SharperDingaan

When our nephews turned 16 we gave each of them a 20K cheque to do something ‘big’ with. The only conditions were (1) They could use the money for whatever they wanted, but the funds had to be deposited in their granny’s account for safekeeping, with interest covering the banking costs, & (2) We all had to agree the spend was ‘big’ enough; if it wasn’t - the first $2 of cost came from the nephew, the next $1 from mom & dad, & the last $1 from the fund. The amounts were deliberately large, designed to confuse, accelerate their maturity & stretch their horizons. One nephew chose travel, & eventually travelled from London to Cape Town for 6 months on the back of a truck. The other chose cars, went to racing school, & finished up with truck driving school. The two of them now drive truck on the arctic ice roads as a winter job - just for fun. Both of them are under 21. They are their own men, & there are swarms of girls around these two. Compared to their peers they are light years ahead. Money is the servant, not the master, & it exists to be spent. SD

Sometimes you cant tell the difference between the scum & the good that float to the top! SD

Well if you're going to be run by a mob family - at least they had better be good! Goldman to I-Banking, GE to Industry, Halliburton to Oil Field Servicing .... SD

The risk model referred to was Value at Risk (VaR). Under normal conditions (& normal curve distribution), there is a 95% probability that your maximum one-day trading loss will not exceed $X, 19 times out of 20. Model accuracy is determined by back testing the models daily prediction over the last 200 trading days & validating how many times the actual one day loss exceeded the models prediction. If there were more than 10 failures (5%) over the period, or a cluster of failures over a short timeframe (movie premise), your risk model doesn't work - & you're in deep shite. VaR is used to determine a banks required regulatory capital at month end. The accuracy of the banks VaR model, and its month-end BS (inflated intra-month by MBS securtization) are material determinants in how much capital is required. As all banks use the same VaR calculation, it was only a matter of time untill competitors also realized the problem (movie premise) & fire-sold risky assets the same as our movie bank did. The evil side of VaR is the 5% chance the loss will be so large that you cant even quantify it, 1 time out of 20. Because the model breaks down under extended periods of extreme volatility, when a Black Swan (rocket scientists 25% nortgage valuation decline) shows up - you have to hope that you have enough other liquid assets, & willing buyers, to be able to recover your capital. As there will be no bank unless there is sufficient capital, the bank is willing to sell at extreme loss. Given Eurolands banking problem, & that the risks of VaR have long been espouced amongst risk managers, the movie has resonance. Given that the content will pass over most heads, it also has cachet. SD

Well worth seeing, & a broad story line that is probably more realistic (BOD references excepted). Given that it may well be the 2000's successor to "Wall Street" - ask yourself which banks contributed to the experience! http://arts.nationalpost.com/2011/11/11/margin-call-film-review-kevin-spacey-and-jeremy-irons-shine/ SD

We're not a fan of the legal route when it is friendly parties. You may win the battle, but you too often lose the war. We also suspect that prem may well be quite pleased with the dissent - as FBK was put into play for a reason. Diligence requires that FBK 'fight the ship', & the more 'vigorous' that dissent the easier it is to support an improved valuation. A valuation that may well also move the FFH holding into the money (elegance itself !). SD

Frankly its nice to see. A standard test for 'fairness' is that if your grandmother read about your offer/deal in the press - would she be proud of you ? , especially when you're on both sides of the transaction. If you come over as bullying & coercive, it is probably not what you intended. The objection is the price, not the deal. Perhaps it is time for a little graciousness ? SD

Welcome aboard Quebec - it's great to have some representation from other than Ontario! We're of similar view, but were adding during the recent lows. Cost base is < $1.00, but it would appear that our highly likely 35-40% compounding over the next 18-24 months is going to be c'est le vie. Long term it was enevitable that FBK would get exchanged/swapped into a bigger player. We're happy with taking ABH shares (safety in size) but not the exchange rate. Around 0.1 ABH/share + a cash dividend is probably a reasonable saw-off though. A votre sante! SD

Racemize. Once the FBK saga is over we will do a multi-part thread on small cap investing using FBK as the example. There is no right or wrong to it, but it is definately not boring ;) SD

In terms of share count: > low 6 digit. In terms of $: Zero, as we are working with house money - having recovered our investment a few times over allready through the years. Ideally we would like to see a 10-20% increase in the offer price (high enough for face saving purposes, but not enough to trigger the FBK management options), & a material cash dividend (ABH/FBK synergies carrying the interest cost) When it's done, we would like to be able to exchange for &/or buy up to about double the ABH position that we would otherwise have got. We like foresty, but we need to move up the quality curve. SD

