SharperDingaan

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

The elegance of the MRI bid is that the outcome is really in FFH's hands, which is really where it should be. ABH is not going to be able to put in a marginally better bid for the power - as MRI need only top it by 1c. MRI has a strong incentive to keep bidding up as long as the increment is less than the power is worth, & they're not about to get pushed around by ABH. A big chunk of whatever cash FFH fronts - will come back to them immediately as a major shareholder of FBK, materially reducing their out of pocket. The more FBK rises the better off FFH will be. FFH could easily front ABH the cash via a warrant vs debt issue, & increase their % of ABH. And if ABH doesn't win, that chip plant will fall into MRI hands & make St Feliceon virtually impossible to dislodge. SD

(1) The ABH/FFH weighting got diluted by 20%, & MERC was given a 20% foot-up on the bid for 67% approval. We have a more balanced horse race. (2) We have a Q4 & Q1 hedge against the transaction costs of all this, & have pushed our D/E ratio still lower. We're financially a lot stronger than we were, & its not conditional upon MERC winning the bid. (3) To win the bid you will essentially have to pay up for the power generation. As both deals offer 70M in cash, the increment will get paid in either ABH or MERC stock - & MERC is the better choice. To move it in favour of ABH, FFH will need to front ABH the funds to go to a cash payment instead. (4) It also doesn't look like MERC is intended to win - they are going to get 8.5M + the 20% of the incremental gain on ABH's improved offer. Worst case they get FBK, & we get $1.30/share. A sceptic might suggest that ABH arrogance has cost them dearly here. Congrats to the FBK management, & we're glad to see that MERC's winter ski trip worked out ;) SD

We would like a better number, but this is just the opening round... The poison pill also got replaced with something far better: "The Support Agreement entered into by Fibrek and Mercer contains, among other things, a termination fee of $8.5 million payable by Fibrek in certain circumstances, including the acceptance of an unsolicited superior proposal from a third party. Mercer has also been granted a right to match in respect of competing proposals" "Mercer has also agreed to purchase 32,320,000 special warrants of Fibrek on a private placement basis, at a price of $1.00 per special warrant for total subscription proceeds of $32,320,000. The special warrants are convertible into common shares of Fibrek on a one-for-one basis. Conversion of the special warrants is automatic in certain events and otherwise at the option of Mercer subject to certain conditions. The special warrants are also redeemable by Mercer or Fibrek in certain events at their subscription price, including in the event that Fibrek receives and supports a superior proposal. The proceeds of the private placement will be deposited in trust at closing and will be releasable to Fibrek on conversion of the special warrants or to Mercer in the event of a redemption. Proceeds from the private placement are initially to be used by Fibrek to reduce net debt given (i) the recent costs associated with its strategic alternatives review process in response to Abitibi's unsolicited offer, (ii) the high level of RBK Pulp inventories and lower than anticipated sales which have resulted in a 5-week market shutdown of the Fairmont Mill effective February 20, 2012 and an increased need for liquidity, and (iii) capital expenditures required in connection with Fibrek's power-generation initiatives and other growth and diversification opportunities. Completion of the private placement and the conversion of the special warrants is subject to a number of conditions, including the approval of the TSX, but is not conditional on the successful completion of the Mercer Offer" SD

The 'value' here is the internet as the medium. Pre internet, you learnt how to apply by pretty much getting hired by, or talking to others in the desired circle of competence - if you were lucky enough to have access. You were all from the same geographic area, with maybe a rung or two of status difference, all at a similar stage in life, & everyone thought alike because they all came from the same place. What university, college, etc you went to mattered - because of where their alumni worked, & your ability to access that privileged circle. The broader the range of views, difference in life, & occupation, the more liberating & better for all. Yes, a Heinz57 ;) investor can be scrappy at times - but it is their presence that counters the often incestuous bias of the 'old' days, & keeps everyone healthy. If that investor wasn't present - would you have heard that view any other way? even if it is only 1 in 20 times - or less. We would love to hear more from those in other than NA. It is also hard to believe that there is not at least one other Parsad out there doing something similar - but in spanish, or mandarin, etc. They just cant recognize each other because there is no common language! Great story. SD

Most would expect the winning bid to be structured as either (1) $X now, plus a $Y receivable payable if/when the power deal is signed, or (2) a lot bigger $X now - & no receivable because the buyer accepts the risk. Obviously (2) is better than (1), but it really means the province is in the room. Exclude the power deal & the range for X dramatically narrows. It rises if the mills can be split off into separate BU’s (ie: RBK recycling as a utility, NBSK as a hedged pulp play). It falls if most of the proposals are for FBK as a complete entity. Obviously, St Feleceon is worth most to ABH re the woodchip proximity - the US mills are probably worth more to someone else. Add in the power & take-or-pay, & much of the EBITDA market volatility disappears. Asset stripping FBK actually does make sense, but only if there is confidence in management’s ability to return capital - & there is the rub. Apparently replacing management to ensure that it happens; is not a consideration. So what is possible? 1) No asset/company sale, FBK stays independent, new management & asset stripping 2) Shareholders get cash from an asset sale, FBK stays independent, same management 3) Shareholders get cash/stock + a receivable, FBK is sold to someone else 4) Shareholders get more cash/stock only, FBK is sold to someone else, power deal is signed early, or buyer takes the risk Most would expect that to assure a win, a bidder either pays top $ - or pays off the power receivable up front. For ABH, it really means FFH fronting the cash & getting repaid from the estimated 10M/yr of synergy re the Canaccord valuation. FFH has also been in the room with the province before. Elegant solution, but will ABH/FFH make it happen? SD

Masterpiece as to what is NOT in this valuation ... 1) The valuations deduct net debt of 117.8M. Strange how they attribute zero value to the 100M (0.77/share) of inventory on the BS at the same 9/30 date. 2) How is it that a firm with amongst the lowest D/E in the industry, has a debt cost of 8.4% - higher than the cost of their existing lines, & on which they have 50M+ of unused borrow room? 3) How is it that D/E remains at 25/75 for the ENTIRE 5 yrs, when the industry as a whole operates at closer to 50/50 or higher? At 50/50 the discount rate is 2.0% lower (worth .22/share) 4) Average forecast FCF in the last years is about 21M/yr. Strange how the materially lower per ton guess was used, instead of doing a DCF on the maybe 10 yrs of additional 21M/yr from yr 6-16? 5) Interesting approach to recognize the 16M of fully expected incremental power revenue, but only give you 25% for it – most would tell you to exclude it from valuation, & add it back as a sale adjustment when the deal is signed (approx .64/share). 6) Ever come across anybody doing appraisals with almost 50% of the sample MORE THAN A DECADE old? And then base an analysis on essentially just ONE sample? 7) Notice that when you use the more reasonable & more recent precedent numbers, the mill values are within 5-10% of the 9/30 capital asset BV? Exactly what you would expect in an IFRS world where assets are impairment tested annually. A sceptic might argue that the report presents the absolute MINIMUM value, & is the STARTING POINT for the competitive bid process. The real number would appear to be somewhere around 2.44 (1.45 base +.77+.22) – or $3.08 (2.44+.64) when the power deal is signed. A valuation at around what this board has been thinking. SD

Watsa: Welcome back :D It's always nice to have some independent thought, & the macro category makes a lot of good sense. SD