SharperDingaan

An awful lot changed in Euroland in even the last 3 months, it is just not visible – yet. When was the last time you saw a ‘deposit run’ – maybe Northern Rock? They are now occurring monthly, the amounts are massive, & the funds are leaving Europe entirely. Even the tax evaders (ie: the most informed) have stopped investing, & possibly re-investing, their cash in Bundts. http://www.telegraph.co.uk/finance/financialcrisis/9307106/Spain-is-in-total-emergency-the-EU-in-total-denial.html http://howestreet.com/2012/05/full-fledged-european-bank-run-ecb-deposit-insurance-is-not-the-answer-how-fdic-played-a-part-in-the-us-real-estate-bust-monetarist-fools-are-everywhere-believe-in-gold/ When was the last time you saw investors ‘pay’ central banks to take their money? - & a central bank reject it (by not massively increasing their offering & relending the money to the IMF crisis fund). A sudden need to recycle through another route is not encouraging http://www.thelocal.se/40326/20120418/ http://www.dailymail.co.uk/news/article-2153324/Markets-facing-rerun-Great-Panic-2008-Head-World-Bank-warns-Europe-heading-danger-zone-bleakest-day-global-economy-year.html http://www.reuters.com/article/2012/05/31/markets-usa-bonds-idUSL1E8GVOJ720120531 Some might suggest that Europe has had the equivalent of a stroke. We just don’t know how serious yet, or what is paralyzed. The other man in the room is also not doing well. http://online.barrons.com/article/SB50001424053111903964304577422293673015120.html?mod=BOL_hpp_mag Now why would a rational man not expect at least a 30% drop, & have those long equity positions hedged?

We all need to realize - that the more misery, the more the Euro devalues, & the more Germany benefits. They make the widgets, they reap the margins, every FX downtick makes the widgets cheaper, & they have the employment. It is not in the German, or Euroland interests, to break up. Euroloand substituted population for FX movement. You move to where the jobs are, & ‘retire’ to your home country (state) when you’re done working – same as in the US. The age profile of the North underpins labour flow from the South to the North, & remittances from the North to the South. Northerners vacationing in the South add to the net wealth transfer. The wealthier the North the more ‘2nd homes’ in the South, & the more Northerners retiring in the South. The result is more homebuilding in the South, and a market for the labour of those older Southerners who can meet the needs of those older Northerners who have moved south. The real discipline is eviction from the magic circle. Members are expected to break the rules, but the egregious end up dead; same as everyone can drive 20km over the speed limit, but if you drive at 50+ over the limit & like to weave in/out of traffic - the odds are that you will have a short life. Eviction is the cure to moral hazard, & it is in the Northern interests to enforce it. In the old days Europe regularly had brutal wars, diseases, etc. that keep the population reasonably in check. The young & the old were regularly culled -& both sides lost much of their productive capital stock. For those who lived, the result was favorable population pyramids, scarcity driven innovation (overcoming labor shortages), & rapid replacement of capital with state-of-the-art machinery and processes; extended bursts of massive productivity that dramatically improved the standard of living. Most recognize that the old days were a little extreme. Until older folks die off at a faster pace than they are created, slow/no growth in Europe is almost guaranteed – & it is really no different to Japan. When Japan’s miracle collapsed, much of the workforce > 50 was forcibly retired, & never worked again at anything remotely approaching its previously productivity; the new additions outpaced the morbidity rate for years, & Japan had to implement successive rounds of stimulus to achieve just slow growth. Euroland is going to remain; if only to ensure that Europe remains at peace (not its natural state). The demographics will do its thing, & some members will get evicted - so expect volatility.

WEB did nothing more than take on high risk & get paid for it. The positions typically had an inherently significant & material risk which he simply mitigated through various hedge techniques. The end result was a high return on moderate to low risk - that compounded over time. Slick for his time, but ho-hum today. The hedge techniques were MOS, buy & hold forever, growth vs inflation rate compounding, & taxation assistance. WEB look good because few investors take the time to fully understand how the mitigants work, & how to apply them.

Capital can be returned to you in 2 ways. (1) The company paid you a cash distribution. (2) You sold shares at a high price & bought them back at a low one. The result is the same sized holding with a lower cost base. The difference in cost base is your return of capital. Tax authorities do not recognize gains or losses on ‘wash’ trades as they do not reflect the economic intent or substance of the holding. Most tax authorities define a wash trade as a buy & sell of the same number of shares of XYZ, within a 90 day period. The actual gain or loss from the wash trade is simply added to the cost base. By extension – if your cost base was 10,000 & your wash trade gain is 10,000; your new cost base is zero. Within the volatility text of the posting, wash trades are the norm. To understand the tax assistance, run your own scenarios. We have assumed 50% of the gain or loss is taxable, which is Canadian practice. Tax varies across nationalities & types of account. The rest is classic WEB

Most folks see ‘idea’ as ‘what should I buy and hold, & why’. If the approach, or investment, is good enough for ……. - it is good enough for me. Anything not a liquid stock or bond is ‘too hard’. Arc or rowboat, your ship goes up or down with the tide (volatility)…..Does anyone really think that volatility is likely to decline before Europe finally settles & the US election(s) are over? View ‘idea’ as a technique, & it is not hard to see why folks are reluctant to give away value proposition. The enlightened will recognize that it is actually very good for long-term business - but it is maybe < 5% of the population. Example: Look at tax. Buy 100 XYZ @ 100, sell 100 XYZ @ 150, & pay tax on 5,000 of gain [100*(150-100)]. But .... if I buy back 100 XYZ @ 50 …. I finish the year with the 100 XYZ that I started with + 10,000 in cash [100*(150-50)] + NO TAX to pay. The cash is a tax free return of principal, & l still have my original holding - but my cost base is zero. At a zero cost base, If I ever have to liquidate the 100 XYZ I will pay tax on the entire proceeds. Therefore I need to follow WEB; hold XYZ to death, hold something high quality (or going there), something I can margin against (if I need liquidity), something paying a rising dividend (or likely to), & (maybe) some life insurance to pay the eventual tax bill. If I doubled up on XYZ at 50, the reduction in my tax exposure would offset part of the cost of my additional purchase, & reduce my premium cost. I got to sell XYZ @ 150, & repurchase XYZ @ 50, because I used the market volatility ….. and the more volatile the market the more, & the better, the opportunities that I get.

