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Jax Daily Record Monday, Jul. 17, 201709:00 AM EST

The Basch Report: Rayonier AM’s deal to acquire Tembec opposed

Tembec's largest shareholder says offer undervalues company.
by: Mark Basch Contributing Writer

Largest shareholder of Tembec says offer undervalues company.

The largest shareholder of Tembec Inc. said Friday it will vote against the company’s proposed acquisition by Jacksonville-based Rayonier Advanced Materials Inc. because the purchase price is too low.

Oaktree Capital Management L.P., which owns 19.9 percent of Montreal-based Tembec’s stock, sent a letter to the directors of both Rayonier AM and Tembec expressing its concerns.

“Although we appreciate the strategic rationale of a Rayonier-Tembec combination, we believe Rayonier’s current offer significantly undervalues Tembec. If the offer is not increased, we believe Tembec shareholders would be better off if Tembec remains independent,” the letter said.

Tembec shareholders are scheduled to vote on the deal at a special meeting July 27.

Rayonier AM in May agreed to pay either $4.05 in cash or issue 0.2302 shares of its stock for each share of Tembec. The total value of the deal, including the assumption of debt, is $807 million.

The merger would expand Rayonier AM’s market for its cellulose specialty products.

“By acquiring Tembec, Rayonier is capitalizing on a generational opportunity to reduce its dependence on the deteriorating acetate market, transform itself into a well-balanced global specialty cellulose supplier, and reposition its business for long-term sustainability,” Oaktree’s letter said.

“The price offered to Tembec shareholders does not fully recognize these benefits, nor does it appropriately compensate Tembec shareholders for the increased risk associated with combining with Rayonier,” it said.

There have been no other public comments on the deal by Tembec shareholders.

Analyst: Coach ‘Amazon-proof’

As staffs up its Jacksonville fulfillment centers, another company that already has a major local distribution center is becoming “Amazon-proof,” according to one analyst.

MKM Partners analyst Roxanne Meyer last week said Coach Inc. is “a growth story gaining momentum” as she initiated coverage of the handbag and accessories company with a “buy” rating.

“In our view, Coach is a largely unprecedented brand transformation story that reflects the strength of management, ability to execute, and the power of innovation,” Meyer said in her report.

“Its success is due to its courage to shrink sales in the public eye in order to grow, and the strategic decision to elevate the brand through product, store environment, and emotional marketing, creating a more ‘Amazon-proofed’ brand,” she said.

New York-based Coach operates an 850,000-square-foot warehouse at Jacksonville International Tradeport. While the company won’t give current employment figures, it did say a year ago it had about 250 workers at the facility.

That pales in comparison to Amazon’s plans to hire at least 2,700 workers in its Jacksonville facilities now under construction, but Coach’s distribution center is a bigger part of the company’s overall operation. The Jacksonville facility handles all of Coach’s North American distribution.

Amazon, of course, seems to be expanding everywhere and it has retail businesses scrambling to compete. However, Meyer thinks “luxury handbags and relevant brands” can withstand the competition.

“We view Coach as increasingly ‘Amazon-proofed’ given the strength of its brand (which we believe continues to grow) and the emotional appeal of handbags and the in-store experience (helped by the modern luxury store upgrades),” she said.

Coach’s stock jumped 35 percent in the first half of this year as sales rebounded after several down years.

Besides the pickup in sales from its existing brands, Coach also will expand with its $2.4 billion acquisition of Kate Spade & Co., which was completed last week.

“In our view, Kate Spade is a strong brand that makes Coach a more impactful player in the approachable luxury space,” Meyer said.

Even after its strong run-up this year to about $47 recently, Meyer expects further gains in the stock, setting a price target of $59.

“We like Coach as a stand-alone story given what we perceive to be a continuously improving earnings growth story, and view Kate Spade as an added tipping point,” she said.

S&P index drops Stein Mart

Stein Mart Inc. is in a similar position as Coach was a couple of years ago, with sagging sales depressing its stock price.

However, Stein Mart’s drop has been more severe, with the Jacksonville-based fashion retailer falling to slightly above $1 recently.

Because of the low price, S&P Dow Jones Indices last week said it is dropping Stein Mart from its S&P SmallCap 600.

“Stein Mart is ranked at the bottom of the S&P SmallCap 600 and is no longer representative of the small-cap market space,” it said.

Chico’s FAS is replacing Stein Mart in the index.

