SharperDingaan

FFH Watcher: Working Capital adjustments are common to ALL take-overs, not just private ones, as the same basic valuation issues have to come to practical resolution. The adjustments just don't get the press because they're normally very small relative to the purchase price (often a rounding difference in EPS terms), & they are the outcome of negotiated collection (sufficient effort in the collection effort, etc.) Look at the sale of the 407ETR by the Province of Ontario to a private consortium of toll-road investors. Sale proceeds were $3B+. The working capital adjustment was $10M, & paid roughly 6 months later through a seperate money bill passed in the Ontario Legislature. SD

Very well played gentlemen .... Because we have a bidders hedge covering both our Q4 & Q1 results, we are not affected by the downtime & write-downs that were required to set the business up for Q2 going forward. The bids remain at $1.00 & $1.30, & we continue to have a material incremental PPA in progress that is mutually exclusive of how both the NBSK & RBK markets perform. Notice: The global NBSK market is currently showing signs that prices have reached the bottom of the cycle. For the first time in seven months, February presented no price reductions and China spot prices were increased by US$20 per tonne. An announcement was also made by a leading producer of NBSK for an additional US$20 per tonne on China spot prices for the month of March. Furthermore, paper machines which had taken market-related downtime during the holidays are now being restarted. The Company anticipates a gradual recovery in both demand and prices during the second quarter of 2012. St F has taken its downtime & is going to be selling NBSK into a rising market starting Q2. EBITDA goes back up to normalized levels & starts rising from BOTH price AND volume increases. Just in time for its buyer to start coining it Notice: During the fourth quarter of 2011, RBK pulp markets continued to be negatively impacted by high wastepaper prices and low hardwood kraft pulp prices. Fibrek announced on February 10, 2012 that it will be taking market-related downtime for approximately five weeks, beginning February 20, 2012, at the Fairmont Mill to manage inventory levels. Looking forward, the Company believes the return to a balanced level of harwood inventories should have a positive impact on the RBK pulp demand. Feb 20 is the natural sale date for these mills as the buyer has 5 wks to do their thing at Fairmont while the inventory is running down, & FBK takes the hit on the labour disruption. Despite bad conditions the other mill would also seem to be largely unaffected (assume its the take/pay contracts, & new product). ie: by mid-march a buyer could expect BOTH these mills to again be generating EBITDA at normalized rates, that should grow over the balance of the year. SD

MERC would have to include the PPA as a working capital A/R adjustment. FBK shareholders do not have to vote in favour of the $1.30, & they can afford to wait the expected short period for the signing to be completed. The obvious solution for FBK & each bidder is to agree a PV of the PPA, & hold the funds in escrow until the PQ signs the deal. If there is no subsequent signing, the funds return to the bidder as a working capital adjustment. On a risk scale of 1:10 (worst) holding at $1.00 was perhaps a 2. Holding at $1.30 is maybe a 4-5. More risky than it was, but still relatively low overall. The saving grace is that the significant & material size of the PPA forces both bidders to recognize it. Despite the bitching ::) SD

Don't knock it - there's money in muck! SD

Forget the gadgets..... Henry VIII lived from 1491 through 1547. He died very old (56) for his time, but 500 years ago even the 'king of the world' - had to use a cold & drafty 'long drop' from castle turret to the moat below. 300 years later (1836-1910), Thomas Crapper comes along & invents the flush toilet. By 1900 virtually every wealthy individual around the world has one. If you really want to make change, this is how you do it ;) SD

(A) In the history of public market deals, have you ever seen a bidding entity happily increase their bid to IV in order to make shareholders under a hard lock happy? SD, this makes no sense to me. Money talks. Very loudly - & especially when those hard lock shareholders are also the ones funding you (either directly or through their indirect acquiescence). Only the Marx brothers would be deaf to the need to keep this group happy. The whole point of getting FFH to commit to a hard lock is so they can't chase after a higher bid. That is what allowed ABH to perhaps get away with a weak bid and transfer the excess intrinsic value to ABH and away from the minority shareholders of FBK. The point of the hard lock is to demonstrate the displeasure of the major shareholders & lend credibility to the alternative - if value is not realized in very short order. Furthermore, if FFH was in fact displeased with Garneau's cowboy antics as you suggest then why is FFH seeking to stop the issuance of the warrants through the exchange? A hard-lock requires the shareholder to publicly support the bid. Privately the shareholders may say something quite different, & in different ears. (B) It seems to me that this is applying private equity theory to a public market deal. In the public markets, I would not expect the bidders to pay up for a contract that doesn't yet exist. I note that neither ABH nor MERC have offered prices that include that future potential revenue stream to any meaningful degree. The best hope for the FBK minority is to try and get a PPA in place, yesterday. With a new contract on the table the value of FBK then goes up. But what are the chances that it happens before the deals close? I would be willing to bet that whoever wins the bidding war will pay the lowest price they are able to pay inorder to win the deal. And until such time as a PPA is in place ... I won't expect that future cash flow to be fully valued. There is nothing to prevent the PPA from being treated as a working capital adjustment. As in all takeovers the buyer pays the agreed amount of the A/R, & gets a rebate off the price for that portion of the A/R that subsequently turns out to be uncollectable. ie: pay up for the PPA, & get your money back if the PQ doesn't sign the agreement. Consequently, it is highly likely that the winning bid will be the one that guarantees to pay the most for this A/R. ie: the least rebate from FBK if the PQ doesn't sign the deal. We will get paid for the PPA. It is just the how that is unclear. SD

