Chemtrade Responds to Canexus Directors’ Circular
- Chemtrade’s compelling offer fairly values Canexus and provides Canexus shareholders with a significant cash premium.
- Canexus’ aspirational vision of the future does not offer a credible alternative path to maximizing value.
- Canexus Board urged to shorten the minimum offer period and let shareholders decide.
TORONTO, October 24, 2016 — Chemtrade Logistics Income Fund (TSX: CHE.UN) (“Chemtrade” or the “Fund”), responded today to Canexus Corporation’s (TSX:CUS) (“Canexus”) directors’ circular issued in connection with the previously announced offer (the “Offer”) by an indirect, wholly-owned subsidiary of Chemtrade (the “Offeror”) to acquire all of the issued and outstanding common shares (the “Common Shares”) of Canexus.
Canexus shareholders are invited to review a detailed presentation that provides a comprehensive refutation of a number of misleading and incorrect statements in the Canexus’ directors’ circular, available at www.CanexusOffer.com.
“We believe Chemtrade’s premium, all cash Offer to Canexus shareholders provides compelling and certain value. The Canexus Board and management have repeatedly failed their shareholders and have presented no credible plan for growth. Incremental cost cutting and diverting cash flow to pay down debt, instead of investing in their assets, is a recipe for lackluster returns and will not maximize value,” said Mark Davis, Chief Executive Officer of Chemtrade.
Mr. Davis continued, “The Canexus Board fully shopped the company in a comprehensive sales process just last year. In the face of obvious regulatory risk, the Canexus Board tried to sell the company to Superior Plus Corp. (“Superior Plus”) but was blocked by US Federal Trade Commission. More recently, rather than responding to Chemtrade’s September 6, 2016 proposal by entering into negotiations, the Canexus Board further eroded shareholder value with a $110 million high yield note offering. The Canexus Board repeatedly refused to engage constructively with Chemtrade to negotiate a friendly deal, while also ignoring requests from significant shareholders. In response, Stirling Global Value Fund requisitioned a shareholders’ meeting to replace the board so that Chemtrade’s proposal could be considered. However, the Canexus Board chose to delay that meeting until late January, after Chemtrade’s Offer expires. These actions reflect a blatant disregard by the Canexus Board to act in the best interests of shareholders.”
“Given that Common Shares were trading at $1.24 on the date immediately prior to the public announcement of Chemtrade’s interest in acquiring Canexus, two things are apparent: the market shares our skepticism about the Canexus Board’s ability to drive value; and Chemtrade’s Offer of $1.50 per Common Share provides compelling value to Canexus shareholders. The Canexus Board clearly does not need 105 days from the October 4, 2016 launch date to consider strategic alternatives to the Offer. The Canexus Board should do the right thing and shorten the deposit period to 35 days to allow shareholders to sell their shares under our Offer without delay,” added Mr. Davis.
Canexus Asked “Why Would You Sell at $1.50 Per Share”?
Here are Five Reasons Why
1) Chemtrade’s Offer Represents Compelling Value for Canexus Shareholders
The Offer price of $1.50 per Common Share fairly reflects the composition and expected performance of Canexus’ portfolio of assets. The Offer price represents an enterprise value of $884 million, which implies a premium multiple of 8.4x Canexus’ 2016 Adjusted Cash Operating Profit (“ACOP”). This multiple is in the top quartile of relevant precedent inorganic chemicals transactions. It is also in line with the 8.5x ACOP multiple in the failed sale of Canexus to Superior Plus, notwithstanding the fact that Chemtrade has significantly less synergy potential – approximately $10 million compared to $35 million for Superior Plus.
The all-cash Offer provides Canexus shareholders with immediate liquidity, a 21% premium, and certainty of value today in the face of Canexus’ exposure to market volatility and the significant operational and financial risks associated with its aspirational vision of the future as a standalone company.
