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Rayonier Advanced Materials Reiterates Commitment to Acquire Tembec on Agreed Terms

Tuesday, Jul 18, 2017

Rayonier Advanced Materials Inc.  today reaffirmed its commitment to acquire Tembec Inc. on the terms previously agreed with Tembec. The Company believes that the previously announced arrangement consideration of C$4.05 in cash or 0.2302 of a share of Rayonier Advanced Materials common stock per Tembec common share—which is subject to proration so that approximately 63% of the aggregate consideration is paid in cash and 37% is paid in Rayonier Advanced Materials stock—provides compelling value to Tembec shareholders. The Company does not intend to increase the consideration offered to Tembec shareholders.

 On July 14, 2017, the Company received a letter from Oaktree Capital Management (”Oaktree”) indicating its intent to vote against the Company’s acquisition of Tembec at the special meeting of Tembec shareholders. Oaktree’s letter contains a number of misleading statements, which we address in Appendix A. The Company believes that the previously announced arrangement consideration, which was the result of extensive negotiations with Tembec, represents a full and fair price and an attractive valuation for the following reasons:

•    Significant premium – The arrangement consideration represents a significant premium to Tembec’s historical share price. The headline offer price of C$4.05 and the current implied value of C$4.20 per Tembec share represent a 37% and 42% premium, respectively, to Tembec’s unaffected share price on May 24, 2017, and a 76% and 83% premium, respectively, to Tembec’s VWAP for the 12 months pre-announcement.
•    Certainty of value – The cash component of the arrangement consideration represents approximately 63% of the current overall value of the arrangement consideration and provides a substantial and immediate value realization for Tembec shareholders.
•    Upside participation – With approximately 37% of the consideration in the form of Rayonier Advanced Material stock, Tembec shareholders have the opportunity to capture enhanced long-term value prospects through ongoing participation in a larger, more diverse company.
•    Enhanced liquidity – In the year prior to the announcement, Tembec common shares traded an average of $0.13 million per day. In contrast, Rayonier Advanced Materials shares traded an average of $7.8 million per day in the same period, which means that the Company’s shares are greater than 60 times more liquid than Tembec shares. As part of a significantly larger company, Tembec shareholders receiving Rayonier Advanced Materials common stock will benefit from this significantly increased market liquidity.
•    Full price discovery – Tembec’s Board of Directors and management, with the assistance of their financial and legal advisors, reviewed strategic alternatives for nearly two years, including the continuation of Tembec's existing stand-alone business plan and the divestiture of core and non-core segments, before recognizing that a transaction with Rayonier Advanced Materials was the best option for Tembec and its shareholders. The interest of Tembec’s Board of Directors and management are fully aligned to that of shareholders, and Tembec’s Board received two fairness opinions to the effect that the transaction is fair.
•    Optionality on superior offers – Tembec also retained the ability to engage in discussions with respect to an unsolicited competing offer that could reasonably be expected to be more favorable to Tembec shareholders, from a financial point of view, than the transaction with the Company. In the nearly two months since the arrangement agreement was announced, no third party has made such an offer.

Tembec’s Board of Directors unanimously approved the arrangement agreement and recommended that its shareholders vote “FOR” the arrangement. Institutional Shareholder Services (“ISS”), an independent proxy voting and corporate governance advisory firm, also recommended that Tembec shareholders vote “FOR” the arrangement with Rayonier Advanced Materials, stating that “In light of the premium offer consideration, the favorable market reaction and the sound strategic rationale, shareholder approval of this arrangement is warranted.” The research community also supports the transaction. For example, Bank of America Merrill Lynch stated, “… RYAM is paying a sizable premium  and could bring significant value to Tembec through its expertise in the cellulose specialties business, potential for an improved capital structure and more steady cash flow generation to invest in the business, among others.” Similarly, TD Securities stated, “ we believe that RYAM’s bid is fair.”

The Company believes that the agreed-upon consideration reflects the significant value that can be created through a combination between the two companies, but also the meaningful risks associated with Tembec’s business segments, including:

•    Commodity businesses – With the significant majority of Tembec’s revenue in commodity markets, including High-Yield Pulp, Newsprint and Forest Products, the agreed-upon price reflects the volatile nature of these businesses as they are currently operating above historical averages. In High-Yield pulp, there is 1.8 million ton expansion of the competitive BEK pulp coming on line in 2017, with other announced capacity expansions in Asia and South America to follow in 2018. Newsprint demand continues to decline by over 8% per year. Forest Products is driven by US and Canadian housing. These markets face threats from rising interest rates and trade disputes.
•    Softwood Lumber tariffs – Tembec has a significant exposure in the developing trade tension between Canada and the United States with historical lumber export volumes in excess of 50%. Recently, approximately 27% tariffs were announced on lumber exported from Canada to the United States and the outlook of the negotiations is in flux given the change in administrations at each government. While prior tariff disputes were eventually settled after numerous years, there can be no assurances of a similar outcome.
•    Currency – Nearly 50% of Tembec’s Canadian sales are denominated in US dollar with the majority of their production inputs in Canadian dollar. A stronger Canadian dollar can significantly affect Tembec’s cost position compared to foreign competitors. At the time of announcement, the Canadian dollar was trading below historic averages and, as expected, is reverting to more normal levels. One Canadian dollar was worth around 0.74 US dollars at the time of announcement. Since then, the Canadian dollar has appreciated by over 6%. Based on Tembec’s disclosure, a 1% change in Canadian dollar impacts EBITDA by C$7 million; resulting in a potential reduction in EBITDA of C$43 million.
•    Expense and risk to synergies – While the Company expects to achieve upwards of $50 million of synergies over the three years following the completion of the arrangement, it will also require considerable time, money and resources along with increased execution risk to capture these synergies. These synergies are a direct result of the combination and will only be achieved with careful investment and management.

Given the lengthy exploration of strategic alternatives that Tembec undertook and the attractive premium and valuation offered by the Company, a rejection of the offer exposes Tembec shareholders to significant market valuation risk and diminished liquidity. Rayonier Advanced Materials stock has benefited approximately 15% since the announcement. With cash on hand equal to approximately 40% of the equity market capitalization of the Company, much of this value was created by providing clarity on the Company’s strategy. With over $345 million of cash on hand and free cash flow generation of $90 to $100 million, the Company also has significant capacity and ability to create shareholder value through other strategic and financial alternatives. The Company has successfully implemented a four pillar approach to driving value, focused on cost improvements, new product development, optimizing existing markets and executing on complementary acquisitions. The Company continues to evaluate other opportunities independent of its acquisition of Tembec and believes that it has various strategic alternatives, including or excluding Tembec.

Rayonier Advanced Materials believes that its acquisition of Tembec is in the best interests of both companies and their shareholders and reaffirms its commitment to acquire Tembec on the previously announced terms.

 

Source:businesswire.com

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