As long as ABH can buy the coy for less than its approximate MV, the offer will proceed, & we think there is +/- 220M on the table. The negotiation is about how much of that +/- 220M will go to FBK vs ABH shareholders. It is in FBK's interest, & power, to declare a special dividend as soon as possible - & make it as of record the day BEFORE the bid was made. Excludes all bid related selling, & ensures that original institutional shareholders get the cash - decapitating possible opposition. As the total dividend will still be less than the +/- 220M on the table, it will remain in the ABH interests to proceed. Most would also expect that the offer can still go through - & on the same terms - as FBK shareholders get the $1.00/share + the dividend. About the best that anyone can really hope for. And .... the improvement will be without ABH having to put ANY additional cash/equity. Keep in mind that the FBK debt covenants give them a sizeable exclusion (FBK managements Q3-2011 reason as to why they could claim a 12% D/E ratio). An additional 75M is the LEAST they could borrow, & this is BEFORE stripping all available cash out of the existing working capital. Notable is that the dividend is in the lock-up groups interest, as they will be recipients of the cash. Not reassuring the banks, or blessing the transaction, will hurt them as cash is better than ABH stock. Everyone walks away happy. Agreed; management may know to run mills, but s**k at creating value! It is beyond pathetic, that most of the opposition seem to have to come from a message board. SD

Like everyone else, we're happy we can get out ... but it will not be at 37c (130M/350M [assumed approximate market value]) on the $. We're sorry - but even a blind, & one-eyed monkey can do a lot better than this! This is hostile, lowball, "all or nothing" bid for the entire company - & highly likely to succeed. But there is NOTHING .... to prevent FBK borrowing every nickel it can on its credit lines (130M-150M) & paying out a 'special' div of $1.00/share before the close date. ABH may win, but it gets a sucked out shell - & 130M+ of additional debt! This pig is going to release its value - but the pie will be a lot bigger if the parties negotiate. Easy to change FBK's management if its a show-stopper. SD

Just to ensure that FBK 'gets' point (2) .... Per the Q3-2006 acquisition of the RBK mills, St Felicion made up roughly 74% of the capital assets at that time. If MV approximately equals BV, & the mills have been maintained, then St Felicion is worth around 274M +/- as at Sep-30-2011. Were ABH to agree, FBK could pay off its entire debt (103M), buy back every share issued (130M), & still increase cash by 41M. If FBK just bought back 75% of their stock (97.5M), cash would increase by 71.5M, & BV (=MV) would be around 7.77 on 32.5M shares. Lot of ways to slice & dice, but they all result in a higher share price for FBK SD

We're inclined towards >80% chance of a price increase. We also think the transaction will ultimately go through, but probably with some modification along the way. Example: Assume ABH only wants the St Feliceon mill (SPECULATION). (1) ABH could take all of FBK, ring-fence the RBK mills in their own sub, & sell the mills &/or spin off the sub via an IPO. Simplest, but more new ABH share issuance. FBK rises because the exchange rate improves. (2) ABH takes just the RBK mill, but FBK has to buy back the tendered stock at the offer price. Less ABH share issuance, but they need to pay enough cash to ensure that FBK can buy back its stock. FBK rises because the share count drops. The folks around the table are more than capable of arriving at a solution. SD

It is a little more accurate to include our hedges when we say "fully invested". Taking this approach there is a lot to be said for keeping your equity portion fully invested (as your price level view could be wrong), but you will make your money (short term) from adding/lifting your hedges as you see fit. How much you have allocated to equity, versus prior years, is a different issue based on risk tolerance. If you think you can hedge well, you may be willing to tolerate a higher equity weighting. SD

Couple of final comments. Agreed, there was no other practical way to take out the institutions other than via a bid for all of FBK. The bid had to be orchestrated from pretty much only one source, & we should all be thankful to get out at $1.00. Agreed EV was around 130M. That was the offer price & it included the typical >30% take-out premium. The offer was the lowest possible, but fair. If we believe in IFRS accounting, & its associated impairment testing, the BV should be reasonably close to the MV of the assets & liabilities were the business to continue as a going concern. Furthermore, the principle is so well established that ABH will be able to use it - to write-up the value of the net assets acquired to about their former BV. The difference between BV (350.6M) & EV (130M) will result in an accretive 220.6M addition to equity for no new share issuance. Most would argue that how that 220.6M is split between buyer & seller, would be negotiated. The folks around the table are more than capable of coming up with a reasonable saw-off. SD

"Are you thinking the assets may generate more interest if they are split up and sold off in pieces?" 1) We think FBK needs an appraisal on each of their mills. 2) We think the mills need to be shopped to determine buyer interest & the accuracy of the appraisal. 3) We think FBK needs to reconcile & explain why the Sep-30-2011 $369,719 BV of the P&E is only receiving a market value of $112,519 (at best). A $257,200 (70%) difference of $1.98/share. 4) We think FBK needs to review the results of the IFRS Dec-31-2010 long term asset impairment testing & explain why either the bid valuation, or the P&E BV, is not appropriate. 5) Our expectation is that FBK will be able to show that the P&E BV is about what the independent appraisals/bids/DCF valuations come in at. ABH either pays up or walks away. 6) We think there is a >50% chance that a FBK mill will get sold, FBK shares get consolidated, & FBK rebrands into just a RBK recycler. Best guess is that ABH pays up (with equity), then sells the RBK mills (for cash). Materially improves the ABH D/E ratio, takes out the FBK shareholders cleanly, & lets everybody move on. An elegant solution, but we suspect that it may well be Plan B. SD

