Takeover speculation seems prematureRational43 wrote: Little Conifex not even trading at Book Value, while all the industry is flush with cash it doesn't know what to do with, and lumber prices continuing to set new highs, months after it was supposed to crash.
Conifex is gone soon in a takeover unless its share price gets to the $4 range quick.
No, Conifex is not "gone soon". That is not how things work. You have a high-cost average among the large holders who are finally about to get it back after being underwater for a decade and not seeing a penny paid out. Take Blue Wolf's buy-in:
"the value of $50 million through the issuance of common shares of Conifex with an issue price of $6.50 per share, 3.5 million warrants to purchase common shares for a period of five years after closing of the acquisition, at an exercise price of $8.78 per share." It's a similar deal with Ken and Polar and others. Why lock in a loss when the vision is arriving as expected, albeit a decade late? In BW's case those warrants have value but expire worthless below that threshold. Bids can happen any day of the week just because you get one doesn't mean you're getting the votes to make it happen. They'll get rid of this voluntarily at a threshold of respectability, but that's a long way away yet. Moreover, if I have $80 to $120M of cashflow this year, selling at $4 gets me what? $184M? What kind of lunatic would do that when you can just pay the $120M out as 100% dividend and recoup $2.60 a share this year? If that doesn't drive the SP to $10, you can probably pay out another $50 or $60M in 2022 as well. Do this until you're whole or some fund sees that they have to pay 20x for earnings in the broader market but in forestry, earnings can be had for 3x. These gaps close, not rapidly, but eventually, the market catches up.
Creeping takeovers are ruled out by the poison pill that kicks in over 20% ownership. There aren’t enough shares to begin with on the market to accumulate that level, and if there were the poison pill makes it far more costly to proceed than it would be just to do a friendly takeover and give Ken his $8 or $12 or whatever the number ends up being. If we have these prices in a year? It’s $12+, but realistically higher as they can fit in another SIB and drop the share count down to the 22M range so a company of $400 or $500M of assets becomes increasingly valuable. A few big years of earnings make all the difference when you can’t (and are not expected to) grow. Sit back and pay your shareholders, they have suffered enough.
Eventually this gets a makeover and a vision, and get credit for the power, timber tenure, and 80 cents on the dollar for the mill while the debt goes to zero and SIB absorbs the excess cash. This is all likely in 2021. You're looking at an EV if ~~$340M zero debt on a share base of 32M, so a per share value of $10.55 or so. Anything above $10 they'd take a basic 20% premium to walk away (more if it's a private bidder; if public they'd do say 2/3 cash and 1/3 equity). BW gets its free money too. It's not that big to walk away from a free $30.7M payday.
Mercer, Canfor and West Fraser all have use for the fibre and the power; Tolko, Dunkely, Millar Western, Western Forest, and Hampton are viable, as are Resolute, EACOM or Rick Doman's new outfit GreenFirst are all long shots. Western has a market cap of $740M but only 800 million feet a year capacity so this diversifies them into power and SPF plus increases output by 25% overnight. With Canfor and WFG it's a bit more of a founding error and they could have issues optics.
Any of these outside of GreenFirst can write a cheque for $340M easily, but the public guys will be disinclined to offer the type of premium to take it as that big a leap makes them look stupid. You can pay $10 for a $6 stock if synergistic, but you can't pay $10 for a $2.35 stock without looking bad.
The interim period will be interesting. A private guy or a PE fund may also spot this compelling free cash. If it was me, I'd buy 19.9% then just find a partner or two to get to 51% to drive change. This is a great way for a corporate raider to unlock a massive amount of value by getting ahead of this.