To: Jay Arkay who wrote (6 ) 12/22/1997 2:48:00 PM From: Jay Arkay Respond to
I sold my Harmac common shares last week at $10.75, the day after the take-over bid. I couldn't fight an 11 percent gain in just one month, and more to the point, I'm not convinced that Harmac can effectively fight off the Pope & Talbot bid. That bid is for $11.50 a share, but it is only to acquire 50.1 percent of Harmac, and as I understand it Pope & Talbot already owns nearly 10 percent of Harmac shares. Hence, shareholders accepting the bid will have only a pro rata portion of their shares bought at $11.50 (less than half if most shares are offered), and I would expect the market value of shares to then drift back to the $8 level where they traded just prior to the take-over bid (they might even be lower, given that public shareholders would then be minority shareholders). Hence, on a probability basis, $10.75 in hand seemed better than $11.50 for perhaps 40 percent of my shares and $8 for the balance. It is not evident that Harmac will be able to get Pope & Talbot to improve their bid in today's pulp market, and it also seems unlikely that another firm would enter with a superior bid (analysts reported in The Financial Post expressed this opinion). Even though Harmac would be an attractive equity holding for a two year time horizon if it could remain independent, I don't believe that it will remain independent. For those who might be interested in a high interest return, with a warrant-like kicker, Harmac's debentures are currently trading around par ($100). These debentures are convertible for about at about $16.50 per share, so the convertibility aspect does hold some value, even if the company is acquired by Pope & Talbot. Harmac cannot redeem the bonds for almost two more years unless the share price exceeds 125 percent of the conversion price (which would be over $20); after that they can redeem the shares at any time at par. The debentures pay 8 percent, which is more than 2 percentage points above the yield on comparable two-year bonds with corporations having a similarly strong balance sheet. One can expect that Harmac (or Pope & Talbot after a successful acquisition) will redeem the bonds in two years, so essentially one is getting two years of extra interest (above the market) of 2 percent per year. This, added to the warrant-like aspect of the conversion privilige for two years, are worth somewhere between $4 and $5 in current dollars per bond. Hence, the bonds should trade in the range of $104 to $105, not the $100 or so that we have seen in the last few days. This is really a fixed income investment opportunity (with the warrant-type kicker), not an equity investment per se. Jay
