Pattison seeks to take Canfor private

Stock surge signals strong chance of success for Vancouver billionaire’s plan

As Canada’s forestry industry suffers through a pronounced downturn, Vancouver billionaire Jim Pattison has seized the moment with a proposal to buy out and take private Canfor Corp., one of the country’s largest lumber and forestry product companies.

Pattison’s Great Pacific Capital Corp., which already owns 51 per cent of Canfor, on Sunday offered to pay $16 per share — an 81.8 per cent premium to the Friday closing price of $8.80.

The company’s price surged more than 73 per cent to close at $15.26 on Monday, which many analysts took as a sign that the proposal, although non-binding, had a strong chance of success. If successful, it would mark one of the highest premiums paid for a commodity company in recent years.

But in a testament to the volatility of the forestry sector, it comes after Canfor’s share price hit record highs just last summer only to crash to near record lows this summer amid a supply and demand imbalance in the lumber market and uncertainty about the U.S. housing market.

“If I were owning a Canfor share I’d be jumping for joy,” said John Tumazos, of Very Independent Research, an analyst who covers the sector. “I think an 80 per cent premium is generous. There’s a lot of things that can go wrong or right.”

Still, the $16 per share offer falls below some analysts’ target price for Canfor; and some believe the sector is due for a quick recovery, possibly before the end of the year, if the current low-interest rate environment revives the U.S. housing market and lumber prices.

Canfor deals in many forestry products, but lumber contributed between 66 and 76 per cent of its cash flow from 2016 to 2018, according to BMO analyst Ketan Mamtora.

“It looks like great timing from (Pattison’s) standpoint,” Mamtora wrote in a note to investors on Monday. “However, with the offer coming as (Canfor’s) stock price flirts with multi-year lows, we are not convinced this bid is the optimal outcome for (Canfor’s) minority shareholders.”

Last June, the company’s stock price peaked at $31.64, just about 50 per cent of what Pattison’s Great Pacific offered.

A Canfor spokesperson declined to comment, but the company has said it will form a special committee to review the bid.

Given Pattison’s large position in the company, analysts said another bid is unlikely.

Ultimately, a simple majority of the minority shareholders would have to approve the deal, which could take months to close.

Pattison, 90, has invested in a diverse range of industries including fisheries and supermarkets and has held his interest in Canfor for years. Pattison was travelling and not available for comment, but Great Pacific released a statement saying Canfor was better suited as a private company, which would eliminate administrative expenses required for public listing.

“The company is facing important strategic and capital decisions, which Great Pacific believes are best suited to a private company with a long-term focus,” its statement said in part. Much of the recent news about Canada’s forestry sector has focused on supply cuts in Western Canada, where forests have been decimated by mountain pine beetle, and efforts to diversify outside the United States.

Earlier this year, for instance, Canfor closed a $580 million deal to purchase a 70 per cent stake in the Swedish company Vida.

Now, it derives a little more than half of its lumber from forests in B.C. and Alberta, around 30 per cent from forests in the U.S. and the remainder in Europe, according to analysts.

Mamtora, of BMO, said the recent volatility in the lumber sector is a result of mismatch between supply and demand.

Throughout 2017 and 2018, a series of events triggered a runup in lumber prices, including catastrophic forest fires, but also weather events during the winter of 2018 that interrupted the supply chain, he said.

Meanwhile, the fundamentals of the U.S. housing market appeared solid, so many forestry companies were anticipating strong demand for lumber. Unfortunately, weather events in 2019 hurt housing starts, and lumber prices have fallen precipitously.

“It’s a classic case of supply rising and demand falling,” said Mamtora.

If I were owning a Canfor share I’d be jumping for joy. I think an 80 per cent premium is generous.