SharperDingaan

It's unlikely to be a friendly deal. The buyer is going to pay at/near the top of the range, add a control premium, & agree to a price adjustment if a power deal is subsequently signed. The buyer will agree to pay more if paying with stock, & the FBK board will agree to recommend the buyers bid & pay a sizeable break-up fee if they are outbid by ABH, or anyone else. ABH needs the winning bid for St Feliceon, or it orphans its wood chip plant. If they fail - they will be trying to buy it from a Domtar, or Merc - neither of which will hesistate in temporarily switching to other chip producers, to help the ABH orphan drown. Scratch my back ... SD

Agreed re the bad rep on growth through acquisitions. A little different though, when you're the one getting acquired ;) We're not against the dividend & independence route - but its hard to see why one wouldn't capitalize at todays record low rates, & get out - were one offered the equivalent PV. SD

Re independence. 3 big issues for us. (1) Muscle: Realistically, they have to buy wood-chips from ABH - to do that long term, you really need to be their size - or bigger. Alternatively, break ABH's local monopoly through a provincial action (ie: forced ABH sale to Quebec, & a Quebec lease-back to FBK) (2) Liquidity: FBK needs to consistently trade well > the $5 minimum, so that institutions can trade it. Share consolidation & dividends could get you there, but long-term it may not be sustainable. (3) Growth: We think it is better to own a small part of a bigger player, vs a big part of a small one. Quebec is great protection, but only if FBK remains primarily a Quebec company, & grows primarily only in Quebec. There is room for boutique's (Fortress), but it may well be safer/more reliable better to start/revive a new mill than try to change the probable outcome here. SD

Interesting valuation .... at first blush; (1) It seems to be a base valuation at around 3.75x EBITDA. Power generation is not included. STARTING point is $1.45, inclusive of the 7M/yr in expected RBK EBITDA savings. (2) No control premium. Given that industry is pricing at an EBITDA multiple range of 5.0-7.0x, it implies a control premium of roughly 33 1/3%. Pretty much, the industry standard. (3) Power EBITDA of 16M/yr is worth roughly $0.62 [(16x5)/130] So .... .. if you believe nothing management says, & you’re not going to compete - pay $1.25 .. if you believe the saving on the RBK contracts, but you’re not going to compete – pay $1.45 .. if you want the going concern, pay the premium & buy at 5x EBITDA – pay $1.93 .. if the province also signs the power deal – pay $2.55 .. if you pay with all equity, & pay a 10-15% premium – pay $2.81 to $2.93 But .... .. there could also be asset only sales. But to occur, they have to realize a value > the EBITDA going concern value – pay > $2.93 .. there could also be a ABH damage settlement. You wouldn’t pay for it, but you would use it in the renegotiation of wood chip supply from ABH, & more so if you’re also a big player. St Feliceon margins increase over the near term. .. there is also re-engineering opportunity. Material value accretion if you pay with equity valued at a high multiple, then sell mills to losing bidders for cash. Your D/E significantly falls, & your multiple rises as it is more stable. .. FBK shareholders. If you paid in equity & resold all the mills, within 1 yr, for cash – your BS would be materially stronger, but FBK shareholders could make up a good portion of your new ownership. Given how FBK shareholders have acted, most would see that a positive - particularly if they are not NA. Lots of possibilities SD

We're with Cardboard. We would also remind board members that hedging was invented for a reason, & that we're all playing the long game - not the short one. Once earnings season, & FB, is over it's pretty hard to see why going forward - long & margined is better than T-Bill & Options. Textbooks speak only to the level of risk, they do not speak to the stability of that risk. SD

You might want to rethink the sale & leasebacks, & see them for what they really are: a hedge against a future significant increase in interest rates (1) (2), & a B/E reducer (3). (1) It is highly likely that they have agreed to pay a sweetheart - but increasing rent, for an extended period. Discounting the CF at todays historic low interest rate, maximizes the sale price, & their regulatory capital. (2) In 5-7yrs+ BAC buys back the lease, & does so when interest rates are 'normal' - reducing the PV of the remaining CF as low as possible. If the lease sale was at 2.5%, & the repurchase was at 4.5% - 5-7yrs in; BAC will book a PV gain of 2% on the remaining CF - when they repurchase. A off BS cookie that gets bigger, the longer the lease. (3) 5-7B of fixed cost becomes variable. But if the lease cost in the early years is less than the existing depreciation (& it will be), the difference is an increase (probably significant) in contribution margin & a reduction in the banks operating BE level. EPS rises (& share price), but it starts to rise at a much lower level of business. Thinking its just an indirect immediate capital raise, is to minimally capture the true value of the transactions. SD

