Photographer: David Ryder/Bloomberg

Tembec Shareholder Oaktree to Vote Against Sale to Rayonier

  • Oaktree argues Tembec better off solo if offer isn’t improved
  • Canadian tax benefits aren’t reflected in proposal: Oaktree

The largest shareholder in Canadian lumber and paper producer Tembec Inc. says it will vote against a proposed takeover by Rayonier Advanced Materials Inc. if the purchase price isn’t improved.

Oaktree Capital Group LLC, which owns 19.9 percent of Tembec, sent a letter to both companies’ boards Friday outlining its arguments against the deal. The Los Angeles-based investment firm said it understands the strategic rationale but doesn’t like the deal’s terms.

“Rayonier’s current offer significantly undervalues Tembec,” Patrick McCaney, an Oaktree portfolio manager, said in the letter. “If the offer is not increased, we believe Tembec shareholders would be better off if Tembec remains independent.”

Representatives for Rayonier Advanced and Tembec didn’t immediately respond to requests for comment.

Rayonier Advanced agreed to buy Tembec for about C$405 million ($319 million) in May to extend its geographic reach and expand product offerings. Rayonier said the transaction would produce about $50 million in cost savings over three years, which could provide a boost for the Jacksonville, Florida-based company that has struggled amid price declines and rising competition after it was spun off from Rayonier Inc. in 2014.

Cigarette Filters

Under the terms of the deal, Tembec shareholders can receive either 0.2302 of a share of Rayonier Advanced Materials or C$4.05 in cash per share of Tembec, representing a 37 percent premium to its closing price prior to the deal announcement.

Tembec shares have jumped about 44 percent since the offer and traded up 1.9 percent to C$4.24 at 1 p.m., above the offer price. Rayonier Advanced’s shares are up 18 percent since the deal agreement.

Oaktree said it believed the offer as it stands provides Rayonier’s shareholders, not Tembec’s, with the vast majority of the value created through the transaction. The firm has relayed its concerns to management of both companies and hasn’t received a “constructive response,” it said.

Rayonier Advanced produces specialty cellulose for use in several products, including cigarette filters and liquid-crystal display screens. Oaktree argues the business is overwhelmingly skewed toward the cigarette filter business, which is experiencing single-digit annual declines. By contrast, Tembec’s largest business is growing at a single-digit rate, Oaktree said.

The deal would significantly reduce Rayonier Advanced’s dependence on its top three customers, which account for 56 percent of its sales, and allow the combined company to reduce taxes by shifting income to Canada. Oaktree argues tax benefits aren’t reflected in the proposed purchase price.

Tembec shareholders are set to vote on the transaction July 27.

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