Special Situation Investing

Friday, February 09, 2007

Weyerhauser (WY) - Initiates Domtar spinoff/stock exchange

Weyerhauser (WY) has initiated it's Domtar stock exchange program, which implements the spinoff of their fine paper division:

Under the terms of the offer, participating Weyerhaeuser shareholders will receive approximately $1.11 worth of Domtar Corporation common stock for each $1 of Weyerhaeuser shares tendered in the exchange offer, subject to a limit of 11.1442 shares of Domtar Corporation common stock per Weyerhaeuser share. The value of Weyerhaeuser shares and Domtar Corporation common stock will be calculated using the simple arithmetic averages of the daily volume-weighted average prices (VWAP) of Weyerhaeuser common shares and common shares of Domtar Inc., respectively, on the New York Stock Exchange on the last three trading days of the offer, unless the offer is subject to the mandatory extension described below.

Keep in mind that if the offer is over-subscribed, you are not guaranteed to fully exchange your Weyerhaeuser shares for Domtar.

Weyerhauser also announced earnings today.

Weyerhaeuser Company (NYSE: WY - News) today reported net earnings of $395 million for 2006, or $1.61 per diluted share, on net sales of $21.9 billion. This compares with net earnings of $733 million, or $2.98 per diluted share, on net sales of $22 billion for 2005.

Excluding one-time items, earnings were only .68.

It is also worth noting that the company repurchased 5.5 million shares of stock during the past quarter. WY has ~240 million shares outstanding.

I originally posted about the WY spinoff of it's fine paper division here.


Did just a bit more digging and I have figured out a few more pieces of the WY spinoff puzzle.

If you are interested in the nitty-gritty of the transaction, click here, if you accept their agreement, in the following screen click on the prospectus link.

At present WY expects 281 million shares of Domtar will be available for exchange. As previously mentioned the company is offering to convert WY shares to DTC at a maximum rate of ~$1.11 worth of DTC for each $1 of WY. For the price to use in setting the exchange rates, they are using the values of DTC & WY averaged over a 3 day period at the end of February - beginning of March. WY estimates the maximum number of shares of WY they would accept for the ~281 million DTC shares is ~25 million. WY has ~240 million shares outstanding. So at most 10.5% or so of their outstanding shares could be converted to Domtar.

To add another twist, their is a possible delay added to the deal. If it over-subscribed, that is if there are more shares offered than are available for trade, there will be a 2-day delay added. During this period those shareholders who offered their shares may either transfer at the adjusted exchange rate or not transfer at all.

Unless you hold an amount less than 100 shares, WY will apply prorationing to the subscription. What this means, I believe, is that even if you submitted 100 shares you may only be allowed to convert a portion of them to Domtar shares. For instance, the company may only accept 50% of those shares if the offer is 100% over-subscribed, or 25% of the shares if the offer is 300% oversubscribed. The remaining fraction of the shares are returned to the shareholders. However, if you own less than 100 shares you can request not to be subjected to prorationing. It appears that this is a case where small investors may have an advantage. You can submit up to 99 shares and then, based on the closing prices, be relatively confident of making a gain, over the averaged prices in those 3 crucial days. Of course, if the stocks were to move significantly before the calculation or after, if the spread between WY and Domtar was to exceed the maximum 11.1442 maximum ratio of shares exchangable, the gains coud be reduced or even turn into losses but it still sounds appealing.

I am going to keep digging into this one.


  • What additional risk factors have you identified with this spinoff?

    By Blogger Nick, at 12:46 PM  

  • Well for one, it wouldn't take too dramatic a move by WY stock to negate the advantages of the 11% hike. Secondly, you are subject to proration on 100 shares plus. Third, there may be large scale selling AFTER the Domtar shares are distributed. I mean there are some 280 million shares being handed out and only 225 million currently. This could have a significant factor on DTC price.

    Then of course, if you are not in it for the short-term, the fundamentals for fine-paper look downright scary right now.

    By Blogger spinoff, at 7:12 AM  

  • If anyone is interested in more information on the transaction I wrote a post on my blog, www.purecapitalism.blogpress.com/. Let me know what you think.

    By Blogger Michael, at 9:39 AM  

  • Disregard that last comment. 'Michaels' site is a total fraud with just a bunch of links.

    By Blogger spinoff, at 10:22 AM  

  • Sorry Spinoff.... gave you the wrong URL, the one I gave was a fraud. Here is the link, http://purecapitalism.wordpress.com/. I am new to the blog stuff, and found your blog after I launched. Seems we have similar interests.

    By Blogger Michael, at 12:31 PM  

  • Michael,
    Read your post and in general I like your style. Good, detailed analysis which addresses the major issues. Most of the material already appeared on my blog but perhaps that is just coincidence.

    I think you may underestimate the potential sell-off in Domtar shares. WY shareholders will take 55% of the new company and this could very well lead to large-scale selling, whether the shares were issued on a voluntary basis or not.

    By Blogger spinoff, at 1:52 PM  

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