Resolute Forest Products Inc. T.RFP

Scotia on the CVR

[dosperros]

How Much Is a Duty CVR Worth?

OUR TAKE: Positive. On July 6, 2022, Paper Excellence Group entered into a definitive agreement with Resolute Forest Products (RFP) to acquire all of RFP’s shares. As part of the deal, RFP’s shareholders will receive US$20.50 of cash and a non-tradable Contingent Value Right (CVR) on softwood lumber duty deposit refunds per RFP’s share.

We’ve received many questions regarding the value of the CVR. We provide our estimate of its value (see Exhibit 1) and can also provide investors with a simple Excel-based tool (available upon request) to make their own assessment using their own assumptions.

Assuming no cash taxes, 5% administrative (legal/accounting) expenses, a conservative five-year wait period and 50% refund rate, we estimate the value of a CVR at ~$1.90 per RFP share.

We reiterate our Sector Perform rating and increase our target to US$22.40 ($20.50 + $1.90).

KEY POINTS

CVR’s upside could be significant. Under the CVR, shareholders will be receiving any refunds on approximately $500M of duty deposits paid as of June 30, 2022 (including interest but net of certain expenses and any applicable tax and withholding), The CVRs will not be tradeable and will be subject to prohibitions on transfer. We do not expect any cash taxes to become due or payable under a refund scenario.

The US$500M of deposits (or US$475M net of 5% expenses with no cash taxes) could have a face value of ~US$6.00 per share. However, the uncertainty regarding the actual percentage of deposits to be refunded and the timing of those potential refunds significantly reduces the present value. A 50% refund rate would reduce the value to US$2.93 per share, or a present value of $1.90 per share assuming the refunds come only in five years.

The 2006 SLA provided an 80% refund. The last negotiated agreement (the 2006 Softwood Lumber Agreement) included an 80% refund (~$4B refunded out of ~$5B), which would translate to $4.71 per share. We are not aware of any ongoing discussions between Canada and the U.S. and therefore believe a potential refund is at least 18-36 months away given how slowly the legal challenges are progressing, if at all.