triedtestedand

Formal offer now proceeding as of this morning: http://resolutefp.mediaroom.com/index.php?s=28238&item=96690

If not apparent already, it seems Richard Garneau likes to juggle multiple balls ... a) He's closing a paper machine in Saguenay region just before Christmas, and that has sparks flying (use Google translate to get the gist of things): http://www.lesaffaires.com/bourse/nouvelles-economiques/clement-gignac-lance-un-ultimatum-a-resolu/538788 http://blogues.cyberpresse.ca/lapresseaffaires/cousineau/2011/12/12/la-bombe-politique-de-lusine-kenogami-vient-de-sauter/ b) Some are having a bad taste after he secured $50M of gov't funds to keep a plant open in Nova Scotia: http://thechronicleherald.ca/thenovascotian/41614-corporate-bully-resolute-left-dexter-little-choice Not sure if any of this will play within the context of the proposed Fibrek deal, but the politics are intriguing. What are peoples' thoughts of timing of formal announcement? The clock can tick until December 30th according to the lock-up agreements ... do you think it'll go that long?

PS -> Two other posts from the stockhouse board that are worth a scan http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30426412&r=0&s=FBK&t=LIST&pd=2 http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30435359&r=0&s=FBK&t=LIST&pd=2 Interesting the article from jdamo ... and, as a dissenter in another takeover situation, used the courts to force the suitor to cough up a higher price. Not for the faint of heart, or with expectation of a quick resolution, but definitely something to seriously consider if ABH doesn't revise their offer.

"The objection is the price, not the deal." Agreed ... at the right price this should make absolute strategic/tactical sense for all stakeholders. I'm just as sure how well Richard Garneau has done on the Miss Manners courses compared to Prem. In all this, am working with incomplete information, so need to discount these public arguments of Prem's (which I do agree with Alertmeipp are both uncharacteristically weak and conflicted), give him the benefit of the doubt, and rather optimistically expect that Prem et al have thought this through several moves ahead, and done this to put FBK into play, expecting FBK's management/board now to do their job and extricate the most value. Whatever the motives however, it's in play now, so trust actions are ongoing.

Interesting the opinions that are starting to be published: http://business.financialpost.com/2011/12/08/moodys-downgrades-paper-and-forest-products-industry/

SD: I'm coming to see your (more simple) line of thinking ... -> tap into available credit lines, maximize working capital, seek extra credit line -> pay existing shareholders via special dividend (if up to $1, then Prem/Pabrai should have no argument) After that is done, then yes, FBK is then left with weaker balance sheet ... BUT existing shareholders are compensated (now) for the risk ... and if ABH continues to proceed, they don't need to come up with more cash or shares to maintain offer ... and further, if they did proceed, the increased debt burden is still ring-fenced in FBK as a sub. Calls their bluff nicely. How much are you into FBK for? I'm in for plenty, so happy to yell loudly with you to management and the board if desired. ;-)

PS -> I might also add the following components to the deal: a) IQ subs portion of deal to management and employees/unions (reduces IQ exposure, and gets mgmt/employees/unions to have skin in the game) b) a break-up fee payable to IQ (and it's partners) if deal does not materialize (e.g. ABH pitches better offer) c) Management's current options are priced at $1.35/share, so might seek for them to exercise all vested options as part of the deal as well?