The Offer is subject to conditions that are customary for transactions of this nature and is fully financed and not subject to a due diligence condition. Chemtrade’s most recent proposal to Canexus prior to the commencement of the Offer provided Canexus with the opportunity to enter into an arrangement agreement on effectively the same terms as the arrangement with Superior Plus, but Canexus declined to do so.
Chemtrade believes that the Offer has significantly less regulatory risk than the terminated transaction between Canexus and Superior Plus, which the Canexus Board approved. In fact, Chemtrade announced last Thursday that the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired, which satisfied an important condition of the Offer.
2) Canexus’ Standalone Strategy Will Not Maximize Value to Shareholders and Was Already Fully Reflected in its Unaffected Share Price
Chemtrade believes that Canexus’ standalone plan does not offer a credible alternative path to maximizing value for Canexus shareholders. Even assuming management meets its latest estimate of the high end of its 2016 ACOP guidance range of $100 to $110 million, they forecast only 5% ACOP growth in each of 2017 and 2018, while Canexus remains subject to substantial risks.
Canexus’ hope for a recovery in the Chlor-Alkali segment to historical 2011-2014 levels and an associated hypothetical incremental benefit of $25 million is hopeful at best and contrary to its own forecasts published in the Canexus directors’ circular. Equity research analysts also share our skepticism as demonstrated by consensus Cash Operating Profit (“COP”) estimates for the Chlor-Alkali segment of approximately $5 million for 2016 and $12 million for 2017, well below the numbers referenced by Canexus.
Canexus’ estimate of $25 million of annual capital expenditures is wholly insufficient to adequately maintain its assets. Canexus is diverting funds from its plants to enhance short-term cash flows at the expense of the longevity, sustainability, and safety of Canexus’ operations. These risks are multiplied by the historical starvation of these assets, especially the important Brandon, MB sodium chlorate plant, while capital was directed into the NATO fiasco.
In response to Chemtrade’s Offer, the Canexus directors’ circular offered virtually no new information. The potential operational upside discussed in the directors’ circular is consistent with what was said during Canexus’ July 2016 investor presentation. The only difference is the hopeful projections noted above. Chemtrade believes that the unaffected Canexus share price of $1.24 is fully reflective of Canexus’ standalone plan and is the price to which Canexus shares are likely to decline to in the absence of the Chemtrade Offer.
The Canexus Board and management have driven the destruction of approximately $680 million in shareholder value over the past two years. Canexus shareholders’ understandable lack of confidence in management’s standalone plan is evidenced by the 6% decline in Canexus’ share price from $1.32 on July 4, 2016, the date immediately prior to Canexus’ investor presentation outlining its standalone plan, to $1.24 on September 13, 2016, the date immediately prior to the public announcement of Chemtrade’s interest in acquiring Canexus.
3) Canexus’ Portrayal of Synergies Available to Chemtrade is Unrealistic and Misleading
Canexus’ assessment that Chemtrade would be able to achieve annual cost savings of $20 to $30 million is unrealistic and there was no agreement as to the level of synergies potentially available to Chemtrade.
Canexus has already realized G&A cost savings of approximately $15 million in 2015 and 2016 to date, thereby eliminating a large proportion of the synergies that could have been available to Chemtrade. There is very limited overlap between the businesses of Chemtrade and Canexus. Chemtrade has only one small sodium chlorate plant, whose production is mostly captive to a single customer adjacent to the plant and Chemtrade does not have chlor alkali operations. This significantly limits any meaningful logistical and procurement efficiencies as well as site specific opportunities, in contrast to those that would have been available to Superior Plus. Canexus’ comments on purchasing synergies are erroneous. Canexus’ predominant input cost is electrical power, the prices of which are set by provincial jurisdictions for all customers, eliminating any ability for Chemtrade to realize power purchasing synergies should it acquire Canexus.