There are actually 3 options on the table. Sell to ABH @ .97, MERC @ 1.27, or do nothing. The board & the external valuation agree that FBK qualifies for the PPA. Most estimate the average PV of the PPA at $1/share +/-. The bid argument is dont pay, because you dont have it, the business is worth $1.27 at most. The sell argument is pay up for the PPA or we don't sell, we'll simply wait to get the deal signed & increase our value by the $1/share PV of the PPA to $2.27. A gain of 79% for maybe a 3-4 month delay. There is nothing to prevent FBK itself selling its RBK mills to someone else. It is highly likely that they have received an offer for those mills, that would eliminate a very large chunk of their debt. Were there a RBK mill sale, the PPA would incease St F's value by well > 100%, & we would be having another discussion with ABH. Merge the chip plant with St F, or buy St F, or sell the chip plant to St F. No matter what - the PV of the PPA gets included. SD

Look at 5-yr history, & stay in the top 3 firms within the industry segment. You might miss the odd diamond, but if management was no good these firms would not have made the cut. If it is something local - look at the storefront, & read the social networks, etc. If its industry, talk to the worker bees (the original social network). The storefront observations should intuitively make sense. The social networks will point to who's best/worst & what are the common practices. SD

The IV argument is right, but to make it work you need 100% of the sellers ownership in the hands of one party, & prior owners have to have sold to you at lower prices - so that the premium price applied to the last share is not received by all shareholders. The practical solution is to put up a cash offer for all of the shares up to about the IV, then collect the synergy on the combined entity. Swapping cash for stock made sense if FBK traded at materially less of a discount to IV than ABH did, AND you had confidence that the ABH discount would narrow following the merger. At the time most thought this reasonable, but the sticking point was ABH's refusal to pay up. Board solicitation of a competing bid was to make ABH pay up. The argument still holds today, but with possibly a wider ABH discount & a delay in the narrowing of that discount. If you need to issue a lot more stock to pay for the deal, & are likely to make senior management changes, you have to discount your stock. Today many would not accept ABH stock. So they either do a placement with a friendly party for cash, or they do a placement with the street for a fee. Given the recent treatment, both parties will be mercenary. There's no conflict with FFH. Fiducary duty requires them to maximize the sale value of their FBK stake, & they will accrue the synergies on their ABH stake if the merger is successfull. SD

Something to consider: FFH/Pabrai/Oaktree may have agreed to a lock-up, & a lowball tender, to put FBK into play. The intent was to exit either via ABH share issuance (& resale to the secondary market), or a direct sale to the winning bidder. Clean, elegant, & the fairest way to deal with a problem holding. No additional involvement from FFH other than lend their credibility via the lockup. Then ABH decides to play the thug, & CONTINUES to play the thug right up to the present. Most senior management recognizes that the job comes with risk, & OK - you might have been overly aggressive in the intial delivery to spur the desired reaction. But attempting to have the courts throw out a subsequent superior & COMPETING bid just because you don't like it ? What are your lockup shareholders supposed to do - when you've just tried to legally rob them by attempting to remove the competing offer that they were trying to obtain ? ABH is a bankrupt & hoping to use 50M of its reformed stock as currency. Now nobody wants the stock (unless deeply discounted) & they need maybe an additional 130M to pay for the PV of the PPA. If you held your bowl out to me for an additional 180M, just after trying to rob me, I'd also be supremely p*ssed. I'm working with the Marx brothers, to protect my existing investment I don't have a choice but to fund them, I'm going to very close to the complications of 50% ownership, & I have to act to protect my business reputation. Some might even think that I'm being greenmailed. Most would want this resolved, & quickly, behind closed doors. Simplist is to put up the fair bid, end the event, then use the votes to make the changes neccessary. SD