I wonder what Investissement Quebec's (IQ) view on the matter is: - they hold the $78M term loan (one of their bigger investments) - given their mandate of investing in Quebec firms, presumably they're not a totally disinterested party? - they hold investments (equity and debt) in a number of other familiar names (see link #1 below), so approachable? - not sure their relationship w ABH, other than recently hiring someone from there (see link #2 below), so no conflicts of interest? Link #1: http://www.investquebec.com/en/index.aspx?page=2885 Link #2: http://foresttalk.com/index.php/2011/10/11/abitibibowater-appoints-silvana-travaglini-as-vice-president-and-chief-accounting-officer/ Here's one train of thought relating to this angle ... What if FBK: a) could get IQ to invest $70M in new (convertible preferred?) shares @ $1/share (raising share count to 200M) b) drew $30M on the floating credit line (increasing the $70M in accessible cash to $100M) c) instituted immediate repurchase offer of 70M shares (or 35% of shares outstanding) at $1.428/share (using up the $100M, and reducing share count back to 130M) d) got agreement that IQ participate in repurchase, but only at 50% of their notional allotment (i.e. 17.5% of 70M shares, or 12.25M shares) e) instituted regular dividend of $.02/quarter going forward f) instituted normal course issuer bid going forward, with option for IQ that any common share repurchases be matched with commensurate repurchases of the IQ convertible prefs at the same proportional rate (and valuation ... presuming the valuation is attractive) In this scenario: - Investissement Quebec would: 1. become largest individual shareholder (but not controlling) with 57.75M shares, representing 44.42% of shares outstanding 2. book immediate realized gain of $5.2M on the 12.25M shares repurchased by FBK 3. book another $24.7M in unrealized gain (presuming $1.428 is set as new floor) 4. secure dividend of ~$4.6M/year on their remaining investment 5. secure pro-rata repurchase of preferred shareholdings in same proportion as any of the common shareholdings are repurchased - ALL other shareholders would: 1. get a minimum 44.42% immediate liquidation opportunity of total shareholdings ... BUT at a 42.8% premium to current bid, so would have 63% cash-in-hand of what ABH is currently offering 2. start getting dividend of $.08/share/year 3. get increased liquidity on remaining investment as result of normal course issuer bid What does this cost to FBK's balance sheet? Not that much really ... a) underwriting and legal fees b) ~$30M against their credit line (which represents only 6-9 months of recent debt repayment efforts, so wouldn't set them back much) c) ~$10.4M/year in dividends What does this really cost IQ? A net ~$52.5M outlay for 57.75M pref shares, with a $4.6M/yr dividend (i.e. ACB of ~$.91/share, and 8.8% yield) ... which sounds like a reasonably low risk proposition ... BUT with significant influence on the board to shake things (e.g. divest RBK mills if/as/when get better valuation for them), and with ability to force ABH's hand at the same time. Am I totally delusional on a friday night? If it forces ABH's hand, then great ... and even if ABH balked and did not cough up, IQ gets a good investment, FBK's financial position doesn't get compromised, and Prem/Pabrai and all us other shareholders would still get a fairly significant partial liquidity event, at a much more palatable valuation, and with a commitment to a dividend stream going forward. And if we didn't like the story, we could always still sell on the open market!

Well actually, if my math is correct, FBK doesn't have quite that much immediate access to cash ... but they're not without significant ammo. FBK has $150M of credit facilities, with $75M taken out on the term loan, and the remaining $75M on the revolving credit line. Against the credit line, it had $20M drawn on it as of end-of-Q3 (offset by $7M in cash). For argument sake, if FBK generated another $10M-$15M in FCF this quarter , and with the existing cash, and with no changes to AR/AP ... they'd be able to zero their credit line, and thus have about $75M in credit room to work with ... which they could then either pay out as a special dividend, fund a partial buy-back, etc. ... so SD makes a point that even without any asset sales or white knights, it's not like management/board doesn't have any options ... something they did not have luxury of even just 18mo ago.

Hey all: The lock-up agreements have been filed on sec.gov http://www.sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=abh&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany Haven't read through them thoroughly yet, but at first glance did see that FFH would elect to take either cash, or cash+shares ... NOT shares-only as first option. That was unexpected.

SD: What about FBK's tax losses? Isn't there some untapped value there as well that can be leveraged in any negotiations? They've never shown up on the balance sheet as a deferred tax asset (like I've seen with FFH and ABH), but that said there has been ongoing issue with Canada Revenue Agency about reassessment of past values, so until such is resolved am guessing FBK has opted to be conservative and not attach value to them.