T-Bone: If just one of those proposals is from someone with a high multiple ;) ... $3.00+ SD

"As previously disclosed, Fibrek is currently in proceedings before the Bureau de révision et décision (Québec) (the "Bureau") following the application made by Abitibi and one of its affiliate for an order cease trading Fibrek's shareholder rights plan. Fibrek is issuing this press release in response to a request made by the Bureau during the course of the proceedings to provide an update regarding any proposals having emerged to date" - So ABH didn't think FBK had anything, bullied - & it blew up in their face. Habs 1, Toronto 0 - Given that this is Quebec, ABH is very unloved, & FBK does have something - there is now very little risk to the Bureau in ruling against ABH 'on the balance of probabilities'. ABH/FFH go to the penalty box. Habs 2, Toronto 0 - It also makes it highly likely that a power deal will be signed before the final deal closes, & that the province will use the rate as a sweetener for these alternatives. Habs 3, Toronto 0 Congratulations, gentlemen. SD

This is where the 'other' side of value investing kicks in ... 1) A sceptic might argue that you IPO when your product life cycle has peaked. Future margin growth is unlikely to improve, & it will take at least 2Q's of publicly reported results for that to become evivident. If you make Hula-Hoops, you IPO at the peak of the fad. 2) Coolest of cool is 1 share of FB to go along with your latest smart phone, & even cooler if you can show your friends a digital certificate. Entertainment buying feeding mo-mo is always an opportnity. 3) UW's will extensively short the IPO to feed more shares to the favoured few, & reverse as soon as the support period is over. A squeeze to feed the mo-mo & the entertainment 'buzz' ... there will be a lot $ made skillfully riding this thing down, vs up. SD

+16% YTD, but wait 3 weeks ;) SD

SharperDingaan--couple of questions if I may--1) Why would there be "significant damages accruing to FBK, FFH included" if this is an insider bid? 2) You state that ABH needs to "steps aside to let FFH make one (a bid)." What makes you think FFH is interested in making a bid? 1) FFH/ABH used their 'inside' knowledge to stop a value accretive bid, depriving all FBK shareholders (including the FFH 46% holding of FBK) of the benefit. FFH does not have 50%+1 control over FBK, & it was not their call to make - consequently FFH would have to make all FBK shareholders whole via a damage settlement to FBK. 2) FFH has no interest. If the bid fails (no competing bid, &/or no tenders at the price) their least damaging reputational exit is to take FBK private ASAP, & resell it ASAP. The bad press is spreading to other parts of their business (RIM), & they need to tie it off. Its also Quebec .... they don't have to void the poison pill, the review is to give FBK as much time as possible to find an alternate, & you're guilty untill proved innocent. FBK is not going to reveal anything untill they absolutely have to, & I think we're all big enough to see the humour in the snub to Toronto & Montreal. Good for them! SD

It is what it is. Management is doing what they are being paid to do, & the outcome will speak to whether this is actually an insider bid or not. If the assertion is true, there will be significant damages accruing to FBK, FFH included. The fact is majority ownership at < 50%+1 does not give you absolute control, & low-ball bids for absolute control is abusive behaviour - the last guy with this view was Conrad Black. Ultimately, FFH has to get out of FBK through either a real tender for all of FBK (& resale to someone else), or a sale of FBK to some other party. With 20/20 almost everything about this bid points to zero foresight, bad advisement, & poor execution - & all because they wanted to be cheap? They need to end it, & soon: ABH either puts up a real bid before expiry, or steps aside to let FFH make one. SD

2 yrs is at the long end of the development cycle. Beginning of Yr3 your competitor introduces their shite competition to your device, but there's still a big gap. Beginning of Yr5 your competitor introduces their 2G, & the gap is much smaller. When they get to 4G, you're the one with the shite device. Each generation usually takes less time than the last. Assuming 4G is achieved in around 6-8 yrs, todays Blackberry would be the shite device - & it appears to be exactly that, versus its competitors. Observing the strength of RIMs competition today, maybe our 2yr time frame should really be 18 months. A patent is worth the PV of its future CF. The problem with tech patents is that once the product life-cycle peak is over, its almost impossible to materially extend the product life by driving down widget costs, & selling at just over cost - you simply get a warehouse full of obsolete & unsellable shite widgets that no-one wants. The good news is that the patent may still have 10yrs+ to run. If you can reuse the patent in a totally new & different product line, you will do very well - & get a deterrent thrown in as well. As at about the time your competitors reach 3G/4G your patent expires, & every copycat, world-wide, will use it to flood the market. If you are the first mover, & the patent has less than 5-6 yrs to run, you'll probably get most of the profit for yourself. SD

