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Chemtrade makes offer to acquire sodium chlorate and chlor-alkali producer Canexus, values company at $884 million

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Chemtrade makes offer to acquire sodium chlorate and chlor-alkali producer Canexus, values company at $884 million

October 03, 2016 - 10:48
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TORONTO, Oct. 3, 2016 (CNW) -Chemtrade Logistics Income Fund (CHE-UN.TO) ("Chemtrade" or "We" or "Us" or the "Fund") announced today that an indirect wholly-owned subsidiary of the Fund (the "Offeror") intends to commence an offer (the "Offer") on October 4, 2016 to acquire all of the issued and outstanding common shares (the "Common Shares") of Canexus Corporation (CUS.TO) ("Canexus"). The Offer will remain open until 5:00 p.m. ( Calgary time) on January 18, 2017 unless extended, accelerated or withdrawn by Chemtrade in accordance with the terms of the Offer.

Under the terms of the Offer, Chemtrade proposes to acquire all of the issued and outstanding Common Shares of Canexus for $1.50 in cash per Common Share. This represents a 21% premium to the closing price of the Canexus Common Shares on the TSX on September 13, 2016 (the last trading day prior to the public announcement by Chemtrade of its initial proposal to the Canexus board of directors). The Offer values Canexus at an enterprise value of approximately $884 million , which implies a multiple of 8.4x the mid-point of Canexus' 2016 Adjusted Cash Operating Profit ("ACOP") guidance range of $100 to $110 million .

In connection with the Offer, Chemtrade issued a letter to Canexus shareholders, the full text of which follows:

Monday, October 3, 2016

Dear Canexus shareholders,

Over the past few weeks Chemtrade has made several attempts to engage directly with the board of directors of Canexus (the "Canexus Board") to negotiate a value maximizing transaction. Despite Chemtrade's repeated and good faith efforts, the Canexus Board has refused to constructively engage with Chemtrade about a fully-funded all-cash transaction which provides shareholders the opportunity to receive fair value and liquidity for their Common Shares.

In the face of this intransigence, and after Canexus shareholders have also publicly called on the Canexus Board to engage with us, we have decided to bypass the Canexus Board and make the Offer directly to Canexus shareholders, the true owners of the company.

REASONS TO ACCEPT THE OFFER

We believe that our Offer is compelling, and represents a clearly superior alternative to continuing on the course set by the current Canexus Board and management, for the following reasons:

    Premium to Market Price. The Offer represents a significant premium of approximately 21% based on the closing price of $1.24 per Common Share on the TSX on September 13, 2016 (the last trading day prior to Chemtrade's public announcement of its initial proposal to the Canexus Board to acquire Canexus). The Offer also represents a significant premium of 21% to the volume weighted average trading price of $1.24 per Common Share on the TSX over the 20 trading days ended on September 13, 2016 .

    Fair Value for Canexus. The Offer price of $1.50 per Common Share represents a premium value that fairly reflects the composition and performance of Canexus' portfolio of assets. The Offer price represents an enterprise value of $884 million , which implies a multiple of Canexus' 2016 ACOP of 8.4x based on the mid-point of Canexus' 2016 ACOP guidance range of $100 - $110 million . This multiple is in line with the 8.5x multiple in the failed arrangement transaction with Superior Plus Corp. ("Superior Plus"). That transaction underestimated the risks involved in closing as evidenced by the strong opposition to the transaction by the US Federal Trade Commission and its eventual termination by Superior Plus. The transaction with Superior Plus has so far been costly to Canexus shareholders, not just from a cash perspective but also due to the significant amount of management time which was diverted from operating its business.

    100% Liquidity and Certainty of Value. The Offer provides 100% cash consideration for the Common Shares, giving Canexus shareholders certainty of value and immediate liquidity in the face of volatile markets. The failed Superior Plus transaction provided for share based consideration and therefore was without certainty of value for Canexus shareholders.

    Fully Financed Cash Offer. The Offer is not subject to a financing condition. The Offeror intends to fund the Offer from cash resources available to Chemtrade and has secured, on a firm, committed basis, all of the financing required to fund the entire consideration payable for the Common Shares and to complete the transaction.

    High Likelihood of Completion. Chemtrade is a highly credible counterparty with a proven track record of closing material acquisitions, including the acquisitions of Marsulex Inc. and General Chemical Holding Company. Additionally, Chemtrade believes that the Offer has significantly less regulatory risk than the terminated transaction between Canexus and Superior Plus.

    Low Likelihood of a Competing Offer. Chemtrade believes that Canexus is unlikely to surface a competing offer at a premium to the price being offered by the Offeror. Canexus conducted a broad sale process for the company in 2015 that also included the solicitation of proposals for certain segments of the company. That sale process resulted in an arrangement agreement entered into between Canexus and Superior Plus that was terminated on June 30, 2016 .

    The Canexus Board and Management Team Have Driven a Significant Destruction of Shareholder Value. There is considerable risk to shareholders if the Canexus Board and management team continue to pursue their standalone strategy. The Canexus Board and management have presided over a share price decline of approximately 75% over the two years prior to September 13, 2016 , representing a loss of approximately $680 million in equity value. Chemtrade believes this is a direct result of several poor strategic capital allocation decisions, including:

        The NATO Fiasco: The decision to construct the North American Terminal trans-loading facility ("NATO") saddled Canexus with significant debt. The capital costs of the NATO build-out greatly exceeded initial estimates, eventually totalling over $450 million . Moreover, the project was embarked upon without any substantial commercial agreements underpinning the investment. The NATO facility was sold in August 2015 for only $75 million , with Canexus realizing a substantial loss.