And for those who speak English only, and want a rough translation: http://translate.google.ca/translate?sl=auto&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&layout=2&eotf=1&u=http%3A%2F%2Flapresseaffaires.cyberpresse.ca%2Fdossiers%2Fla-presse-affaires-magazine%2F201111%2F29%2F01-4472724-richard-resolu-garneau.php%3Futm_categorieinterne%3Dtrafficdrivers%26utm_contenuinterne%3Dcyberpresse_BO4_la_2343_accueil_POS2

Manualofideas: The statement "... the Locked-up Shareholders have no ability to withdraw any Fibrek Common Shares to tender to or facilitate any competing transaction." I wonder just how tight can such a provision be, and what the caveats are. What if <66% of shareholders reject the bid at this price? What if FBK sold/split some of the assets (proving liquidation value > current offer)? What if FBK found a new investor to pump some extra money in, and/or then instituted a partial buyback? I can see FFH locking up, but why would Pabrai and the 3rd (unnamed) shareholder consent so early? That part doesn't make sense to me ... nobody's calling in any markers are they? FBK reached an important point last quarter where current assets roughly equaled all liabilities (save pension), so with continuously improving balance sheet they should have a few more levers to pull than they would have 18mo ago. It may have had markings of a value trap, but illiquidity aside, there's not a lot of downside to the stock at this price ... and therefore leaning towards a "NO" vote from me in absence of anything else. At least now we have the catalyst we've been waiting for.

Sharper: Well done ... you indeed called the ball ... almost a year or so ago! That said, I also see this as an opportunistically timed offer ... one that is "fair and friendly" mostly for FFH only. Recognizing all the support they've given FBK, they're still way deeper into ABH's side than with FBK, so can't really believe they pushed hard on the valuation prior to locking up. Also, the offer of a 39% "premium" to recent trading levels conveniently ignores the lack of liquidity, but I must admit that's probably been a key basis for FFH and Pabrai (as opposed to book value/intrinsic value/etc.), as they undoubtedly view this offer as getting a more liquid play in ABH at a much lower valuation ($15/share) than the re-organization levels (>$22/share) they got in at ... and in a tax-efficient rollover fashion as well. Would any others have interest at this juncture, or indeed, the (independent members of the) board should indeed look to split the NBSK and RBK plants? Canfor is picking up some assets from Tembec, and Fortress/Domtar/etc are all musing about things, so this can't represent a best-and-final offer, no? We'll see what smokes out ... and just how tight the lock-up is, but 46% in lock-up is still a stretch from 66% (let alone 90%) ... and full disclosure, I'm materially into this, so if anyone at ABH is reading this, let me know where the pub is so that I can take Sharper's advice, get down there and have a "Couple of beers around a table, & saw-off somewhere around half-way between $1.00 & IV."

On the balance sheet, based on the major line items, they've hit an inflection point this quarter: Accounts Receivable =~ Accounts Payable Inventory =~ Debt As such, if you close off AP+Debt with those current assets, what's essentially left is a business with PP&E currently generating $50M+/yr of cash, with market cap of <$120M. Hmm ... Here's one lingering question I have for the group ... Does anyone have any insight on the long-standing "tax reassessment" issue? The company has >$300M in accumulated deficit that could shield them from taxes for a looong time. It looks like the two sides are finally talking (see below excerpt from the MD&A): ----------- TAX REASSESSMENT In January 2009, Fibrek received notices of assessment for the 2002 and 2003 taxation years from the Canada Revenue Agency (“CRA”) and the Ministère du Revenu du Québec (“MRQ”) reassessing the tax value allocated to the assets of the Saint-Félicien Mill at the time such assets were purchased by Fibrek from Abitibi-Consolidated Inc. in August 2002. These assessments do not involve any taxes payable. In October 2009, Fibrek requested a statement of revised losses from CRA and the MRQ. In September 2010, the Company received from CRA a statement of revised losses. In December 2010, the Company filed a notice of objection within the prescribed delay. The CRA has since acknowledged receipt of Fibrek’s notice of objection. An introductory meeting between Fibrek representatives and CRA took place in October 2011. Further meetings will be scheduled and a timeframe will be given once the enterprise valuator of CRA has reviewed the Company’s file. A reduction in the value allocated to certain assets would reduce the amount of Canadian non capital losses available to reduce future taxable income, among others. Management used its best estimate of the outcome of the tax reassessment in its calculation of future income taxes. The outcome of the tax reassessment may require an adjustment to the recognized future income tax amounts. This adjustment or any revision of the estimation would be recognized in the interim consolidated financial report of Fibrek and the impact could be material. ---------------