Once it is over it is hard to see why there will not be senior management terminations at ABH. This should be a routine small acquisition for them, & it was so heavily weighted in their favour that even a monkey could do it. Yet they've demonstrated an unbelievable level of incompetence, & it would appear to largely because of hubris. We expect ABH to eventually win, but it will be more of the same. An ABH low-ball counter offer based on P/E multiple that includes the PPA. MERC earning their 8.5M fee & toping the counter based on PV of the PPA. ABH countering again with a finally fair offer. Obviously distasteful, but untill ABH changes its attitude we don't expect any improvement. Fortunately they have shareholders with the muscle to make changes. SD

Just need to keep their head jammed in the toilet a little longer. Not enough bubbles yet ;)

Just to build on Jets post #27, & st96dgx8 post # 325: The new BASE bid that we're all expecting from ABH is the current value of Merc's bid ($1.24) + the PV of the PPA ($1.01 [average of .91+1.11]) - the MERC 8.5M break-up fee ($.065); or $2.185. The market is expecting about another $.945 (2.185-1.24) & is willing to ante up a pretty normal 10% premium ($.10) for it. Our own expectation is a new BASE bid at around MERC's $1.30 + the $1.01 PV of PPA, or $2.31. Plus a reduction in the acceptance level to 50%+1 for swallowing the break-up fee & to put ABH on parity with MERC. Bid a little > $2.40 & ABH will probably ensure it. SD

Just means that ABH is going to have to negotiate :'(, SD

There is no substitute for fieldwork, but it’s not just looking at storefront &/or product. We like O/G servicing, but it is because I got a summer job on a rig while attending school out west. One learns very quickly that the servicing world is all about the qualitative, none of it is on the BS, & that the culture of blunt speaking & merit driven royalty matters. Per the market, PD @ < $5 looked like a dog, until you realized that the majority of the business works on the connections, hand-shake deals, & old-boy networks that are not visible - & that PD is one of that merit driven royalty. It was a PD rig, doing something that had not been done before, that saved the Chilean miners a couple of years ago. We like ‘tech’, but it is because most of our family are trained as engineers, & we distinguish tech from the consumer toys that use it. Again per the market, NEM looks a like a dog, until one recognizes that the industry runs on Chinese connections & old-boy networks which are not visible - & that NEM is not that different than an old school Hong, run by a master. We see forestry as akin to airlines, & about as badly run. Obviously there are some nuggets , but for now we will decline to comment ;) SD

Mercer's bid is just below where the FBK management options kick in, & FBK management was given change of control severance premiums well before the Mercer bid was announced. FBK management gets enriched only if there is a higher bid. Keeping their jobs is not a factor as we would still have to pay our existing management, or their counterparts, for the work we have hired them to do for us. FBK & Mercer could easily rescind the warrant issue & simply replace it with a backdated private placement @ $1.00/share. It has the same effect on dilution. FBK simply argues that they need the money for general corporate purposes, & the market offered a unique opportunity by which they could obtain the funds cheaply. ABH to PROVE otherwise. Its not about the legal, ABH wants the attention diverted somewhere else. So again .... why ABH needs to look the victim ? All this bad mouthing we cant defend against, our share price being attacked & workforce indirectly threatened. We're the ones being bullied! - just ahead of a negotiation with the PQ? Perhaps ABH needs reminding that those institutions holding ABH are also those getting paid to lend it out for shorting - & they may well also be amongst those buying the shares back at depressed prices as well. The target isn't FBK, its ABH, & all that those institutions have do is make large blocks of ABH stock available. You play fair for a reason. SD

More to the point is why does ABH feel they have to be so aggresive, to extend the bid by only 10 days or so. This was approved by the top of the house, & you don't do this kind of bupkis without a very good reason. - They think FBK will announce terrible earnings, & hope to use it to reduce the eventual price ? - Its optics to make an eventual concession look bigger than it is ? - Its to divert attention from something else ? - They're frustrated, & have cracked ? Not our game, but you have to wonder how long it will be before a hedge fund ot two chooses to buy up a few million FBK & short ABH to pay for it. And suddenly ABH ends up dealing with 2 or more other big shareholders. SD

Keep in mind it is highly likely that ABH is probably also sueing for peace, & that it will be a flexible discussion. The result will be an expected winning bid with no interference. Whatever the PQ tells ABH re the PPA, they also have to tell MCI (re fairness). As if you're going to pay the PV of the forthcoming PPA, you need to know the likely terms & get an assurance that it will actually occur. For Quebec, the best long-term outcome is a monopolistic combined St Felecion Mill/ABH chip facility generating power. No RBK plants, & all future discussion with ABH. The PQ makes the rules, & ABH cannot walk away because they have much more in Quebec than does MCI. Obviously, very good for FBK shareholders, but give them a few days to get it done ;) SD

Purely speculation, but we would expect that some kind of provincial accommodation is being negotiated. A sceptic might argue that the terms of a PPA, the minimum acceptable bid price, & the structure of FBK post acquisition are probably on the table. SD

