“Whither Canfor? – Part I - The battle for control”

By Peter Ewart

Over the last year, a fierce battle for control of Canfor Corporation has been waged between different shareholder factions. 

In this battle, three factions - including Great Pacific Industries Inc. led by Jim Pattison, Matthew Cartier Holdings controlled by the Bentley and Prentice families,  and Third Avenue Management LLC, a New York based hedge fund - have formed an alliance that is pitted against the Jarislowsky Fraser Ltd. faction, which is a Montreal based investment firm led by Stephen Jarislowsky.  The stakes are high, as Canfor, with its takeover of Slocan Forest Products in 2004, is considered to be the largest softwood producer in Canada.

The hands down winner of the current battle appears to have been the Pattison / Bentley & Prentice / Third Avenue Management alliance (which controls 52% of Canfor’s outstanding shares) with the Jarislowsky Fraser faction being the big loser.  Indeed, some analysts have been describing the victory as a boardroom “coup d’etat” (Globe & Mail, April 10). The carnage from this battle includes the resignation / sacking of Canfor CEO Jim Shepherd, the expected ousting of Stephen Jarislowsky from the Canfor Board of Directors (along with several other directors) at the annual general meeting scheduled for May 4th, and the elimination of a shareholder rights plan at the same meeting. 

Another name for “shareholder rights plan” is what is called, in investment terminology, a “poison pill”.  Such plans are sometimes put in place to block takeovers by outsiders or factions within a company.  According to Toronto Securities lawyer Philip Anisman, the elimination of the plan will leave “the company’s shareholders vulnerable to a creeping takeover,” presumably by the Pattison / Bentley & Prentice / Third Avenue Management alliance (Globe & Mail, April 10). 

If the alliance is successful in its aims, the battle may not be over as it is unclear which of the three victorious factions will be dominant once the dust settles.  However, some tendencies have emerged.  The Bentley and Prentice families founded the company in the 1930’s, but there control has declined in recent years to under 10% (from a high of 40% in the 1990s).  On the other hand, both Pattison and Third Avenue Management have been increasing their share portion to 25 per cent and 24 per cent respectively.  But some feel it is unlikely that Third Avenue Management will buy out the company, given that its strategy as a hedge fund is to establish just enough control to “impose its own disciplined, shareholder-oriented values on the board and on management” (Vancouver Sun, April 14).  However, its strategies as a hedge fund often go beyond individual companies, and can have the aim of using its leverage to gain control of the direction of an entire industry sector, in this case the forestry sector in BC.  Once this achieved, it can pick and choose the time to shut down mills and consolidate operations.

What has this battle for the forestry giant Canfor been about?  The general answer, of course, would be money, power and control.  The Jarislowsky Fraser faction is concerned that a takeover “would mean the full value of Canfor’s shares might not be realized” (Globe & Mail, March 20).  Others, like Bill Mackenzie of the Canadian Coalition for Good Governance, say that “without knowing the specifics of a side deal, it’s impossible to say whether it’s in shareholders best interests” (Globe & Mail, April 5). 

But what is clear is that the strategic direction of Canfor is at stake.  Of late, Canfor has been faltering, struggling to cope “with the slumping U.S. housing industry, the high Canadian dollar, the relative puniness of Canadian producers globally and the infestation of the devastating pine beetle in Western Canada” (Globe & Mail, March 20). 

When Canfor took over Slocan Forest Products in 2004, Jim Pattison and Peter Bentley had high expectations that they believe have not been realized.  Canfor’s “operating profit margins” have lagged “behind West Fraser Timber and International Forest Products by about 10 per cent” (Bloomberg.com, April 19).  In addition, West Fraser struck a deal to acquire thirteen mills in Southern United States, a move that many feel left Canfor behind in the dust. 

Pattison and Bentley favoured “rapid, drastic action to address Canfor’s slumping stock price and other problems.”  Others, including Stephen Jarislowsky, wanted to give Canfor CEO Jim Shepherd more time “to to turn the company around,” given that he was facing “a slumping U.S. housing market that was hitting all lumber producers, not just Canfor” (Globe & Mail, April 4). 

One of the options for Canfor’s future could be to “take it private and get it on the cheap.”  Jim Pattison’s track record might suggest that course of action, given that his own business empire is a privately held one worth about “$6.3 billion in annual sales from assets that range from car dealerships to wax museums.”  Others argue that the aim of the victorious factions will be to “fix” the company and “improve value” (April 4, Globe & Mail). 

This could possibly mean acquiring more assets in Canada or the U.S., as well as slashing costs.  In other words, Canfor could possibly seek concessions from workers, close mills, demand tax and stumpage reductions, and increase the company’s monopoly position through acquisition, consolidation and establishment of “super mills.”  There is even talk of a merger or buyout involving Canfor and West Fraser, although this would probably involve some regulatory competition issues.  Rich Coleman, the provincial Minister of Forests, does not seem too concerned, commenting that “Third Avenue’s investments are an example of the private market place at work” (Vancouver Sun, April 14).

What does all this mean for employees and communities in the Central Interior and province?  Third Avenue Management is keeping a closed mouth about its proposals until after the crucial May 4^th Canfor annual general meeting.  But many feel that the picture is not good.  According to Third Avenue Management, which has also gained a substantial interest in Catalyst Paper, its research approach for investments is “opportunistic and indifferent to sectors, industries, market capitalization, countries and benchmarks.”  The captain of a pirate ship could not have put it better.

It is a strange fact of modern commerce that, despite the earthshaking nature of these corporate decisions, the very workers and contractors who produce the value for these huge companies as well as the communities and businesses that provide the infrastructure, have no say whatsoever.  Indeed, many feel that governments at various levels often operate as “Judas goats,” rubberstamping corporate consolidation and foreign takeovers, as well as granting huge tracts of forest and other resources, all the while leading workers and communities to slaughter. 

Others argue that such drastic measures will ensure the company remains profitable, thus favouring workers and communities in the long run, and they point to a rise in Canfor’s stock price after the above changes were announced. 

One thing is for sure, corporate monopolization in the forest industry has reached unprecedented levels.  When all of this shakes out, the entire BC forestry industry could be divided up into one big global forest company and two pulp mill companies, all of which would have substantial foreign control (Vancouver Sun – April 14). 

The population of British Columbia is over four million people, many of whom live in forestry dependent communities.  Canfor’s new board will have just 8 directors.  Never has the fate of so many been decided by so few. 

“Whither Canfor – Part 2 – Blood in the water”, which is the next article in this series, will be published in the Thursday, May 1^st, edition of Opinion250.  Peter Ewart can be reached at: peter.ewart@shaw.ca or phone (250) 962-6792.

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