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Chemtrade-Canexus case shows an easy way to make a hostile bid friendlier

A Canexus sodium chlorate operation. The company has facilities in Brandon, Man.; Beauharnois, Que.; and Nanaimo, B.C.

Hostile takeovers are notoriously difficult deals to complete. Only half these bids actually succeed, and the ones that do set out a game plan for those that follow.

Chemtrade Logistics Income Fund broke with conventional takeover tactics as it launched a hostile bid Monday for Canexus Corp., and in doing so, hinted that there may be room to improve an offer that puts an $884-million enterprise value on the target company.

Chemtrade has been trying to strike a friendly deal for Calgary-based Canexus for several months, as part of a move to create a leading North American producer of industrial chemicals used by pulp and paper companies. Chemtrade opted to go directly to shareholders Monday with a $1.50-a-share offer after several attempts to do a friendly transaction were turned down by the Canexus board.

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It's not unusual for frustrated corporations to take this step: Law firm Fasken Martineau published a study last year of 140 Canadian hostile offers over the past decade, and found that 55 per cent of bids were eventually successful.

Fasken's study found successful hostile takeovers featured a number of common traits. There were cash bids – Chemtrade's offer checks that box. However, the bid falls short on other key elements.

Successful hostile bids tend to feature an offer made at a 30-per-cent-plus premium to where the target company's stock was trading prior to the bid, according to Fasken's research. Paying up for a target translated into a 75-per-cent success rate on the takeover.

Chemtrade's bid comes at a 21-per-cent premium to the price of Canexus stock prior to the revelation of takeover talks in mid-September. At $1.50 a share, the offer is a few cents below where Canexus stock was trading last week, which would make this a takeunder offer.

Past history on hostile takeovers is not lost on Chemtrade and its advisers at Bank of Montreal, law firm Osler Hoskin & Harcourt and communications adviser Bayfield Strategy. The decision to step up pressure on Chemtrade is clearly being made with an eye to leaving room for an improved bid, in exchange for engagement from the board and a shift to a friendly offer.

It's clear that Canexus is not entirely averse to a deal, as the company tried to hook up last year with Superior Plus Corp., only to have U.S. competition watchdogs block that combination. And Canexus has effectively been up for sale for the better part of a year, as it deals with a relatively heavy debt load and falling stock price.

If past takeovers are a guide, the next step in this dance will be filing of a formal offer from Chemtrade – the paperwork is expected Tuesday – then informal overtures to the Canexus board and its advisers at CIBC, Valence Group, Stikeman Elliott, Longview Communications and Kingsdale Shareholder Services. While there have been harsh comments from Chemtrade on the way its rival runs its affairs, everyone involved recognizes that this is just part of the takeover game.

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The long odds that Chemtrade's hostile deal gets done will be greatly improved if there's more money on the table, with a bump in that $1.50 bid. Cash has a funny way of making friends.

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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More


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