Conifex Inc.’s move to pull out of a C$285-million acquisition bid for Domtar Corp.’s (NYSE:UFS) lumber business may simply be a ploy aimed at dropping the purchase price, according to RBC Capital Markets analyst Mark Bishop.
The acquisition, announced in late June, was simply too rich, Mr. Bishop wrote, “given the poor operating history [of Domtar] and current weak operating environment, which has resulted in half the capacity remaining in an indefinitely idled position.”
Conifex is a new company formed to take over Domtar’s lumber and forest tenure assets, and the deal was predicated on government approval for transferring Domtar’s forest licenses. But the Quebec Ministry of Natural Resources and Wildlife announced earlier this month it was canceling Domtar’s license to forests near a pair of mills it has permanently closed.
Domtar is appealing the license cancellation, and believes Conifex cannot pull out until the end of the year if that appeal is unsuccessful. Nevertheless, Conifex announced this week it is terminating its acquisition bid. Mr. Bishop, however, suspects the deal may not actually be dead.
“We expect Conifex may be using the revocation notice as leverage to improve the transaction terms, which may include a reduced purchase price, increased minority ownership by Domtar, or higher cost sharing by Domtar during a transition period, or a combination thereof.”
That is still bad news for Domtar and “a modest negative for the shares,” he wrote, but maintained an “outperform” rating on the company with a 12-month price target of C$10.50 per share.