Clarke seeks to buy Supremex despite envelop maker's declining demand

MONTREAL – Clarke Inc. (TSX:CKI) is making a play for the Supremex envelope company, offering $19.27 million to buy out the other shareholders and take the firm private.

The Halifax-based Clarke, which owns 45.1 per cent of Supremex, says it has made an offer of $1.20 per share for each of the more than 16 million shares in Supremex (TSX:SXP) it doesn’t own.

Supremex shares closed up nine cents at $1.18 on the Toronto Stock Exchange.

Clarke has a history of taking an activist role in companies and industries that are in long-term decline, and bringing in new approaches in hopes of turning a profit.

“No one expects the envelope industry to turn around so we think that it provides fair value and it’s fair to everyone,” Clarke vice-president Michael Rapps said in an interview.

Rapps said Supremex is a very small company for public markets and taking it private would eliminate some of the regulatory and compliance costs involved.

“Markets don’t tend to put value on businesses that are in a secular state of decline.”

While Clarke has committed to retain Supremex’s management, it would also reduce staffing and other costs over time as the industry continues to shrink.

The volume of envelopes produced by Supreme Inc. (TSX:SXP), which has its head office in the Montreal community of LaSalle, has decreased by about a third in a few years, falling to less than five billion a year.

It lost $18.69 million last year as revenues declined 8.3 per cent to $131.9 million.

During the fourth quarter, Supreme increased its operating margin as it implemented cost reductions including the conversion of pension plans to defined contribution from define benefits.

Supremex described Clarke’s proposal as an expression of interest and not a binding offer that would be subject to shareholder and regulatory approvals.

Its board has established a special committee of independent directors, including the board chairman, to review the proposal and make a recommendation.

Clarke said Supremex is free to discuss strategic transactions with other potential buyers, but it “will be reluctant to consider acquisition proposals for Supremex from third parties.”

Rapps said Clarke has enough shares to block any other bid but said its effort should not be considered hostile. It went public with a news release Monday because it had an obligation to make a regulatory filing.

“Anyone who’s going to make another offer should be talking to us before they should be talking to the company because if we don’t like it we just say no.”

Clarke nearly doubled its stake in Supremex in November by acquiring 5.2 million shares in two rounds, paying $1.08 and $1.05 per share. At the time, it said the purchases were for investment purposes, but noted that it relied on the private agreement exemption from the formal takeover bid rules set out in the Ontario Securities Act.

Supremex is a manufacturer and seller of envelopes and related products, with facilities in six provinces and about 550 employees. Company CEO Gilles Cyr didn’t immediately return calls seeking comment.

Adam Shine of National Bank Financial said in a research note that Supremex’s shares have decreased since January 2007 amid “evolving secular declines in envelope demand.”

He recently upgraded the company’s rating to sector perform following the release of the fourth-quarter results on March 12 that saw its net profit increase 9.5 per cent to $3.23 million despite an 8.1 per cent drop in revenues due mainly to lower Canadian volumes.

Over the past 52 weeks, Supremex shares ranged between 93 cents and $2.19