Chemtrade’s general indication of approximately $10 million of potential annual cost savings represents approximately 40% of the $25 million of North America G&A expenses Canexus has estimated for 2017. While Chemtrade does not have sufficient business overlap with Canexus to derive cost savings of the magnitude that Canexus has suggested, this lack of overlap does significantly reduce the regulatory risk of the Offer unlike the significant regulatory risk associated with the failed Superior Plus transaction.
Notwithstanding Chemtrade’s more modest synergy potential, the transaction multiple implied by Chemtrade’s Offer is nevertheless consistent with the multiple in the failed transaction with Superior Plus, which estimated its annual cost savings from that transaction to be $35 million.
4) The Offer Compares Favourably with Canexus’ Board-Supported Failed Transaction with Superior Plus
The “sticker price” of $1.70 per share referenced by Canexus proved to be illusory at best as it was never realized. The consideration consisted entirely of Superior Plus shares at a fixed exchange ratio of 0.153 which, as illustrated by the trading price of Canexus’ shares, provided no certainty of value to Canexus shareholders, unlike the current all-cash Offer of $1.50 per Common Share from Chemtrade. In fact, Canexus’ shares closed below $1.50 approximately 85% of the time and their volume weighted average price was $1.32 during the period the Superior Plus transaction was pending.
In a desperate attempt to confuse shareholders, Canexus has pointed to a non-binding expression of interest by Chemtrade in 2015 that contemplated a price of $1.90 per share. As Canexus well knows, this preliminary indication was based on public information only and was subject to comprehensive due diligence, including site visits and access to non-public information. The due diligence undertaken by Chemtrade after the submission of the initial offer uncovered, among other issues, operational deficiencies, including substantial catch up capital expenditures required for the continued operation of certain plants. These types of findings are exactly why bidders conduct due diligence and they resulted in Chemtrade reducing its offer for Canexus to $1.45 per share. Canexus chose to accept the much riskier all stock offer from Superior Plus which failed, resulting in Canexus’ shares trading down to $1.24 on September 13, 2016.
5) Canexus is Highly Unlikely to Surface A Competing Offer
Canexus is unlikely to surface a competing offer at a premium to the price being offered by Chemtrade. Canexus conducted a broad sale process for the company just last year. This process resulted in the submission of only one proposal in addition to those by Chemtrade and Superior Plus. No party attempted to top Superior Plus’ bid, although the Canexus Board would have been free to review any superior proposals. The Canexus Board clearly does not require 105 days now to surface an alternative bid.
SHAREHOLDERS – IT’S TIME TO ACT!
Canexus shareholders are encouraged to contact the Canexus Board and management to make their views known. Shareholders deserve an opportunity to sell their shares under the Offer without delay. It is in the Canexus Board’s power to shorten the deposit period to 35 days. Shareholders who have additional questions about the Offer are encouraged to contact the information agent for the Offer, Evolution Proxy at 1-844-226-3222(North American Toll Free Number) or +1-416-855-0238 (outside North America), or by email at firstname.lastname@example.org.
To learn more, please visit – http://canexusoffer.com/
Chemtrade operates a diversified business providing industrial chemicals and services to customers in North America and around the world. Chemtrade is one of North America’s largest suppliers of sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, liquid sulphur dioxide, sodium nitrite, sodium hydrosulphite and phosphorus pentasulphide. Chemtrade is a leading regional supplier of sulphur, sodium chlorate, potassium chloride, and zinc oxide. Additionally, Chemtrade provides industrial services such as processing by-products and waste streams.
This news release does not constitute an offer to buy or the solicitation of an offer to sell any of the securities of Chemtrade or Canexus.
