LOS ANGELES–(BUSINESS WIRE)–Investment funds managed by Oaktree Capital Management, L.P. (“Oaktree”), which beneficially owns 19.9% of the common stock of Tembec, Inc. (TSX:TMB) and is the Company’s largest shareholder, today urged all Tembec shareholders to vote against Rayonier’s acquisition of Tembec unless Rayonier’s offer price is increased to reflect fair value.
Oaktree has received significant shareholder support since it announced its opposition to the proposed transaction on July 14th. Oaktree understands that other Tembec shareholders have expressed similar concerns directly to Tembec’s Board.
While Oaktree welcomes the opportunity for a constructive dialogue with Tembec and Rayonier, Oaktree will continue to put a spotlight on unaddressed questions to ensure a fair deal for all Tembec shareholders.
Flawed Transaction is the Result of a Flawed and Poorly Timed Process
The Tembec Board of Directors’ claim that the proposed sale to Rayonier is the result of a comprehensive sale process is misleading and relies on an apples-to-oranges comparison. In fact, the Tembec Board conducted a piecemeal process over a number of years, with multiple financial advisors, offering some or all of the company’s assets at various times, ultimately creating confusion among strategic and financial buyers.
Importantly, this undisciplined process concluded before Tembec negotiated 2017 price and volume contracts with key customers – negotiations that specialty cellulose companies conduct annually in the first half of November. For 2017, Tembec successfully negotiated contracts with price and volume increases for the first time in three years and then discussed its bullish views on specialty cellulose pricing on both its fourth quarter 2016 earnings call (November 17, 2016) and its first quarter 2017 earnings call (January 26, 2017). During this time, Tembec’s stock increased 161% to C$3.00 from C$1.15.
Despite this material change in the Company’s performance, Tembec’s Board took no further action to renew the sale process: Rayonier’s offer was unsolicited and opportunistic and was not part of any formal sale process.
Oaktree questions why Tembec would sell itself to an opportunistic buyer, to the detriment of its shareholders, at a time when its business is improving. Rayonier’s arguments on trailing share prices ignore the resurgence in both the company’s financial outlook and the multiple expansion that contributed to a near-tripling of the value of Tembec’s shares.
No Explanation for Material Gap Between Rayonier’s Offer and Tembec’s Intrinsic Value
Oaktree believes that there is a significant value gap that makes the proposed transaction unfair to shareholders.
No consideration has been given to recognize:
- The unique strategic value and generational opportunity Tembec represents to Rayonier, a company with a significantly shrinking market, high customer concentration and high-cost production challenges. It is very rare that a unique and complementary asset like Tembec comes to market.
- The fact that the replacement cost to Rayonier could be greater than C$10 per share, according to industry analysts.
- Comparable businesses trade in the range of 6.6x – 9.9x EBITDA vs. the inadequate multiple of 2017 consensus EBITDA of 5.0x pre-synergies and 3.9x post-synergies (and as low as 2.9x when including the present value of Tembec’s substantial deferred tax assets).
- Tembec’s highly-valuable deferred tax assets. Oaktree estimates that on a present value basis these tax assets could be worth as much as C$250 million, or C$2.50 per Tembec share.
The unusual market reaction to the transaction announcement demonstrates that this is a good deal for Rayonier, but not for Tembec shareholders: Rayonier’s share price increased 31% in the week after the announcement, indicating the market’s opinion that Rayonier negotiated a bargain basement price for Tembec shares.
Moreover, the Tembec Board then protected this poorly conceived deal by agreeing to a high termination fee of 4.9% equity value, which will act as a deterrent to the emergence of a superior proposal.
Will The Tembec Board Count Empty Votes?
On May 25, 2017, the Tembec Board announced the support of then 19.99% shareholder Fairfax Financial Holdings, yet Fairfax has since ‘voted with its feet’ and sold its entire position in Tembec. The bulk of its disposition occurred on June 19, 2017, the record date for the Special Meeting. It appears, although Fairfax and Tembec have declined to clarify, that Fairfax is entitled to vote at least approximately 15.9% of the issued and outstanding shares by virtue of its position on the record date, despite the fact that Fairfax no longer owns these shares.
“Fairfax currently has voting rights but no economic interest in Tembec, and we believe it is simply unfair to Tembec shareholders that Fairfax’s empty votes should determine the future of a company in which Fairfax confirmed it has no stake,” said Patrick McCaney, portfolio manager for Oaktree’s Value Equity strategy. “We believe the Tembec Board has an obligation to all shareholders to immediately commit to not counting Fairfax’s empty votes to force through this undervalued transaction.”
