Description

This write up will be brief, as the opportunity here is time sensitive (the rights expire this Friday, July 30). I'm happy to engage more in the comments. 

I will also note that this opportunity is somewhat unique: in the U.S., you can only participate if you are an accredditted investor. So, contrary to the typical "larger size is a drag on your returns" mantra, in this particular trade you need at least some size to get access to the trade!

The idea is simple: take advantage of the forced selling in GFP's rights to create the stock at a massive discount.

Some background: in April, Greenfirst (GFP) announced a deal to buy the "forest and paper" assets of Rayonier for C$176m plus the value of inventory. The deal will be funded by some issueance of Greenfirst stock to Rayonier, a C$147m senior secured credit facility, and a rights offering.

The rights offering is what's of interest here; as I'll detail in this write up, it's completely unique and has creted an overwhelming wave of forced sellers that has depressed the price of the rights. As I write this, each right is trading for ~$0.20 (CAD). A right allows you to buy shares for $1.50 CAD; with the stock at >$2.50/share (CAD), you are creating the stock for ~$1.70 (CAD), or >30% below the current market price of the stock.

Why does the opportunity exist? Well, while reminding that nothing in this write up is investing advice, the opportunity exists because securities laws precludes non-accreditted U.S. investors from exercising their rights. I'd encourage you to fully read the company's FAQ, but to simplify you were given 3 rights for every share of GFP you held. In order to recieve the rights, you needed to submit paperwork to the company to prove that you were allowed to recieve them. For U.S. investors, this meant filling out a form showing you were an "Approved Eligible Holder" (an accreditted investor).

If you did not fill out this form by July 23, you could not recieve your rights; instead, the company started selling your rights on the open market starting on July 26 (see bullet point 8).

I'm sure you can connect the dots here: you have a company with 3x as many rights outstanding as shares. Any retail shareholders or shareholders who forgot to fill out their paperwork are ineligible to recieve their rights, and those rights are now being force sold on the open market.

So my suggestion is simple: buy the rights at a huge discount to GFP's share price and take advantage of the arb. 

There is one technicallity that you need to do for this trade. In order to exercise your rights, you'll need to email [email protected] with a filled in "form of investor representation letter" (available at the bottom of the FAQ website) to prove you're an accredditted investor. I recommend you do this ASAP after you start buying the rights. Once that's done, you'll be good to exercise any rights that you acquire on the open market.

That's the simple crux of this trade. I will hit on two other points that are somewhat related.

First, the shares purchased through the rights will not be immediately liquid. The company will have to register them before you can sell (or, failing that, you'll be able to sell w/ a legend in ~6 months or without a legend in ~a year). I'll reiterate that this is not investing advice and the technicalities of selling unregistered shares is not my expertise; however, I don't think that'll be an issue. I believe the company will get these shares registered quickly. 

So you'll have to hold your shares for at least a little while. I think the massive discount you're buying the rights at compared to the stock more than makes up for that holding period. But that does raise my next question / point: is there any valuation support for the current price?

I think the answer is absolutely yes. A lot of this will depend on what lumber prices do; lumber is well off its highs from earlier this year, but even at these levels I think the company is quite cheap. On the call, the company guided that they could do ~$175m (CAD) in EBITDA if lumber prices were sligthly lower than they are currently trading. Slap a 4x EBITDA multiple on that, and you'd get to a $3.50 (CAD) share, well above the current price. Obviously a lot of assumptions in the, but insiders own a bunch of stock and are reasonably aligned, Senvest is putting in a good deal of money to backstop the rights offering, and the seller is taking stock in GFP as part of their payment. All of that screams "there is value here". (Quote below from the GFP deal call)

Catalyst

Closing of rights offering