Or rather ... who sold? And why? Presumably a) liquidity issue (share volumes have been super low the past few months), b) capitulation and/or frustration, c) flight from (perceived) risk, d) better opportunity elsewhere, e) change in analysis of company and/or industry go-forward prospects. Have been seeing announcements of NBSK October price reductions in N. America to $950, down from recent $1030 highs in July ... that's worrying of course, but not so much when it is offset entirely by CDN dollar plunging to $.95 USD. Correlation, or causation? And now to the release announcement coming up in 4 weeks ... As of June 30th quarter, FBK's total liabilities were essentially equal to their current assets, so this latest quarter should be a transition quarter in my mind. With debentures paid, with revolving credit line trending to zero, and with term loan still a long-way from due (and backed by their inventories, and due to a friendly lender), FBK are now in a position of leveraging generated cash much more flexibly .. and I'd argue for a balance of building up cash cushion (to ensure reserve), but also to start buying back stock -> especially if it is $.63 per share!!!! ;-) I'm feeling like a stock pumper on this one. I have to admit, the stock performance has certainly been Rodney Dangerfield like (i.e. no respect), but all the other "darling" alternative associated w pulp (CFX, MERC, etc) have dropped precipitously as well. SharperDingaan ... you've been quiet on this one for a while. Any recent changes/updates in thoughts?

I agree. Nothing very exciting ... but that's of worthy in and of itself (i.e. no bad surprises). The story remains what's happening incrementally below the waterline, where net profits don't make any headlines, but quality of balance sheet continues to improve quarter-over-quarter (i.e. asset mix transmogrifying from being more reliant on PPE to having more tangible cash mix ... and lower debt ratios). Looking at balance sheet ... on top of their term loan, they now have $30M drawn from their revolving credit facilities, but with the debenture now paid off, they have no other material loans, so can now start bringing that facility back down. Thinking wishfully ... their accounts receivables are up $14M over Dec 31st, so if they got their collections up and their EBITA remained similar this quarter, then in 90 days or so they could have that back down to (near) $0. I would have liked to see an announcement about a modest share repurchase and/or dividend, but management has shown good prudence of late, so can wait before getting too vocal about it. (Of course I would like such triggers to help get share price up in a more sustained fashion, as am already more than fully invested so not taking advantage of what I think is an absurdly low price ... that said, MERC and others have dropped a lot from their highs, and with a lot more liquid share base.) http://www.fibrek.com/en/investors/financial-information/

cwericb: Incrementalism is the song sheet I'm working off of for FBK, trusting that their balance sheet continues to solidify and simplify over time. With the debentures now history, continued EBITA of 10M+ per quarter will pay off revolving credit line ... so by the end of this quarter, their (account receivables + inventory) should roughly equal their (accounts payables + long-term-debut), which will make the company much simpler to analyze/value. I trust they will continue to make steps to get their RBK business more profitable, keep cash coming in on the NBSK business line, and keep allocating such cash wisely. My worry is that of other board members ... that the next commodity downturn comes sooner than later ... but that is outside management's control, and in the past 18 months I've had a few gripes, but overall I've been quite satisfied with how management has been able to knock down various pins.

As expected ... the remaining FBK debentures were redeemed today: http://www.newswire.ca/en/releases/archive/June2011/28/c8932.html With the debenture overhang now past ... we shall (sooner? later?) see what becomes the next priority for use of FBK's FCF. It's never as fast as you'd like, but directionally it remains ... so far, so good. Further, NBSK pulp price this week remains firm (info via www.foex.fi) ... as $1035USD pricing has been pushed thru to customers.