For WIW a few observations .... Look at all those who did well. For the most part they were all given their independence early; sometimes by neccessity, sometimes by deliberate push. Probably some survivorship bias, but most seem to have thrived - perhaps even a little too much! We often see the women of wealthy families being used as 'property'. The trophy wife, traded in once/decade. Rich daughters traded as breeding stock to other wealthy families, to 'keep it in the family'. Poor daughters killed at birth to avoid paying dowry. Money, corrupting metrics. Rich or poor, all kids are pretty much the same - but how they act is learned from their parents & idols. Most see entitilement as a reasonable expectation, its the exception who sees otherwise. SD

Most trusts do more harm than good. They prevent the student from qualifying & applying for student loans, they break the link between the need to simultaneously study & work to pay for next semester, they remove the consequence of good/bad decisions, & the student never learns how to deal with overwhelming debt. The harm noticably worsens when the student also lives at home while attending school. Back in the day, you & the rodents shared a dive with 3-4 others, you went to class during the day, you typically worked 1-2 nights as well as a Saterday/Sunday, & you embraced life - how to cook, & the need for cleanliness! Low pay, long hours, low status - the same as most others have to do, every day, & economics ruled your life. You tried different things out of neccessity, & if you failed - the guy working next to you was what you might otherwise become. The spoiled & the bratty failed miserably, the natural leaders rose on their own merits. Why move out if mom/dad let you live in a nice place with free room & board, & throw in a car to use? Why work terribly hard if the trust is paying your books, tuition, & holiday breaks? - living at home what expenses do you really have? Cut the apron strings. Nothing wrong with trust funds, just make sure that you know if it is really about you or them? SD

Same as munger, we're usually in just 1-3 stocks, married to them, & each stock is in an unrelated & totally different industry. You might want to look at risk parity. The basic concept is to overweight the low risk (T-Bills) vs high risk (equity) so that the total risk from the T-Bills is the same as that from the equity. Then margin the entire portfolio to get to the design return you want. A 60/40 equity portfolio essentially becomes a 40/60 equity portfolio with 25% margin, but risk is now spread evenly across the portfolio vs concentrated in just the equity allocation. If your stocks go down there is cash to buy, but you give up opportunity in return for less risk. Using leaps minimizes/eliminates margin & allows a higher equity allocation. Sounds sexy, but you’ve probably been doing something roughly similar for many years. Back then we just called it ‘gut instinct’ SD

st96dgx8: Reply #240 Assume: (1) All the additional shares tendered were from Steelhead. 11.1% at an average cost of $1.05/share (15.17M) (2) An all-stock ABH tender at 3.25 (3) The Steelhead interest is the RBK plants 130.1Mx3.25=422.8M ABH equity issue, of which Steelhead gets 46.93M (11.1%). RBK mills are valued at around 124.8M [(20.8+0)x6]. Steelhead swaps its ABH stock & pays 77.87M for the mills. Total cost to Steelhead is 93M (15.17+77.87) – for mills with a ‘true’ value of around 222.2M (166.2+56)? A sceptic might argue ..... If the majority of the additional shares ARE Steelheads, there is no intention that ABH actually wins the bid. (1) The lock-up group just wants out at the best price possible; otherwise they would be buying & putting the tender > the 66 2/3% threshold. (2)Steelhead is indifferent as the incremental gain on their FBK position is a hedge against the market price for the RBK mills that they would offer to buy from the winning bidder (3) An all equity winning bid at higher multiples, a built in asset sale, & willing sellers, is worth a lot to both FBK’s shareholders & a highly leveraged bidder.

Cardboard: Agreed re the cheering, but it is deliberate, & generally done to expose weaknesses that some might prefer weren't highlighted. Unfortunately, we're in a hostile bid, there was a low ball offer, more than a little coercion, & we do not tolerate getting robbed. Just as with FFH being shorted to 57, it is blatantly unfair, & we're going to fight back. If we're good enough, maybe we'll attract some badly needed big friends. Now the friends are here, & weaknesss are exposed, its a more balanced transaction, & we can afford to return to our preferred obscurity. Very few folks have seen the value in this thing. Worse still is that it doesn't trade by the industry norms, so it is always on the wrong side of 'opinion'. An irritating thorn to group think is not always a bad thing. Agreed we have done very well to date, & we will do better still with an improved bid & our additional buying over the last weeks. That said, we've also been in this thing a very long time, & expect a fat compounding return for the risk & time invested. There's always a purpose ;) SD

Jets: The math is 1.30 + .57 - .065 = 1.81 More likely to be somewhere around 2.00 if Steelhead wants the RBK plants. The bid value for those plants - the high value of their FBK stock = cash available to repay the FFH 'fronting' loan (speculation). SD