It would be better to keep them off BS & tighten the footnote disclose. Basel Risk Weighted Assets would rise & most banks would have to increase their capital by around 15% of the offsetting asset. For a bank lending at 20x capital (conservative), & a (conservative) 150bp spread (borrow EFSF, buy sovereign), this could be costly. ie: 100M of operating lease x 15% x 20 = 300M lending reduction. 300M x 150bp = 4.5M/yr of less margin. This operating lease has to be making you AT LEAST 4.5%/yr - just to break even.

In manufacturing some things are pretty constant. Relationships are critical as XYZ small biz is often a spin-off from a bigger player. Something happened way back, & a senior exec bought out a LOB; or a senior exec got pushed out & established XYX small biz as a satellite to their old employer. Key person(s) risk. Technology creates the opportunities. Typically a very large capital investment to buy the machinery, a need for some very skilled expensive & hard to find staff, & not enough usage for the large firm to make its hurdle ROI. So... the investment is outsourced to XYZ small biz which splits the risk over 2 or more major clients (ideally) & a number of other smaller ones. Everybody wins. A material new technology investment may easily run to 15-20M, & is not financeable until a reputable buyer issues a material purchase order. The initial financial risk is on the owners, & often beyond the ability &/or willingness of those owners. Additionally, the buyer is also not going to make that commitment unless they know you. Lots of VC’s around, but very few want to operate (or know how to). Your major asset is that you can replace the owners, not the $ brought to the table. Existing owners also don’t have to grow their business, selling out to a major is always an option ... provided the biz’s scale is large enough.

Three practical experiences. Buy existing, buy with partners, and have a plan to at least triple the biz within 4-5 years. You are spraying gasoline ($, people, talent) on an existing blaze. Plan on day-1 to sell out to a major. Your job is to prove concept & develop the market for that major. Cash on the barrel & little discounting. Maximum 8-12 years from start to finish. If you have a 50 yr working life, don’t put more than 20% of it into any one venture. Life happens, & you are a different person at T+10, than you were at T.

End the year with the same number of shares you started with, & trade down your cost base. The reduction is a tax free return of capital ;)

The nightmare is Greece doing an Iceland, & the precedent spreading to the rest of the PIIGS. A unilateral declaration that Greece is leaving the Eurozone, & suspending all Euro denominated sovereign debt & debt service payments for X years. It is not a default (no CDS payout), existing debt suddenly values at cents as zero coupon debt, Greek banks are nationalized overnight, recapitalized in Drachma, & open up next day with wide open Drachma denominated credit taps. Deliberate inflation & devaluation to drive tourism/exports, & put the country back to work. You have to think this is repeatable in Spain & Portugal, the lands of 50%+ youth unemployment. It also has to be looking attractive to southern Italy (Palermo) with 85%+ youth unemployment. The obvious solution is a new Plaza Accord, & two euro’s within Euroland. A hard currency (Germany, France, Switzerland, etc), a soft currency (PIIGS), a fixed hard/soft euro exchange rate, & all existing trade agreements remaining as is. At best, a minimum 3-5 years to implement. A minimum 3-5 yrs of extreme volatility ..... that N America cannot hope to escape.

GSK,Roche. Nothing like being a legalized drug lord in a high cash flow, low cost biz with lots of governmental protection & guaranteed paying markets for my product.

Having acquired approximately 63.3% of the currently outstanding shares of Fibrek as of May 4, Resolute also announced today that its offer to acquire the remaining shares of Fibrek will NOT be further extended and will expire definitively on May 17. As further described in the offer circular and other ancillary documentation related to the offer (as amended), Resolute intends to carry out a second step transaction to acquire the Fibrek shares not deposited in the offer. By tendering before the final expiry time, remaining Fibrek shareholders will avoid the risks associated with a potentially illiquid market until Resolute can complete the second step transaction for the remaining Fibrek shares, if at all. May 18 we will know what the ABH take-up was; highly likely to be above > 66 2/3%, but may be < 90%. ABH ARE doing a follow-up, but expect the knuckles out once the bid expires - to force the price down. Keep in mind they want the remaining shares as cheap as possible. A 1c bid increment will steal their lunch ;)

At each successive ABH take-up, if you asked for the $1 cash under Option 2 that is what you received. It will continue untill the maximum (per the offer details) cumulative 71.5M of cash has been paid out. It takes roughly 10-15 days to get your cash/ABH shares once your FBK shares are accepted. We hedged our bet, we haven't walked away. 85% of our FBK holding for cash reinvested directly in ABH @ <12.5, once ABH attained 50%+1; we're gambling the remaining 15%. Dependent upon what prevails, we may well double up on FBK before its over. The more ABH squeezes the more we gain, & we gain more if ABH stalls at < 90%. Obviously not for everyone, but a page from the ABH playbook. Best of luck to you.

We tendered most of our FBK for cash & bought ABH directly @ < 12.50; with our remaining position we're willing to gamble. About as conflicted as the rest of the major ABH shareholders ;)

... 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 ...