Illiquidity is my read ... volume has been low most of past 6 weeks ... so will get lots of apparent swings

alertmeipp: I hear you ... I had bought some more last year at about ~$1.50 or so, just 2 days before the rights announcement, so felt like a schmuck on that ... could have been smarter there and dumped it to play the in-retrospect-predictable arbitrage that brought share price down to the $1.01 level. Ahh well ... patience, persistence, and perspective ... got to have a bit of each with these value plays, and avoid the traps along the way. ;-)

alertmeipp: The shares were from the rights offering ... so if you're a long-term shareholder and see yourself as an owner, you'd think of it as a cash call that shouldn't affect your % position as long as you participate. Furthermore, EVERY existing shareholder got a free pass to participate (and average down PLUS increase their % ownership as applicable) before FFH did. As to whether they needed to do it ... you've got an argument there ... but it was part of the package deal to get the new credit line and loan in place ... and I'd say it was prudent (and structured to favor the existing long-term shareholers), especially given a) the "forecast" for NBSK pricing was for it to go down after the increases thru Q3/10, and b) their near-death experience from Q4/08 onwards. You get the cash when you can ... ;-) In 30 days there's no more debenture overhang, and if FBK starts buying back shares, then shareholders who participated in the rights offering could find an added buyer in FBK to pull some money out, while reducing the share count at the same time. Given the stock options that management now holds, I'd think motivations would align towards this. In any event a share buyback announcement would not involve a huge # of shares, as the average daily trading volume is on the order of 100K or so, so the $15M in EBITA they keep making per quarter could probably be split between share buybacks, loan/line-of-credit repayment, and even a nominal dividend.

Excellent news regarding both the new agreement with the union, as well as the redemption of the remaining debentures, which highlights not only a strengthening of the balance sheet, but a simplification of it as well, importantly eliminating it's potential dilutive effect. Next target ... share buyback and/or dividend announcement (after Q2 results are out)?

While I agree that summary results look so-so, my own #1 investment criteria for FBK is free-cash-flow, and they continue to generate ~$15M/qtr, or ~$60M/yr ... which gives them continued ability to expedite paying off the debentures and simplifying the capital structure. I also see that amortization remains high (~$10M/qtr) even with new accounting, so it's effect on overall profitability masks the continued strengthening of the underlying balance sheet. Until some of these items are cleansed from their system, and/or they start to put that FCF to use for more than debt reduction (e.g. initiate dividend, share buyback, etc.), then it won't be a totally clean story. The good thing is that mgmt is now better incentivized via share options, so will hopefully align accordingly. RBK does continue to drag overall performance, with no quick answers/fixes ... but then again it's not really losing them any money either. One other thing worth noting from the MD&A ... "The Saint-Félicien Mill’s collective agreement with production and maintenance employees expired on April 30, 2009. Negotiations on local issues started on July 22, 2010 with a management review of the economic and market conditions of our industry. On April 29, 2011, the negotiation team reached a tentative agreement. Union members will vote for ratification of this agreement on May 23, 2011."

biaggio: I've tracked PEY since they were first listed as a TSX company ... making one of those "lost opportunity" mistakes a decade ago by buying at $.60, and selling at $.95 (thinking I was really smart) ... before they then went on to peak at >$35 a few years later. They are an incredibly well managed company ... their founders are Buffett type investors, and their structure/incentivation is very well aligned with shareholder interest. They do well as low cost producer, and their CEO's monthly report is a great read. I bought back into them a few years ago when there was concern about their revolving line of credit, and the stock (well actually, trust units then) went down to $6 ... yielding >15% as a consequence, it was a no-brainer ... I sold out last year at around $15, obviously a bit early in retrospect, largely on premise that natural gas prices would remain depressed with all this shale gas coming into the market, and so there wouldn't be catalyst for PEY to crank up to former lofty levels.