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The Tembec softwood lumber plant is seen in Senneterre Que. in this file photo.

Jacques Boissinot/The Canadian Press

The takeover of Canadian forest products company Tembec Inc. by Jacksonville, Fla.-based Rayonier Advanced Materials has been thrown into doubt as major shareholders of the Montreal firm voice their opposition to the friendly $807-million (U.S.) deal.

Oaktree Capital Management, a Los Angeles-based investment manager, said in a statement Monday evening that it has won "significant support" from like-minded Tembec shareholders against the transaction. Oaktree, which holds a nearly 20-per-cent stake in Tembec, doesn't like the price and says Rayonier must increase its offer.

Restructuring Capital Associates, another major Tembec shareholder, said Tuesday it is siding with Oaktree. Together, the firms have roughly 37 per cent of Tembec shares. That's enough to scuttle the friendly takeover as it is currently structured.

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"It isn't quite Game of Thrones level, but we are seeing some drama with the Rayonier-Tembec deal," said RBC Capital Markets analyst Paul Quinn. "Ultimately, Rayonier may increase the offer given the overall strategic appeal."

Tembec shareholders will vote on the offer at a special meeting scheduled for July 27. The transaction must be approved by two-thirds of the Tembec shares voted.

In another twist, Oaktree said a highly unusual situation has emerged where a major Tembec investor that backed the deal when it was announced on May 25, Toronto's Fairfax Financial Holdings, can vote its shares for the transaction despite the fact it has since sold off its roughly 20-per-cent stake.

Oaktree says there's no way these zombie votes should be allowed to decide the outcome for existing shareholders. It is weighing whether to raise the matter with regulators, a source said.

"Fairfax currently has voting rights but no economic interest in Tembec, and we believe that it is simply unfair to Tembec shareholders that Fairfax's empty votes should determine the future of a company in which Fairfax confirmed it has no stake," Patrick McCaney, an Oaktree portfolio manager, said in the statement.

Officials with Tembec and Rayonier did not immediately respond to requests for comment. A Fairfax representative was not available.

Although it has questions about the sales process, Oaktree's main criticism of the transaction centres on price.

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Rayonier is offering $4.05 a share in cash or the equivalent in Rayonier shares. The $320-million offer, which also includes the assumption of $487-million in debt, represents a 37 per cent premium to Tembec's share price the day before the deal was disclosed.

Oaktree says Tembec shareholders are not receiving fair consideration for the value created by combining the companies. It says the deal is of strategic value to Rayonier, giving it a rare opportunity to reposition its business away from the declining acetate market, reduce customer concentration and improve its geographic diversification.

"In the absence of this transaction, Rayonier faces a challenging future," Oaktree said in its letter to the Tembec and Rayonier boards.

Rayonier has so far declined to increase its offer. It might revise that position as pressure increases, analysts say.

Stamford, Con.-based Restructuring Capital Associates said it expects to vote its 17 per cent stake against the takeover by Rayonier. The investment firm said it reached its conclusion after reviewing Oaktree's July 14 letter to Rayonier detailing what it sees as the shortcomings of the deal.

"We are not prepared to vote for the transaction unless Rayonier responds more appropriately to the points made by Oaktree," Restructuring Capital's founder, James Bennett, said.

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"The strategic merit of this unique combination can improve profitability exponentially and Oaktree makes a compelling case that Rayonier can and should improve its offer. Rayonier's response was not persuasive. We urge Rayonier to engage constructively in order to accomplish a combination that is fair to both sets of shareholders."

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