Racemize: We're speaking to the approximate value of the patent at a point in time following inception, & assuming 50% declining balance amortization every 2 yrs. For a 20yr patent with an inital capitalization of 1,000,000: Yr 0 1,000,000; Yr 2 500,000; Yr 4 250,000, Yr 6 125,000, Yr 8 62,500, Yr 10 31,250; Yr 12 15,625; Yr 14 7,812; Yr 16 3,906; Yr 18 1,953; Yr 20 0 A $1M patent (Blackberry) capitalized in 2005, would have run 6 yrs to the end of 2011 & be worth about 125K, but its future obsolescence cost/yr is small. More notable is that the cost curve closely resembles the inverted decay curve of a long dated LEAP - an opportunity after the intersection point for those so inclined. SD

There is another way to approach it: Assume tangible equity is worth +/- $2.50. Bad decisions, write-offs, etc. burn off the cash cushion. Positive number, average between $0-5, & existing primarily because of HW presence on the board. The range is a best guess, but if they stopped selling everything today - took the inventory write-off, paid the termination penalties & severance settlements, etc - & were unable to sell any P&E - how much cash would be left? Assume the average patent has a 2 yr 1/2 life of 50%. 4K of patent value is worth 1K at the end of Yr4. They are primarily a single sku company & at an advanced stage in the product life cycle. Most would expect the patents to be currently worth maybe 25% of their peak value - & about 13% ongoing obsolescence for the next 2 years. Development: Lot of talent, patents, & financial strength remain. Even with 75% of the talent gone, the odds are good that there will be totally new lines, product, etc < 5 yrs. They have a very large yolk, & the odds get even better if they drop out of the public eye, go at their own pace, & shed the majority of their analyst following. No more analysts, notebooks, blackberry, etc - the buggys in a automobile world. New product & lines, as in not done yet, & minimal chance of additional financing being required. It does happen, & often (Apple). Impossible to value this future development today, but it clearly has material IV. We also know that industry valuation based on sales must continue to push RIM down, as they lose more share in a pie that has increasingly limited growth. A spur driving technology, mo-mo & technical investors to sell to value investors - & further depress RIM. Take the long view & RIM looks reasonably attractive, but you wouldn't buy it yet as the blood is only just starting to sweep the floor. SD

Txlaw: Re the Circle of Competence. To safely (relative) invest in Cdn Industry; the competence circle really needs to include the mechanics of the banking, tech, oil/gas, & forestry industries - & you need to get trained by the masters. With RIM, 3 of the 4 sectors are covered - but they've also had some instruction in Oil/Gas from AIM, & their old holding of Russell Steel (pipeline supply). Long-term they really need to know the green industries as well - but they have some time yet. SD

If you're buying RIM today, you do so in expectation that it will be a venture capital J-curve investment. Some now, 2nd round later at a lower price, 3rd round later still .... with the whole position accumulated over maybe 1 yr. If RIM falls 30% the day after you buy it, it's not that bad a thing. With retail you're small & obscure enough to be able to pick your spots & buy-in at anytime - without moving the market. For FFH, not so much - best they can do is start at around 2.0-2.5%, double down, then double again if needed. At the 4th round, change to convertible debs. Each round is a reassessment. Sometimes the decision is no, you bite the bullet & move on. We wish FFH the best of luck, but for us, it is a pass that we can afford. In FFH's shoes it is more likely a pass on a strategic investment that they cannot afford. SD

We took a look at it early last year & passed.... There are essentially 3 possible ways to play: (1) Buy the best of the US new home builders as if they are not BK by now, they likely will not. You're buying their reputation, old boy connections, & market dominance - then sitting tight for +/- 5 years untill new build starts to recover. The best Cdn analogy is buying PD @ <4.50/share 3-4 yrs ago, shortly after they got a sweetheart financing from the Alberta government. (2) Buy those buying the sub-prime debt itself. At the time the stuff went for < 20c, in bulk, but almost all the buying was by private partnerships. It used to be extremely profitable, as US refinancing programs made the deadbeat temporarily look good enough to allow the mortgage to be resold for a 100-300% profit. We looked at RoundPoint Financial Group (3) Buy the best of the US retail banks (Wells, BAC, etc). Over time much of the risk dissipates as mortgages run-off - & either get foreclosed on, or refinanced (at better spreads). But solvency risk gets swapped for dilution risk if there's a significant hiccup or tightening of capital requirements. You really need to see it as a sector rotation from (2) to (3) to (1). You've no real idea how long you should be in each sector, & you can't assume that sector correlation will remain relatively stable over time (ie: short (1) long (2) pair trade, then reverse). We found that we if simply bought TD we'd get much the same exposure at materially less risk. 50% of the TD branches are located in the US, most are in the more viable states, & whatever they do needs to stay within OSFI's risk tolerances. SD

