SharperDingaan

... then discover that Sharper is one of their new shareholders :D

The PPA is a 25yr 16M EBITA boost from Hydro Quebec. It flows directly to the bottom line. Per the BoC, 30yr Canada’s trade at a 4% yield. Hydro Quebec is not Canada, so assume a 25% risk premium & 5% yield. PV of the 25yr EBITA boost (end of period annuity) at 5% is roughly 225.5M, or 1.73/Fibrek share on 130M shares. ABH paid $1/Fibrek share (cash), a price/book ratio of .50x. Apply a P/B of .50x to the PPA & you would expect an increase of $.87. As FBK shareholders tendering for cash have received it, you would expect a market price of around $1.87 Given the Merc withdrawal, scheduled shutdown’s etc, it is highly likely that FBK will report a very bad quarter. It is also very likely that over the near term, supply will greatly exceed demand, before it stabilizes. Now an ‘ornery fellow might take the view that ABH will not be able to squeeze out the final 10% ... unless they fully pay up for that PPA ... ;) http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/ http://investing.businessweek.com/research/stocks/earnings/earnings.asp?ticker=FBK:CN

In southern Italy the youth unemployment rate is around 80-85%, & the biggest employer is the mafia. We would gather that much of the remaining employment is sheep sheparding.... http://www.managementtoday.co.uk/news/1130480/unemployment-sends-italians-flocking-hills/

ABH may have won but there are still $ on the table

Alert: The 8.5M consolation prize (if it occurred) would have been paid to Merc by ABH - to 'vanish'. When Merc pulled their bid, they gave up their right to get any fees from FBK. Q1 financials may also have other things in them overshadowing the results. You get what the tender price is, after that - you don't own the shares anymore. Page 6, para 4 &5 of the offer - ABH does not want minority shareholders; they intend a Subsequent Acquisition Transaction to remove them.

We do not know what happened with Merc, but they probably did not lose. As consolation prize, ABH may have given them the break fee, & covered their costs to date. Odds are ABH will need to eventually bump their bid to get to 100%, but not until after the offer expires on May 04. Obviously it is now a new game. Hindsight is 20/20. With a 2nd bidder in the mix holding out was the right thing to do, as was proven through 8 rounds of successive bidding. However it is a bet on probability, & you must be wrong at least some of the time.

- Assume Merc would prefer NOT to have ABH or Steelhead as shareholders. Merc does NOT cancel the Merc shares it buys back. - Assume FBK gets the PPA, PV of 130M ($1/FBK share). ABH, Steelhead, own 55% of all FBK. Final bid is $2.40/share, total of 312M Back-of-the-envelope example: - Merc pays with 242M of new common & 70M cash. But 55% of the new common (133M) would go to ABH & Steelhead, then return to Merc as part of the asset sale proceeds (treasury shares), leaving a net new common issue of only 109M. Dont cancel the treasury shares, & the books will show 242M of new equity (improving ratios), but earnings will only be diluted by 109M of new equity. Very usefull to those with high multiples. - Winning the PPA effectively gave FBK 130M of ADDITIONAL equity that will stay with Merc as soon as Merc pays off the FBK liabilities wih the FBK asset sale proceeds. Merc walks away cash heavy. - Cash heavy, & good slug of treasury stock that can be sold at any time, is not a bad incentive ;)

- PPA is announced. Merc increases bid to $2.40 (Guess @ current $1.40+$1.00 for PPA) - Steelhead, ABH, Minority shareholders all tend to the superior Merc bid for cash & Merc stock. FBK board appoves the bid, the tender is successfull. Merc pays with 70M cash, + newly issued Merc sock, & takes over FBK. - Merc sells FBK's US Mills to Steelhead for their newly issued Merc stock +/- cash. Merc sells St F (with/without PPA) to ABH for their Merc stock +/- cash. The valuations used being close to that established in the Q1 consultant report. ..... everybody wins.

Just to flesh the idea out .... - Steelhead sits tight untill the PPA is announced - Merc sells the US mills to Steelhead for FBK stock +/- cash - Merc sells the PPA power contract for cash - Merc sells St F to ABH for their Merc stock +/- cash Steelhead waits for the PPA because it will add +/- $1/share to the bid. With a high enough bid they could even get the US Mills + cash back, in return for their control block. Minority shareholders see a real bid. ABH & Merc get a gracefull exit. ABH gets a super profitable vertically integrated mill. Merc gets an equity issue & a whack of cash & treasury stock.

