Is Canfor Corp. (TSX:CFP) undervalued?
Vancouver billionaire Jim Pattison appears to think so. Pattison made an unsolicited proposal August 10 to buy all outstanding shares of Canfor Corporation (TSX:CFP) through his company's investment division, Great Pacific Capital Corp.
Great Pacific already owns 50.7% of the company; a successful bid would take the company 100% private. At $16 per share, and 125 million common shares, Pattison's offer works out to $980 million.
Pattison's move comes at a time when the forest sector in B.C. has been hit by a series of sawmill closures and curtailments. It's a move that could bolster confidence in the industry in B.C.
Pattison’s play may not to include Canfor’s pulp and paper mill subsidiary, Canfor Pulp Products (TSX:CFX), according to analysts.
When markets opened Monday, August 12, Canfor’s shares immediately shot up more than 70% – from $8.80 per share at close of markets August 9 to more than $15 per share Monday.
In addition to owning 50.7% of Canfor’s issued and outstanding shares, Pattison also owns 12% of West Fraser Timber Co. (TSX:WFT), and there is speculation Pattison has been considering a merger of the two companies.
Pattison’s investment division, Great Pacific Capital, is offering $16 per share – an 82% premium – to buy out all of Canfor’s common shares. The plan is to delist the company and take it private.
There are certain advantages to going private, one of them being that it lowers costs, since there are costs associated with listing on major stock exchanges.
Major shareholders will sometimes opt to take a company private when they think the market has undervalued it.
“We believe that the deal has a high probability of closing as proposed,” says Paul Quinn, an analyst for RBC, in a brief.
“Given that Jim Pattison Group controls over 50% of the outstanding shares and that the deal is at a substantial premium to its most recent share price, we believe the deal is at a substantial premium to its most recent share price, we believe that the additional votes required to close the transaction will be easily attainable.”
Canfor is actually two public companies. Its pulp and paper side is under Canfor Pulp Products (TSX:CFX), with the parent company, CFP, owning 54.8% of Canfor Pulp.
In his brief, Quinn points out that a Great Pacific press release makes no mention of Canfor Pulp Products. It’s not clear whether Pattison plans to take Canfor Pulp Products private as well, or to leave it to continue as a publicly traded company.
Hamir Patel, analysts for CIBC, appears to read Pattison’s move towards privatization as excluding Canfor Pulp Products.
“We suspect CFX shares could weaken further as the likelihood of Canfor acquiring the remaining 45% of CFX does not already own, would seem to have faded,” he writes in a brief.
Pattison has increased his ownership of both Canfor and West Fraser in recent years, sparking speculation his plan is to ultimately merge the two companies – already the two largest in Canada – into one forestry behemoth.
While there is rational for such a move, the Competition Bureau of Canada might put up roadblocks.
"The Canadian Competition Bureau has previously intervened within the BC lumber industry to maintain a desired level of log market competition," Quinn wrote in a 2017 analysis. "Both CFP and WFT have been required to divest sawmills or agree to reduced harvesting rights during previous mergers.
"We estimate that this potential merger would result in a combined company representing (roughly 53%) of BC interior production, which would likely draw significant regulatory scrutiny."
Canfor owns 11 sawmills and five pulp mills in B.C., although it plans to permanently shutter its sawmill in Vavenby and has taken curtailments at several other mills in B.C.
Pattison’s offer must be approved by two-thirds of Canfor’s shareholders.
If approved, it would not be the first time a large B.C. forestry company went private. TimberWest, a formerly publicly traded company, was delisted in 2011 after it was acquired by two pension funds.
Canfor has responded to the bid by saying it has appointed a special committee of independent directors to review the offer, consult with financial and legal advisers and consider its next steps.