Signs point to major shake-up at Tembec

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Could Tembec Inc.'s days as an independent forest products company be numbered?

There's certainly enough fresh timber for the rumour mill these days regarding the fate of the Montreal-based lumber, paper and specialty pulp producer.

The shares fell to penny-stock status recently after Standard & Poor's revised its outlook for the company to negative from stable, and investor jitters ramped up on balance-sheet concerns.

Analysts have been lowering their share-price targets after Tembec – challenged by increasing competition and volatile pricing in specialty pulp markets – posted on June 30 a huge miss on the consensus estimate of a third-quarter loss of 4 cents.

The pressure is ratcheting up on Tembec chief executive officer James Lopez, although there are expectations the company stands to gain significant cost savings from its Témiscaming co-generation boiler project.

Events could be coming to a head, particularly when you consider that Tembec's biggest shareholder is Fairfax Financial Holdings Ltd.

Prem Watsa's investment and insurance company bought its 20-per-cent stake from U.S. institutional investor Wayzata Investment Partners LLC's for $45-million, or $2.25 a share, in June. With the shares now in the dumpster, a refinancing or even possible takeover of Tembec by a rival could be in the cards, and Toronto-based Fairfax is well placed to act as instigator, or at least facilitator.

The fact that Fairfax also happens to be the biggest shareholder of Resolute Forest Products Inc. leads some to think a Tembec-Resolute merger is likely.

Indeed, Fairfax was a key player three years ago when Resolute – formerly AbitibiBowater Inc. – took over pulp-maker Fibrek Inc. in a hostile bid it won over Mercer International Inc. Fairfax was Fibrek's largest shareholder at the time and backed Resolute.

Fairfax had lock-up agreements in the Fibrek deal with other investment managers, notably Steelhead Partners LLC, which also currently happens to be a major investor in both Resolute and Tembec.

Fairfax would consider a Tembec-Resolute tie-up, but there are no immediate plans to pursue that, one source with knowledge of the company said.

Other scenarios being bruited about include asset sales and the combining of Tembec's dissolving pulp operations with those of Vancouver-based Fortress Paper Ltd.