ENN: The TV screen in the top right or top left corner of an elevator, that everyone looks at when travelling up & down in the elevator. The news scrolling accross that screen .... is brought to you by the Elevator News Network. Alert: If Merc doesn't get the 50%+1, they simply bump the price & try again. Eventually ABH either tenders to them, or they tender to ABH - & collect the 8M break up fee + the gain on their shares. It is highly likely that ABH is 1) waiting to see how much Mercer gets, & is 2) waiting for fewer but bigger opponents to cut a deal with.

ABH had to extend EIGHT times to get that 2.6M shares, & most all of it was allready on side almost from day 1 (look at the early votes). The friendly shares have gone; now they have to deal with the hard cases - or tender to Mercer. ABH could try to buy the shares by marching the market bid up in increments, & hoping for hits. They will get a few shares - but not 1.6M, as Steelhead &/or Merc would immediately top the market bid by 1c to prevent any more shares going to ABH. The market price will spiral upward & ABH will always be on the losing end. ABH could negotiate for block sales, but it is virtually certain that every hard case will want a healthy control block premium over the $1.40 Merc is offering. ABH could raise it bid well over the Merc bid which would work, or they can give up & tender to Merc - which would also work. And in the meantime .... even the 'elevator news network' is now mocking ABH. Even at 50%+1 the problem does not go away - the Merc tender dies, but minority shareholders, Steelhead, & Merc DO NOT HAVE TO SELL THEIR SHARES. To buy peace, ABH would have to pay greenmail, & immediately break up FBK to maximize value - or swallow 50%+1 of every $ of loss that FBK generates. Just as the squeeky wheel gets the grease, the stinking fish get the bid ;) The only way ABH can now make it work is via a knock-out bid, & the clock is ticking. It is well known that most have nothing against tendering to ABH, but it is a flat NO untill there is a realistic offer on the table. We live in interesting times ...

Very nice - ABH needs another 1.6M shares to top the 50%+1, & it is now very clear that the only way they can get it is to bid up. To avoid losing the control block it is now in the Steelhead interest to outbid ABH for everything that comes on the market. And it is the ABH interest to up their offer ASAP to spike this virtuous spiral. And each new round of docs is more demand for the pulp ;)

Agree ABH will need to issue more equity, but suspect they would go with a cash heavy bid for FBK - Maximum power to a knock-out bid - Paying in cash versus paper is cheaper (no uncertainty premium) - Cheap equity goes to ‘safe’ hands (averaging down private placement to the lock-up group) - Pay for the PPA via a convertible deb/pref. CF can easily service it through conversion - Additional improvement/ability (convertible deb?) in the financial ratios - Minimal ‘after-the-fact’ share price disruption (spike unhappy folks dumping) - Better class of shareholders. Some of us FBK shareholders may smell too much! Nothing that a good scrub couldn’t fix

Shush!

We're inclined to agree with T&T; Steelhead does not tender to either ABH or MERC at this point. We don't see Steelhead tendering to ABH for a loss, & we suspect that the buyer on a lot of the trades over the last few days was also Steelhead (if only to ensure that ABH didn't get them, & negate the power of their control block ;)) While the lock-up was in place we agree that Steelhead & ABH were acting in concert. Following the legal opinion, & expiry of the lock-up, we think they are now independent - & more so if thier interest actually is the US mills, & they needed to get their operations people in asap. If Steelhead doesn't tender, it's highly likely that ABH comes back with a higher 'satisficing' bid.

We will be tendering to MERC as well. There is no reason to leave the $0.40 on the table.

Game the system for severance. They have nothing more to teach you. Corporate financial analyst for 2-3 years. CFA at night. MBA school. Lessons learned. Selling glamour is selling dung. But if enough fools buy it - glamour sells! Limitations of 'wonderboy'. Move laterally & you will be forever branded a loser Brains to ask. It only took you ONE year to recognize this isn't for you - for most of your collegues it will be 5-10 yrs, if they recognize it al all.

