West Fraser Timber (WFG.TO) – Odd Lot Tender Offer – C$1340 Upside

Current Price: C$84.43

Offer Price: C$85 – C$98

Upside: C$1340 (if priced at the upper limit)

Expiration Date: 17th of August 2021

Issuer bid circular

This idea was hinted by John.

 

West Fraser Timber launched a dutch tender offer for 8.8%-10.1% of its outstanding shares with an odd-lot provision. The stock currently trades below the lower limit of the C$85 – C$98 tender range. Paid-up capital is fairly low – C$17.49/share. Net of 15% withholding taxes for foreign investors the adjusted tender range is C$74.88 – C$85.92/share – thus the idea is actionable only for Canadian tax residents or others not liable to pay these (potentially US IRA accounts). Essentially, odd-lot holders who are exempt from withholding taxes have a 1-month risk-free option for the shares to trade up or tender to get priced materially above the lower limit.

On withholding taxes and IRA accounts, please refer to W51W52 comment on DOO.TO discussion.

Upon the announcement, WFG share price jumped from C$86 to C$95 (middle of the tender range) but has since traded down below the lower limit due to a sharp fall in lumber prices. WFG is a C$10bn company and given current trading levels, the tender is most likely to end-up being priced at the lower limit. Nonetheless, there are couple of points to consider:

• Management will not participate in the tender (owns a negligible amount of stock).
• WFG business is highly dependent on lumber prices and historically WFG share price closely correlated with the commodity price. Due to demand-supply imbalance, lumber went up sharply in H2 2020, which significantly impacted WFG profitability. 2020 EPS was C$6.66 vs EPS loss of C$1.29 EPS during 2019. Q1’21 was even better and the company recorded C$4.33 EPS excluding the contribution from Norbord acquisition (C$4bn) in Jan’21. In April (see charts below) lumber skyrocketed to astronomical levels ($1650+ MBF) and then started falling equally fast. Uncertainty around lumber price going forward remains – if lumber prices start recovering over the next month, WFG share price will likely follow and the risk-free option might pay off handsomely.
• The company is also likely to announce Q2’21 results during the coming weeks (before tender expiration) – again a potential positive for the free option. Previously Q2 results were announced on the 27th of July (2020) and the 18th of July (2019).
• The company was buying back its shares earlier this year – acquired and canceled 4.57m shares (almost half of the current tender amount) at an average price above C$88/share from 16th of Feb to 23rd of June.
• On a negative note – tender size is rather small and information on major shareholders is limited. Apparently, there is at least one large holder that owns 13% of WFG – Canadian billionaire Jim Pattison. If he or any other major shareholders (if there are any) chooses to tender a substantial amount of shares, the offer could get easily oversubscribed.

Lumber price chart:

Historical correlation with WFG:

 

WFG

West Fraser Timber produces lumber, engineered wood products (MDF, OSB, etc), pulp and other products used in home construction, repair and remodelling. The business is comprised of 33 lumber mills, 14 OSB facilities, six renewable energy facilities, five pulp and paper mills, three plywood facilities, three MDF facilities, two particle board facilities, one LVL facility, one treated wood facility, one veneer facility, and one furniture facility.