GLV sale gets a thumbs down

It hasn’t been the best week for shareholders of Montreal-based GLV Inc. The market has given a thumbs down to GLV’s decision to sell its pulp and paper division for $65-million to an entity controlled by insiders and focus on its water treatment operations.

On Friday, the shares closed at $2.45 after hitting a 52-week intraday low of $2.39. Two weeks back they closed at $2.87; a year ago they traded at $3.09. Since the announcement — the deal is not final and requires shareholder and majority of the minority approval — volume has been much larger than normal.

So what caused the drop given that GLV will be aggressively seeking out opportunities both in North America and elsewhere — all part of a plan to double its revenues over the next five years?

According to analysts there are a number of reasons. For instance:

❚Sara Elford from Canaccord Genuity said the $65-million GLV will receive from the sale of its pulp and paper division, is “somewhat below our estimate of fair value for this business.”

In a report, Elford said she pegged the value of the pulp and paper business above $71-million, which was the upper limit in the formal valuation done by KPMG, the firm retained by the special committee to assist with the transaction.

It’s possible that a higher bid may emerge: GLV has included a 45-day go-shop feature in the agreement with the prospective buyers, the Verreault family. (The family consists of the father, Laurent, and the son, Richard, who will leave the firm to run the pulp and paper company. Laurent will remain as executive chairman of the former GLV, which will be renamed Ovivo.)

But a higher bid may not emerge as the buyers have a right to match any offers that may arise from the goshop. A higher unmatched bid means Ovivo will pay a break fee.

Elford writes that by creating a pure-play water treatment company with a strong balance sheet, Ovivo is positioned for growth. “Over time ... we see room for both EBITDA growth and a narrowing of the multiple gap between Ovivo and its peer group — typically a good combination for investors.” Elford reiterated her buy rating but with a lower target: $4.50 versus $5.

❚Frederic Bastien from Raymond James wrote that the buyers of the pulp and paper division are “getting a good deal.” On his analysis, the $65-million purchase price is $17-million “less than we officially value the unit at.”

While Bastien feels the development “should result in a cleaner and more easily investible stock,” he argues the water treatment group will need to “further restructure in the coming months.” Bastien has a $3.50 target and a market-perform rating.

❚Sara O’Brien from RBC Capital Markets said the sale of the pulp and paper group “ups [the] volatility risk,” for Ovivo. O’Brien issued a downgrade (to sector-perform), a lower target price (to $3.50 from $40, and attached a “speculative risk” rating.

While O’Brien expects Ovivo’s EBITDA margin will “expand over time,” she also expects continued restructuring costs” and integration issues if and when acquisitions are made.

Meanwhile, shareholders are hitting the sell button.