Non-IFRS and Non-U.S. GAAP Measures
This news release makes reference to certain non-IFRS measures. These non-IFRS measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement IFRS measures by providing further understanding of operations from management’s perspective. Accordingly, non-IFRS measures should never be considered in isolation nor as a substitute for analysis of financial information reported under IFRS. Specifically, this press release discloses Cash Operating Profit and Adjusted Cash Operating Profit, which are non-IFRS measures used by Canexus. Canexus defines Cash Operating Profit (Loss) as Operating Profit (Loss) before depreciation and amortization (which is included in cost of sales and general and administrative expense) and non–cash share–based compensation expense (recovery) (which is included in cost of sales, distribution, selling and marketing expense, and general and administrative expense). Cash Operating Profit (Loss) represents the cash contribution of product sales and service revenues after taking into consideration direct costs to produce products and deliver services, distribution, selling and marketing expense and general and administrative expense. Adjusted Cash Operating Profit is a non-IFRS measure used by Canexus that adjusts Cash Operating Profit (Loss) for certain items which have not been disclosed.
Caution Regarding Forward-Looking Statements
Certain statements contained in this news release constitute forward-looking information within the meaning of certain securities laws, including the Securities Act (Ontario). Forward-looking information can be generally identified by the use of words such as “anticipate”, “continue”, “estimate”, “expect”, “expected”, “intend”, “may”, “will”, “project”, “plan”, “should”, “believe” and similar expressions. Specifically, forward-looking information in this news release includes statements respecting the benefits of the Offer, the results, effects and timing of the Offer, the expected liquidity and certainty of value for Canexus shareholders, statements with respect to the future financial or operating performances of Canexus, the expected timing and future financial position and results of operation resulting from a combination of Chemtrade and Canexus and any benefits therefrom, that there is a low likelihood of a competing offer, and that if the Offer is not successful it is likely that the Canexus share price will decline back to pre-Offer levels. Forward-looking statements in this news release describe the expectations of the Fund and its subsidiaries as of the date hereof. These statements are based on assumptions and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements for a variety of reasons, including without limitation: the ultimate outcome of any possible transaction between Chemtrade and Canexus, including the possibility that Canexus will not accept a transaction with Chemtrade or enter into discussions regarding a possible transaction, that the conditions of the Offer may not be satisfied or waived by Chemtrade at the expiry of the Offer period, the ultimate outcome and results of integrating the operations of Chemtrade and Canexus if a transaction is consummated, the ability to obtain regulatory approvals and meet other closing conditions to any possible transaction, including any necessary shareholder approvals, potential adverse reactions or changes to business relationships resulting from the announcement, pendency or completion of the Offer transaction or any subsequent transaction, competitive responses to the announcement or completion of the Offer, costs and difficulties related to the integration of Canexus’ businesses and operations with Chemtrade’s businesses and operations, the inability to obtain, or delays in obtaining, cost savings and synergies from the proposed transaction, uncertainties as to the impact of the completion of the Offer or any alternative or subsequent transaction on Chemtrade’s earnings or cash flows that it expects, unexpected costs, liabilities, charges or expenses resulting from the proposed transaction, litigation relating to the proposed transaction, the inability to retain key personnel, any changes in general economic and/or industry-specific conditions, as well as the risks and uncertainties detailed under the “Risk Factors” section of the Fund’s latest Annual Information Form and the “Risks and Uncertainties” section of the Fund’s most recent Management’s Discussion & Analysis.
Although the Fund believes the expectations reflected in these forward-looking statements and the assumptions upon which they are based are reasonable, no assurance can be given that actual results will be consistent with such forward-looking statements, and they should not be unduly relied upon.
The Fund disclaims any intention or obligation to update any forward-looking information even if new information becomes available, as a result of future events or for any other reason, except as required by law. The forward-looking information contained herein are expressly qualified in their entirety by this cautionary statement.
Further information can be found in the disclosure documents filed by Chemtrade Logistics Income Fund with the securities regulatory authorities, available at www.sedar.com.
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For further information:
President & CEO
Tel: (416) 496-4176
Vice President, Finance & CFO
Tel: (416) 496-4177
Bayfield Strategy, Inc.