Look at Iceland in the first 2 quarters after they refused to repay ;) Once the headlines are over .... SD

The current 0.12 Euro/share cost must make this one of the best secured penny stocks in history! SD

Keep in mind that we're value investors looking at a busted mo-mo darling, & one of our biggest weaknesses is buying too early. It is highly likely that declining market share & marketing miss-steps - driving headline news, is going to trump the value metrics for at least the next 6 months or so. Hard to believe that we not see at least one additional manic 1/3 sell off by late summer. There's no rush. SD

Keep in mind that Soros was born in the 1930’s depression. He saw first-hand the impact on family, he saw that in Europe the depression only really ended with Germany re-arming, & he knows what it is to have to run - & have to leave almost everything behind. He knows his topic; the audience – not so much. All the kings horses, men & women believe that the crises can be ... managed .... with enough time & money. Wide-scale sub-prime collapse in the US, wholesale austerity contraction in Europe, repeated material bank bail-outs, multiple sovereign debt collapses, youth unemployment at 20-25%+, etc. Market players need only minor reform, & what has happened far away (Arab Spring) could not possibly happen here. Back then the market players were Carnegie, Van De Bilt, Mellon, etc - & what happened far away ..... was an assassination in Serbia. Been there, done that, twice. Repress high unemployment for an extended period & you get regime change. Often disruptive (Egypt, Libya, Syria), & the new really no different than the old. But when you rely on their exports (oil), & large portions of their population are guest &/or illegal workers in your country – those causes become your causes, & spread like wild fire if you have similar conditions. And European history has repeatedly shown that when disruption is wide spread, bad things happen. Post WWII we’ve had the UN, the IMF, & the Euro to hold the place together .... & all of them are evidencing signs of not being up to today’s demands. The US & Canada are not islands, but they are far enough away that most of the damage will be ‘over there’ versus ‘here’. As in WWII you may lose men, money, & materials in large numbers – but your productive capacity remains intact (it isn’t bombed every night). How you use that capacity changes dramatically, but the fact that you were able to adapt your use, is what pulls you out of the depression. Adaption to industrial & social disruption is what the US & Canada is very good at. With euro GNP contracting, unemployment/hopelessness can only worsen & the possibility of wide-spread & higher % Icelandic style debt repudiation can only increase. Iran closing the Strait of Homuz & sending oil to $150/barrel+ may be enough to tip it over the edge .... & finally make the crises unmanageable. The specifics may have been different in Soros’s early days, but the overall look & feel may well be largely the same. Given that most trust their gut over their head, it is nice to see that he’s speaking up. SD

Thanks for the complement!. The usual process with this kind of loss of confidence is that you try to put the company 'in play', & get an outside bid for the company as a whole, &/or parts of - that you can sell into. If nothing comes forth you then try to replace management &/or asset strip to fund periodic returns of capital; usually a fractious process that requires the voting control of majority ownership - & which would likely occur if the ABH bid were unsuccessful, & Steelhead sold its FBK stake to FFH. The reality is that FBK's senior management will be replaced, & they know it. That said, it is in ALL our mutual interests for management to get the power deals signed, & to get a sale at the highest possible price – following which management either goes with the mills &/or receive generous packages. If management cannot get a sale, the change of control premiums do not kick in, & the magnitude of the packages is materially reduced. The better management 'fights the ship' the more marketable they will be in their next life, & they have done very well to date. It is accepted that the big $ come with risk, but selling the company is the fairest way of dealing with it. SD

FFHWatcher: We'll decline the bet! but we will make a donation to the foundation - the only condition being that the transaction has to close before the FFH dinner. Triedtested: Funnily enough we all play speed chess, & simultaneous games, as an ongoing training tool. Goes along with walking around & adding up random number plates for highest score (not so simple in arabic), & card counting at Canasta. SD

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. ... another reason to be pleased. SD