The lock-up group tendered enough shares for ABH to meet it 46%+ acceptance requirement, which permits ABH to make a follow-up 2nd stage bid for the rest of ABH. However, ABH did not get the 50%+1 they need for control, because their bid price is inferior. We expect Mercer & Steelhead will eventually tender to ABH, but they will work together to force ABH to increase its bid. If ABH underbids, Mercer could marginally raise its bid above the ABH offering, Steelhead would tender to to it, & ABH would be forced to either bid up or sell into Mercers better bid. Both ABH & Mercer have incentive to keep bidding up, to maximize the losers gain on capitulation. The virtuous spiral that ABH is petrified of. The reality of course, is that this is no different to auction bidding on a storage locker. To spike the spiral - the strategically minded would throw out their best bid, & make it high enough that Mercer & Steelhead would appear to be chiselling if they contested it. To cave - Mercer gets a gain of the (bid price - their cost) x the number of shares + the 8M break-up fee. Steelhead gets the (bid price - their cost) x the number of shares + whatever they make on the US Mills (assumed). FBK shareholders get the higher price - & most would assume that will include the lock-up group in some form or another ;) We live in interesting times.

Step out for a day or so, & the whole world simplifies ;) Very nice move by Mercer to bump to $1.40. Indicates willingness to change, willingness to sell into a superior bid, makes it more difficult for Steelhead to refuse, & gives the Court of Quebec the opportunity to smear ABH. The opportunity loss on the Mercer placement, now becomes everyone’s gain - as Mercer forces up the price of a superior bid. ABH is now clear to make a 2nd stage offer. New ball game, & they need a price high enough for BOTH Steelhead & Mercer to tender. If ABH does not include the PPA - Mercer need only marginally top the ABH bid - to give Steelhead the argument not to tender their control block to the inferior ABH bid. Must be very hot in the ABH kitchen. Management will be expected to end this, & do it quickly; to concentrate the mind – a bonus if they get it done, find a new job if they fail? The strategic response is a knock-out high bid that kills the gaming, & soothes the resistance. Of course if it is still the Marx brothers running the show ... we know strategic sense is limited!

P(ABH bid gets control of the 46%): 100%. P(ABH actually pays the $1.00, etc): <25%. There is a big difference between beneficial ownership vs actual ownership, & we find it very unlikely that the lock-up group will sell at $1.00 when we know that they refused an offer at $1.50. We think the tendered shares will go to a trust, & the trust will release the shares to ABH at whatever the final price turns out to be. P(Steelhead tenders to ABH at the current $1.00): < 10%. Steelhead holds the control block, & control blocks go for a premium because they decide the winner. At present the Mercer offer takes it, but we would expect that Steelhead is expecting better; probably > $1.50. P(ABH walks away): <20% . This is about St. F. Combine it with the chip plant & the power generation & it will be one of the lowest cost mills in the country. Sell the US Mills, plus the power generation, & you will get St F for a net cost of close to nothing. Ego investment, reputation, & job security, are further incentive to keep bidding – and win. P(ABH re-prices the bid): >90%. There is no try again later - ABH has to top Mercer by enough to satisfy Steelhead, & it is in the Steelhead interest to demand that the firmer PPA be priced in – by either ABH OR Mercer. The dilution thing is moot were ABH to put up a real offer that the FBK board can agree to. FBK can drop its Supreme Court appeal at any time. No-one, other than Steelhead, knows what they will do - all we know is that they will act in their best interests. There interest would have best served if they had bought a control position in FBK, successfully bid for the US mills, re-packaged/re-sold the mills to someone else, & agreed to pay with a combination of cash & FBK stock. The more FBK sells for, the better they will do.

Lessthan: We beg to differ. The dilution is a major problem. They would fail to make the 45.7%, the lock-up group would be defrauded out of $.30/share - & the lock up groups fiduciary responsibilities will force them to sue. Best ABH can get is an external acceptance of their bid, but no physical shares. At < majority, ABH is not legally required to make a 2nd stage bid; we all have to take ABH's word for it, AND believe the dilution will not go through. Steelhead does not need to see the PPA right now, or operate the US mills. Steelhead could very easily take the US mills (tommorrow) for their FBK stock + cash + a sale adjustment if the bid price goes up - & resell (on the same day) to someone else. The new buyer is in the mills next week, Steelhead is done with the Marx brothers, & they get out with their reputational damage repaired. ABH is going to have to put up, & no amount of legal is going to change that.

