Regulators asked to weigh in on Tembec

Shareholders to vote on deal worth US$807

For a prospective buyer, Rayonier Advanced Materials, and for a prospective seller, Tembec, July 19 wasn’t a great day.

Indeed it’s a continuation of a number of bad days as market participants weighed in on their planned US$ 807 million transaction, a deal that’s supposed to be put to Tembec’s shareholders at a meeting next week.

As for bad news, Tembec’s two largest shareholders — Oaktree Capital Management and Restructuring Capital Associates which between them own about 37 per cent — have said they won’t support the transaction which requires backing from two-thirds of shareholders.

The transaction has also raised the issue of empty voting where a shareholder, in this case Fairfax Financial ( at one stage Tembec’s largest) was indicated to support the transaction even though it now has no economic interest in the outcome.

Fairfax used to own 19.9 per cent of Tembec but sold off that stake with the final sale ( for a 14.2 per cent) being announced on June 19. It also happens June 19 is the record date for next week’s meeting.

And now comes word that lawyers retained by Oaktree have advised the regulators, in this case the OSC and Quebec’s AMF, of the situation. It’s understood the lawyers would like Tembec to clear up the confusing action in the marketplace. In short the lawyers would like the regulators to make Tembec provide some clarity on what it said on May 25 (when the proposed acquisition was announced) and what has happened since can be squared up.

Back then Tembec said, “Fairfax Financial, a 19.99 per cent shareholder of Tembec has advised us that it is supportive of the transaction.”

While Fairfax didn’t enter into a support agreement with Tembec — which normally requires the shareholder tender into the takeover — it is unusual to be “supportive” of the transaction and sell shares before the meeting. ( In making those sales, Fairfax received a higher price in the market compared with selling them to Rayonier’s offer.)

In other words the lawyers want the regulators to step in and get Tembec to clarify the situation for the benefit of all Tembec’s shareholders and thereby ensure fair voting.

Amid that negativity, on Wednesday came news Glass Lewis, one of the two leading proxy advisory firms, has urged shareholders to vote against the proposed acquisition, in large part because of the low price being offered by the prospective buyer. ( Oaktree made the release announcing that decision.)

In the release, Oaktree said Glass Lewis concluded, “Rayonier could likely justify paying a higher purchase price,” because of two main factors: comparable market valuations and in light of the significant increase in the market price of Rayonier shares following the announcement.

In the week after the announcement Rayonier’s shares were up about 30 per cent, but of late have fallen back, closing Wednesday at US $14.87. That initial increase, Glass Lewis suggested, was because “Rayonier may be underpaying for the company and could afford to share more of the potential value with Tembec shareholders.” And Glass Lewis said Tembec “faces reasonable stand-alone prospects with improved volume and pricing contracts for 2017.”

But Tembec stuck to the plan, announcing Wednesday the sale followed a “comprehensive and rigorous sale process,” warning shareholders of the impact that may be felt if the potential sale doesn’t proceed. It also noted that no “alternative acquisition proposal” has emerged.

But Tembec has a problem: its shares continued a trend by closing Wednesday above the offer price, something t hat has occurred every day since the deal was announced.