SharperDingaan

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

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