The independent valuation of $1.25 to $1.45 is meaningless if there is a PPA. As most would expect the PV of the PPA to be around 130M, we need to see $2.25 to $2.45. Simply adding the expected PV of the PPA to the Mercer bid produces $2.30. A bid at $2.30 for all of FBK (assume a 2nd stage bid) will kill the dilution issue. ABH would have the better offer, & Mercer would appear to benefit from regulatory lagresse, as well as the break-up fee. But ABH would need assurance that the PPA is there, & that a new 20% of FBK stock is not going to suddenly appear. It is the regulator that called the 'secret' meeting, & we know that ABH (& possibly Steelhead) was a participant. We have repeatedly suggested that Steelhead's target is the US Mills. We have also highlighted that if there is a new owner for those mills, they need to be assuming operational control right around now. If the consideration is Steelheads FBK stock + cash, there are only 124M shares o/s & the bid could be 5% higher

Secret meetings are rare, but not that unusual. Almost always it is either to read the riot act & break skulls, or inform (not discuss) as to what you are going to do next (i.e. US Fed/BOC calls all the nations bank chairmen to a meeting, & tells ...) Suspect there was some of both. ABH tried to exploit regulatory arbitrage, made both regulators look bad, & there is a PPA in play; not appreciated. They may then have 'agreed' to next steps; probably a precedent setting 2nd stage bid where they do not have majority. Most would think this is definately not what the lock-up group signed up for.

Every PM will disagree, but value-investing as a career makes zero sense. Basic risk diversification - have multiple careers, but don’t mix the two together. Or don’t P*ss in the pond you drink from. I do a renovation, I go to Home Depot/Lowes to buy the materials. I research a stock I go to the 10Q’s, financials, etc. It’s just a data warehouse trying to sell me something. Dressing it in a glamorous wrapper is marketing. Most <30’s like logic. Get the algorithm out of a book, have an Ivy league B-school teach you, program it, & you’re an instant high class wizard; simple, easy to get, everybody benefits. Can’t apply worth sh*t though, because B-school didn’t teach you how. Wisdom is realizing there are many ways of application, & learning it on someone else’s dime. More right brained. If you can ‘read’ people, headlines, etc. well – a great poker &/or bridge skill - go for it. You don’t have to be able to recognize too many ‘manias’, in order to get rich betting against the media line. The less fortunate need to troll the 10Q’s & financials, etc. Most experienced investors can tell < 5 minutes if an investment is for them. They get there through experience, intuition, & logic – not an algorithm, & we call it their value proposition. Sadly, for most folks, a mutual fund offers a better value proposition. ... really sad when you recognize that you also need to clip 3.0.-4.0% off the funds return for inflation, management fees, & the one-year risk free equivalent (i.e. 1 yr GIC for the retail trade) – to get to the risk adjusted return.

The proven reserve estimate is essentially an independent engineering appraisal of what the firm has in the ground, that is commercially viable at a price of X. Same kind of thing as the 3 yr actuarial appraisal of a P&C firm. Importance is because proven reserve x the prices used equals the collateral, against which the bank may lend up to 50-60%. If you can still service the debt, but no longer have the collateral the bank will not call in the loan - but it will be very nervous. It IS an ol'boys club, so expect forced sales on the newer, vs established, operators to reduce the banks total exposure. Ya dance with the ones that brung ya. Lot of physical/technical factors. The majors are formation characteristics, flow rate, presence of distillates (wet/dry gas, etc), age & type/efficiency of well (i.e: fracked with newer technology, & when). Most wells produce mixed flows - water, gas/distillates, oil, etc. in different quantities, & are sensitive to pressure. The less pressure the less flow & higher the heavier (& less valuable) distillate mix. For a porous formation, at high pressure (& heat), & high commodity prices (financing tertiary extraction) you may retrieve 75% of all the pay zone within a 50-150' radius of the well. Horizontal drilling in the formation increase the pay zone. Fracking increases porosity & the extraction radius. Low commodity prices knee-cap the ability to extact the oil/gas commercially, & effectively reduce both the extraction radius & the recovery potential (from 75% to maybe 55%). You get hit twice - & the less porous (shale) the formation, the more vulnerable you are. Proven reserves collapse, & banks start selling assets. Buying a shale field is really a long term play. You buy cheaply today, but recognize that the oil/gas is still in the formation. When prices improve later (West Coast LNG terminals), the higher prices increase proven reserves (through tertiary production) & hopefully more than offset the interim depletion - with NO additional drilling required. Buying the field, versus individual producers, also alows you to maximize formation pressure & extract as efficiently as possible. Drilling still takes place but it largely changes to infill water/gas injection to drive up formation pressure. The risk changes to timing the selling of the oil/gas, versus finding it in the first place. Studied to be a petroleum engineer in a previous life ;)