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The Tembec softwood lumber plant in operation Thursday Nov 13, 2008 in Senneterre Que. Parti Quebecois Leader Pauline Marois visited the plant and met the employees. THE CANADIAN PRESS/Jacques BoissinotJacques Boissinot/The Canadian Press

Fairfax Financial Holdings Ltd. says its intentions have been misunderstood by an aggressive U.S. investment firm and will not vote on the proposed takeover of forestry product company Tembec Inc.

The U.S. firm is Los Angeles-based Oaktree Capital Management, Tembec's largest shareholder. Oaktree is angling for a better price than the more than $807-million (U.S.) offered by Rayonier Advanced Materials in late May, and has been gathering up opponents to torpedo the deal.

Oaktree says Tembec is selling itself to an opportunistic buyer at a price that's unfair to shareholders without having conducted a disciplined sales process. It has also zeroed in on Fairfax, saying the Toronto insurance and investment company should not get a say in next week's vote on the transaction because it has sold down its position since the merger was announced.

"We do not normally discuss our voting decisions publicly, however, we have no intention to vote shares that we no longer own," said Paul Rivett, president of Fairfax.

The conflict stems from disclosure made when Rayonier and Tembec announced their merger and said in a press release that Fairfax, then Tembec's largest shareholder, had "advised that it is supportive of the transaction." Over the subsequent three weeks, Fairfax sold off its stake in Tembec completely, with the bulk of the position being liquidated June 19, Tembec's record date for the proposed merger. That meant it would be still entitled to votes, even without a financial interest in the company.

Oaktree, which owns close to 20 per cent of Tembec, seized on this exit, saying that Tembec and Rayonier potentially misled investors into thinking Fairfax believed in the long-term value of the deal. It complained that Fairfax should not be allowed to cast "empty votes" and set out to rally other shareholders to oppose the deal. It also said it had filed complaints with both the Ontario Securities Commission and Quebec's Autorité des marchés financiers.

Fairfax said Oaktree made no effort to understand its investment approach.

"It is unfortunate that Oaktree did not give us the courtesy of speaking to us first before launching a negative publicity campaign against us, particularly given the fact they purchased shares in Canada without understanding the rules in Canada," said Mr. Rivett, referring to his interpretation that Oaktree did not fully grasp the record holder rules when it made its investment in Tembec. "Oaktree's ill-informed hostile actions will only serve to destroy shareholder value," he added.

Tembec has warned its shareholders that its stock price could drop if the deal falls apart, and that no other potential suitors have stepped up with an offer. Following what it called a "comprehensive and rigorous sales process" that started in 2012, Tembec says it received four non-binding expressions of interest from buyers before concluding that Rayonier's offer was the best one. None of those other buyers has jumped into the fray since.

Oaktree and Tembec declined to comment. A spokesperson for Rayonier said the company had nothing new to say.

The dispute heated up when a second large shareholder, Restructuring Capital Associates (RCA), pledged to join Oaktree in opposing the deal. By Thursday, the two shareholders said they had gathered more support and that investors holding more than half of Tembec shares now planned to vote against the transaction. Proxy advisory firms were split on the agreement with Glass Lewis recommending shareholders vote against it while Institutional Shareholder Services urged them to vote in favour.

Jacksonville, Fla.-based Rayonier is now offering $4.07 a share for total consideration of $320-million (U.S.), as well as taking on $487-million in debt. The price represents a 37-per-cent premium to Tembec's closing price before the deal was announced.

Rayonier has so far declined to raise its offer, but it looks increasingly clear the deal will not pass the vote. Two-thirds of shares must be voted in favour for it to succeed.

Tembec has been a rumoured candidate for a merger agreement since Fairfax took its 19.99 per cent stake in the company in 2015, paying $2.25 per share.

"Unlike Oaktree, we believe Tembec management and board of directors did their best to get the highest sale price for shareholders and we supported Rayonier's offer price," Mr. Rivett said. "That said, as the market price exceeded the offering price we took the opportunity to sell at a price approximately 100 per cent higher than our purchase price."

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 4:00pm EDT.

SymbolName% changeLast
RYN-N
Rayonier Inc REIT
-0.09%33.04
FFH-T
Fairfax Financial Holdings Ltd
+1.16%1537.53

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