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Help with weird pegboard closet

Hi! I just became a homeowner and we have this closet with weird pegboard(?) walls. They’re 12 x 12 tiles that have a texture of cardboard or paper - it’s strange. I’ve never seen something like this.

I want to cover the space with wallpaper but the surface isn’t smooth. Any ideas on how to smooth it/fill those holes or something I can use to smooth out the surface overall to get the wallpaper to stick and stay put?

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