        Inability to Increase Earnings: Cash Operating Profit ("COP") declined from $136 million in 2012 to $105 million in 2015, representing a compound annual decline of approximately 8%. Over this same period, General & Administration expenses increased about 6% annually on average, demonstrating management's inability to control costs. The mid-point of Canexus' 2016 ACOP guidance of $105 million is essentially the same as in 2015, despite management's claim of approximately $15 million of profitability improvements through its Business Improvement Plan.

        Capital Structure Mismanagement: The result of mismanagement and operational underperformance is a balance sheet that is burdened with nearly $600 million of total debt, representing approximately 5.8x the mid-point of Canexus' 2016 ACOP guidance range of $100 - $110 million . This excessive financial leverage has limited Canexus' operational flexibility and increased its cost of capital. Canexus' stressed balance sheet has also been adversely affected by questionable capital structure decisions, including the recently announced value-reducing $110 million senior unsecured note offering. This issuance was completed despite a Chemtrade offer to acquire all of the shares of Canexus at an enhanced purchase price if the offering had been suspended.

        Due in part to the increasingly high leverage, Canexus' Board cut the dividend twice over a span of twelve months before suspending it altogether in Q2 2016. Given Canexus' focus on debt repayment over the next few years, there appears to be little prospect for dividend reinstatement for the foreseeable future.

    The NATO Fiasco: The decision to construct the North American Terminal trans-loading facility ("NATO") saddled Canexus with significant debt. The capital costs of the NATO build-out greatly exceeded initial estimates, eventually totalling over $450 million . Moreover, the project was embarked upon without any substantial commercial agreements underpinning the investment. The NATO facility was sold in August 2015 for only $75 million , with Canexus realizing a substantial loss.

    Inability to Increase Earnings: Cash Operating Profit ("COP") declined from $136 million in 2012 to $105 million in 2015, representing a compound annual decline of approximately 8%. Over this same period, General & Administration expenses increased about 6% annually on average, demonstrating management's inability to control costs. The mid-point of Canexus' 2016 ACOP guidance of $105 million is essentially the same as in 2015, despite management's claim of approximately $15 million of profitability improvements through its Business Improvement Plan.

    Capital Structure Mismanagement: The result of mismanagement and operational underperformance is a balance sheet that is burdened with nearly $600 million of total debt, representing approximately 5.8x the mid-point of Canexus' 2016 ACOP guidance range of $100 - $110 million . This excessive financial leverage has limited Canexus' operational flexibility and increased its cost of capital. Canexus' stressed balance sheet has also been adversely affected by questionable capital structure decisions, including the recently announced value-reducing $110 million senior unsecured note offering. This issuance was completed despite a Chemtrade offer to acquire all of the shares of Canexus at an enhanced purchase price if the offering had been suspended.

    Due in part to the increasingly high leverage, Canexus' Board cut the dividend twice over a span of twelve months before suspending it altogether in Q2 2016. Given Canexus' focus on debt repayment over the next few years, there appears to be little prospect for dividend reinstatement for the foreseeable future.

    Potential for Downward Impact to Canexus Share Price if Offer Not Accepted. The Offer represents a significant premium to the market price of the Common Shares prior to the public announcement by Chemtrade of its initial proposal to the Canexus Board to acquire Canexus. If the Offer is not successful, and no other offer is made for Canexus, it is likely the Canexus share price will decline to pre-Offer levels.

SHAREHOLDERS THE TIME FOR ACTION IS NOW

The Canexus Board and management of Canexus own less than 0.5% of the outstanding shares of Canexus, while receiving aggregate compensation of $5.4 million in 2015 representing 5% of COP. We strongly believe that the Canexus Board and management of Canexus, as fiduciaries of the company, should have engaged with Chemtrade to pursue an attractive opportunity to surface shareholder value.

The Canexus Board's failure to engage with Chemtrade has forced us to bring the Offer directly to you, the shareholders and true owners of the company. However, unless the Canexus Board agrees to shorten the bid period, the Offer must remain open for at least 105 days. It is within the Canexus Board's power to shorten the minimum bid period to 35 days.

There is no practical reason to delay shareholders' ability to accept the Offer. Canexus ran a full process just a year ago, and there is no need for 105 days to find alternatives to the Offer.

I encourage you to contact members of the Canexus Board and management of Canexus to make your views known.

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 info@evolutionproxy.com.

Sincerely,

(signed)

Mark Davis

President and Chief Executive Officer

Chemtrade Logistics Income Fund

The Offer

The Offer will be made for all of the issued and outstanding Common Shares of Canexus. Full details of the Offer will be included in the formal offer and take-over bid circular to be mailed to Canexus shareholders. Chemtrade expects to formally commence the Offer on October 4, 2016 and mail the offer and circular to Canexus shareholders in the following days. The take-over bid circular will be filed on SEDAR at www.sedar.com.

The Offer will be subject to customary conditions including, without limitation, the deposit under the Offer of Common Shares representing at least 66 2/3% of outstanding Common Shares, receipt of all necessary regulatory approvals, no material adverse change in Canexus and Canexus' shareholder rights plan being waived, invalidated or cease-traded. The Offer will not be subject to the approval of Chemtrade's unitholders and is not subject to any financing or due diligence conditions.