The announcement did seem to have an impact on Stein Mart’s stock, which fell 12 cents to a two-month low of $1.17 on Wednesday after the S&P announcement.

Inclusion in an index is generally a positive for a stock, as funds that track the index have to buy the stock to remain consistent with the index. Of course, when the stock is dropped from the index, the funds then dump the shares.

Grupo Mexico completes FEC deal

Grupo Mexico said it completed its $2 billion acquisition of Jacksonville-based Florida East Coast Railway.

Grupo Mexico is a Mexico City-based conglomerate with interests in transportation, copper mining and infrastructure projects.

Its transportation unit includes interests in two Mexican railroads and an intermodal company in Mexico, and a Texas railroad called Texas Pacifico.

It wanted the Florida East Coast Railway, which runs for 351 miles from Jacksonville to Miami, to expand its U.S. operations.

Grupo Mexico said in a news release the acquisition makes the company “a relevant player in the North American transport business, together with its current operations in Mexico and the state of Texas.”

As it announced first-quarter earnings in May, Grupo Mexico said “FEC is a unique and irreplaceable asset” and said it will make changes in FEC’s operations.

“This transaction generates greater strength for Grupo Mexico regarding geographic presence and the service we will be able to offer our clients, and it will significantly improve the scope and reach of our services,” it said.

The company said it “expects to achieve synergies and best practices on both sides, such as adapting locomotives to function with natural gas instead of diesel, which would result in a significant reduction of operating costs.”

Grupo Mexico’s transportation division reported first-quarter revenue fell 6 percent to $410 million, but the decline was due to a devaluation of the peso.

The company said the division’s revenue measured in pesos rose 6 percent.

Net income in the division fell 11 percent to $70.9 million in the quarter.

Grupo Mexico bought FEC from funds managed by Fortress Investment Group.

Fortress paid $3.5 billion in 2007 to acquire publicly traded Florida East Coast Industries Inc., which also included commercial real estate developer Flagler.

Fortress split up the rail and real estate businesses into separate units after the acquisition.

CSX goes to calendar year

Jacksonville’s other railroad company, the much larger CSX Corp., is changing its fiscal year to a year that will make more sense for most people.

Moving forward, CSX’s fiscal year will track the calendar, beginning on Jan. 1 and ending on Dec. 31, the company said in a Securities and Exchange Commission filing last week

That sounds logical but until the change took effect July 7, CSX’s fiscal year always ended on the last Friday of December.

Because of that, fiscal 2016 actually began on Dec. 26, 2015, and ended on Dec. 30, 2016, which made it a 371-day year. Remember, 2016 was a Leap Year.

Although the change took effect on July 7, it’s too late to change the beginning of fiscal 2017, which occurred on Dec. 31, 2016.

So fiscal 2017 will be a 366-day year. Fiscal 2018 will be the first one coinciding completely with the calendar.

CSX said in the SEC filing the change will not have a material impact on its financial results.

FIS profits from refinancing

Fidelity National Information Services Inc., or FIS, two months ago agreed to sell a majority stake in its Capco subsidiary for $477 million, but said the loss of Capco’s business would dilute its earnings.

However, Jacksonville-based FIS last week announced a plan to refinance $2 billion in debt, and analysts said the cost savings from that refinancing will offset the loss of earnings from Capco.

“Likely alleviating significant investor concern heading into 2Q results, we estimate the net impact of accretion (about 12 cents) from the recent $2 billion debt refinancing offset by net dilution from the Capco sale proves modestly accretive to our FY18 estimated earnings per share,” Oppenheimer analyst Glenn Greene said in a research note.

“Furthermore, an improving macro backdrop could boost bank/FI discretionary spending, in time, in our view,” he said.

Greene thinks FIS, which provides technology for financial institutions, has been undervalued.

He reiterated his “outperform” rating on the stock and raised his price target from $90 to $96, with the stock trading at $87.82 at the time of his report.

Robert W. Baird analyst David Koning estimates the refinancing will add 10 cents a share to annual earnings. He also has an “outperform” rating on the stock and already had a $96 price target for FIS.

“We like the stock, and no longer fear that 2018 consensus EPS needs to come down,” Koning said in his research note.

FIS is selling 60 percent of Capco, an international business, digital and technology consulting firm for the financial services industry.

FIS, which acquired Capco in 2010, plans to hold on to the other 40 percent.


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