a statement.
Mercer has also agreed to buy 32.3 million special warrants from Fibrek for C$1.00 each, which can be fully converted to a Fibrek shares.
Shares of Fibrek had lost more than 50 percent of their value since touching a high of C$1.70 in March 2011, before recouping in November on AbitibiBowater's offer.
They were trading around the offer price at C$1.29 in late morning trade on the Toronto Stock Exchange.
($1 = 0.9939 Canadian dollars)
Reporting by Aftab Ahmed in Bangalore; Editing by Supriya Kurane