Canfor cash offer considered below value by industry pundits

October 30, 2019

By: The Working Forest Staff

Ottawa Citizen — British Columbia’s timber giant Canfor Corporation announced Monday evening that it agreed to a $16 per share buyout by billionaire Jim Pattison’s Great Pacific Capital Corp., in what could set up a showdown with shareholders who think the offer is too low.

According to a report in the Ottawa Citizen, Canfor’s board of directors said the cash offer represents a good value given the “headwinds” in the forestry sector including the low prices for logs and pulp and called it a significant premium.

The last trading day before the offer was made public, on Aug. 9, Canfor shares traded at $8.80. The stock was trading 1.8 percent higher to $15.88 in Toronto on Tuesday.

Great Pacific currently controls 51 percent of the shares, but in order to proceed the transaction would require two-thirds of the overall shareholders’ support and a simple majority from minority shareholders. Last month, Montreal’s Letko, Brosseau & Associates, which said it manages 4.8 percent of the outstanding shares, announced it would vote against the offer, calling it based on a “very depressed share price.”

One analyst said the same thing.

“We think Great Pacific’s offer to take Canfor private … looks like impeccable timing,” Mark Wilde, a BMO analyst, wrote in August shortly after the deal was announced. “However, the offer is far below our estimate of Canfor’s ‘intrinsic’ value of $23 per share.”

Wilde wrote that lumber and pulp prices, Canfor’s two main businesses, are very volatile, which results in huge cash flow swings. Lumber hit a record in the summer of 2018, and pulp peaked at the end of 2018, but prices for both subsequently collapsed, and Canfor’s stock price declined too.

Thus, less than two years ago, in mid-2018, every analyst covering the company had a price target on Canfor of between $32 and $40 per share, except Wilde who stood at the low-end with a target of $27 per share.

Wilde wrote that Pattison’s bid is only a premium when Canfor is valued at a low-point in the cycle.

 “We think this bid falls well short of a fair/optimal outcome for (Canfor’s) minority shareholders,” he wrote.

Canfor declined to comment for this article.

Several factors are hurting the sector. In British Columbia, the populations of wood-boring beetle species that destroy forests have exploded in size and reduced available timber, forcing mill closures and industry shrinkage.

Meanwhile, analysts say that wet weather in the U.S. this year reduced the number of home starts, which, combined with lingering tariffs on Canadian lumber, have reduced demand.

Companies such as Canfor have been investing heavily in the U.S. South, where a rival logging industry has rapidly emerged.

Last week, on an earnings call, Alan Nicholl, the chief financial officer of Canfor Pulp Products, said the company is in the process of emerging from a $125-million organic growth program.

“We currently anticipate much lower capital spending in 2020,” said Nicholl.

Meanwhile, Don Kayne, chief executive of Canfor and Canfor Pulp, said that he expects global pulp pricing to start improving next quarter, while global lumber prices “should stabilize” in 2020 when inventory levels “come back into balance,” including improvements over the next couple of quarters.

Paul Quinn, an analyst at RBC Capital Markets, wrote that he now values the company between $14.24 and $19.38, and noted Canfor has limited alternatives given Great Pacific owns 51 percent.

Still, Canfor said in a press release that one member of the board, Barbara Hislop, who owns around two percent of the shares, is not prepared to support the deal, and it suggested certain unnamed executives were not either.

“While we still view rejection of the transaction by minority shareholders as unlikely, we expect that the combination of a prominent board member and major shareholder will increase momentum behind a vote against the take-private proposal,” Quinn wrote.

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