Weyerhaeuser Co. on Wednesday said it agreed to merge its fine paper business and related assets with Domtar Inc. n a $3.3 billion transaction.

The deal, expected to close in the first quarter of 2007, gives Weyerhaeuser shareholders a 55-percent stake in the newly formed company. Weyerhaeuser will also receive a $1.35 billion cash payment as part of the transaction.

The combination creates the North American market leader in fine paper, said Steven Rogel, Weyerhaeuser's chief executive, in a statement. He added that the company would now be able to resume its previously authorized share repurchase plan.

Under the terms of the deal, Weyerhaeuser will transfer its fine paper assets, including 10 pulp and paper mills, into a newly formed company in return for stock and cash, according to a Domtar statement.

Weyerhaeuser will then distribute shares of the new company to its own shareholders. Following that, Domtar will combine with the newly formed company, giving its shareholders a 45 percent stake in the new firm.

The combined company will continue to be run by Domtar chief executive Raymond Royer, the companies said.

In a statement, Montreal-based Domtar said it expects the new company would generate about $6.5 billion in sales, before synergies, and have an enterprise value of $6 billion.