A Better Alternative: A Standalone Tembec?
Tembec could generate more shareholder value as a stand-alone entity. On its own, it is poised to produce as much as C$0.85 per share of after-tax free cash flow in the twelve months ending September 30, 2017. This represents a 20% stand-alone free cash flow yield at Rayonier’s offer price – an attractive yield for a company with strong growth prospects in its core specialty cellulose ethers business that is de-levering rapidly.
About Oaktree Capital Management, L.P.
Oaktree is a leader among global investment managers specializing in alternative investments, with $100 billion in assets under management as of March 31, 2017. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Headquartered in Los Angeles, the firm has over 900 employees and offices in 18 cities worldwide.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Canadian securities laws, Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. In some cases, you can identify forward-looking statements by words such as “anticipate,” “approximately,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “seek,” “should,” “will” and “would” or the negative version of these words or other comparable or similar words. These statements identify prospective information, and are based on the current expectations of Oaktree, estimates Oaktree considers reasonable and information currently available to Oaktree. Because forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied. Risks and uncertainties include, but are not limited to, those discussed in the Tembec circular (including the factors listed in the section captioned “Risk Factors” on page 78), Tembec’s other filings (accessible on the SEDAR website at www.sedar.com) and Rayonier’s filings with the SEC (accessible on the SEC’s website at www.sec.gov), integration risk, consensus analyst estimates, currency exchange risk, risks associated with indebtedness, customer retention risk, expectations respecting Tembec’s and Rayonier’s prospects for growth, profitability and debt reduction, availability of synergies, achievability of tax savings, and cellulose and acetate market conditions.
Forward-looking statements speak only as of the date of this press release. Except as required by law, Oaktree does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. Any financial outlook information contained in this press release about prospective results of operations, financial position or cash flows is based on assumptions about future events including economic conditions and proposed courses of action, based on Oaktree’s assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this press release should not be used for purposes other than for those for which it is disclosed herein.
Information in Support of Public Broadcast Solicitation
Oaktree is relying on the exemption under section 9.2(4) of National Instrument 52-102 – Continuous Disclosure Obligations to make this public broadcast solicitation. The following information is provided in accordance with corporate and securities laws applicable to public broadcast solicitations.
This solicitation is being made by Oaktree and investment funds managed by Oaktree (excluding Oaktree, the “Oaktree Funds”), and not by or on behalf of the management of Tembec.
The address of Tembec is 100-4 Place Ville-Marie, Montréal, Québec, H3B 2E7.
Proxies for the Tembec shareholders meeting may be solicited by mail, telephone, facsimile, email or other electronic means as well as by newspaper or other media advertising and in person by managers, directors, officers and employees of Oaktree who will not be specifically remunerated therefor. In addition, Oaktree may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian corporate and securities laws, conveyed by way of public broadcast, including press release, speech or publication, and by any other manner permitted under applicable Canadian laws. Oaktree may engage the services of one or more agents and authorize other persons to assist it in soliciting proxies on behalf of Oaktree and the Oaktree Funds.
Oaktree has entered into an agreement with Kingsdale Advisors (“Kingsdale”) pursuant to which Kingsdale has agreed that it will act as Oaktree’s strategic shareholder, communications and proxy agent. Pursuant to this agreement Kingsdale will receive a fee of up to approximately $220,000 plus disbursements.
All costs incurred for the solicitation will be borne by the Oaktree Funds.
In addition to revocation in any other manner permitted by Law, any Tembec shareholder executing a proxy form may revoke it at any time, as long as it has not been exercised, by an instrument in writing executed by such shareholder or his attorney authorized in writing and deposited either at the head office of Tembec at 100-4 Place Ville-Marie, Montréal, Québec, H3B 2E7 at any time up to and including the last business day preceding the date of the Tembec shareholders meeting on July 27, 2017, or any adjournment or postponement thereof, or with the chair of the Tembec shareholders meeting on the day of such meeting or any adjournment or postponement thereof. For any Tembec shareholder holding shares through an intermediary, the methods to revoke a proxy may be different, and such shareholder should carefully follow the instructions provided by such intermediary.
Neither Oaktree, the Oaktree Funds, nor any of their managing members, directors or officers, or any associates or affiliates of the foregoing, has: (i) any material interest, direct or indirect, in any transaction since the beginning of Tembec’s most recently completed financial year or in any proposed transaction that has materially affected or would materially affect Tembec or any of its subsidiaries; or (ii) any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter currently known to be acted on at the upcoming meeting of Tembec shareholders, other than the proposed transaction between Tembec and Rayonier Advanced Materials Inc.