Doc. We know the stock in lock-up is going the share route; that leaves a remaining 70.5M shares that could take the $1.00/share in cash - yet there is $71.5M of cash allocated. Hence you can be pretty certain that if you want the $1.00 in cash, you are going to get it. What the ABH stock price does in the interim is essentially irrelevant. LessThanIV. Agreed it is unlikely there will be another bidder, but FBK does not have to agree with the price & can put its plants up for sale to extract a better price (which diligence requires them to at least attempt). Also agreed that ABH will likely prevail - but they are going to have to cough up. Even if ABH offers $1.45 - it is only 59M (3.7M shares), all of it will be additional equity, & the Dec-30 working capital sale adjustment (Q4-2011 earnings) will cover some of it. How much is your reputation worth to you ? & do you really want to smear it by being cheap, when you should be gracious ? These things happen, & price is a negotiation, but you still have to put up. No cheap suds! SD

"The deal seems to be valued around 4X a reasonable estimate of EV/2012e EBITDA . That's perhaps a little too cheap but in the vicinity of proper multiples for a single product pulp company. Most seem to garner multiples of 4.5X to 5X EV/EBITDA" 1) Keep in mind the power generation EBITDA of 4-6M/yr starting 01/01/2013. Roughly 5 x 5M discounted at 7% ? (debt rate) for 1 yr; 23.36M/130M shares - or an additional 0.18c MINIMUM. 2) Assume another 35M MINIMUM of market value > book value for all the P&E. Another 0.27c/share. They need to be thinking about getting above at least $1.45. SD

Trading at <$1.00/share. For many - there is simply disgust & little confidence that ABH will improve their offer. They just want out, & are willing to give up a few cents for the liquidity. The price is not rising above $1.00 because there is so much selling. But ... that $1.00 price will still be there over the next month, & everyday that goes by increases the pressure to be more accommodating – especially if a chunk of the 3M+ shares sold today are going to less polite activists. It is not hard to see what FBK paid for its plants, & to come up with an approximate market value in today’s market. That MV is > the carrying value, & at a minimum - that difference needs to get reflected in the price. Stay 30 days & make a certain 5% (1.00/.95) - possibly a lot more. Or sell now for an uncertain > 5% somewhere else. It doesn’t cost anything to stay & bitch loudly. SD

This proposal has to pass due diligence at both boards. FBK needs to prove (1) that its liquidation value (appraisals &/or getting bids on the plants) is above the offer price & (2) that the going concern (IV) value is above the offer price. The current price of $1.00/share is just the offer price the last time they went out. ABH needs to prove that they put up an appropriate initial offer (price & lock-up), & then settled on a number that was independently proved as reasonable. Most would argue that if you want FBK, you need to pay something between the liquidation and IV value. The institutions that bought at $1.01 last time out will want an appropriate return on that additional investment. They will also want the bid to at the very least, materially cover their average cost bases. We would expect that most of the non lock-up group consists of these institutions, & that the lock-up group has essentially withdrawn (via the agreement) to allow them to set the final price. It is highly likely that the bid was intended to raise a fuss, but the degree of distaste was unanticipated. Not a bad thing, but now is the time to demonstrate the elegance that would appear to be behind this bid. It is highly likely that the ABH bid is the match that sets off an industry consolidation wave, raising the tide for all in the industry. To play the bid you really need to buy FBK & anticipate by how much ABH might improve the exchange rate for an all equity deal – then multiply by the probable increase in the ABH share price as a result of the offer. That kind of demand on the small FBK public float, should be an good indication as to where the true floor price might be. May it be an interesting day. SD

Look into the operations of most TSX listed companies. Often a high % of the sales revenue is from outside Canada, & a good chunk of expense may also be in foreign currency (Indian call-centre, foreign assembly centre, etc.). You already have FX exposure - you don’t need to buy it. Often forgotten is that the $C is a petro-currency backed with probably THE largest oil reserves in the world (Tar Sands + Beaufort + Hibernia). Given that most would expect another Bretton-Woods/Plaza Accord following Europes eventual resolution, it is hard to see why the $C would not settle somewhere in the $1.50-$2.00 range. Probably over a few years (BOC intervention). SD

At 90% you can force the minority to sell. Given that this a friendly deal it'll be what the majority of the remaining shareholders want to do, that will decide it. The major players in that group will also negotiate the exchange rate on everyone's behalf. Couple of beers around a table, & saw-off somewhere around half-way between $1.00 & IV. SD

Alert. Keep in mind that it is highly likely that most/all of the shares in lock-up will opt for conversion. Makes the sale a tax-free roll-over, & the holder indifferent as they have not lost any value. Arguably, if enough shareholders opt for conversion (90%+) they could collectively negotiate for a better price (liquidation value) & 100% conversion. The buyer gets a bigger equity issue, & can use all of the sellers cash to pay down debt - improving their D/E ratio. $1.00/share may well just be the opening bid. Here's to hoping that Santa is a little more generous! SD

The price sucks at approx 2.7x projected stable EBITDA (with power) of 48.5M, but at least it will be more liquid (with better prospects) holding ABH over FBK. Think they could afford more, but a friendly bid was pretty much inevitable. Looking forward to holding ABH! SD