SharperDingaan

Merry Xmas to all! SD

We used the average for the last 15 quarters from Q3-2011 through Q1-2008. Timeline covers both the peak & trough of the cycle, & starts 1 yr after the RBK mills came on board to minimize any acquisition disruption from those mills. It should approximate the average run-rate for FBK over a cycle. Using Q3/2011 #’s: S&A (3681)/Revenue (138267) = 2.66%. Delivery (10320)/Revenue (138267) = 7.46%. Total S&A + Delivery for Q3/2011 = 10.12%. The major variable affecting S&A & delivery is total revenue; as most of the expense is fixed cost. Q3/2009 & prior - delivery cost were part of S&A; affects attribution, but not the total S&A & Delivery cost as a % of revenue. We would expect that synergy’s would reduce the fixed cost embedded in S&A & Delivery. Not concerned re FBK’s 2013 cutting rights as we don’t expect FBK to be independent. If they are part of ABH they will not be squeezed (all else equal). Same thing if FBK is privatized & resold to another major. They are going to get the wood. Merry Xmas. SD

Agreed re the disparity on the plant valuations. On a purely theoretical basis the lowest price should be the Q3-2011 BV, as after netting - the equity consists almost entirely of the mill BV's, & those BV's are impairment tested under IFRS every year. What is being missed here is 1) that in relative terms FBK is a lot better than ABH (hence Steelhead), & 2) what the ABH ratios look like with a +/- 350M equity issue. Should be interesting .... SD

lessthaniv: Keep in mind that ABH may well not have the practical ability. (1) FBK was deliberately put into play by FFH - & without the FFH shares in lock-up there would be no bid. If ABH is not seen to pay fair value for FBK they screw their biggest shareholder (s?) out of a significant number of additional ABH shares, & those shareholders have the shares to put ABH itself into play. (2) ABH is also not competing against itself - it is competing to get the largest possible equity issue under the best possible terms. ABH needs the D/E improvement to build up its war chest. (3) If ABH could force a vote, it would allready have done so. We rather suspect that if ABH forces a vote, & the minority votes no - the shares come out of lock-up. We also suspect that whatever shares the lock-up group has bought post announcement; are not subject to lock-up - & will be excluded from the vote. Minority shareholders will decide the outcome (friendly), but the lock-up group will retain the abiity to force a privatization should they so wish (fairness). Elegance. Nnejad: Plot the quarterly pulp price & capacity utilization for FBK since the ABH spin-off. The median NBSK price is 776-800/ton at 98-99% utilization. The median RBK price is 731-740/ton at 98% utilization. Today's pulp pricing level is the norm under which these mills operate. ABH controls the major NBSK margin cost (woodchips), & 33-50% of the RBK has no margin risk as it is sold under cost+. The ABH delivery & S&A costs should also be far lower than the 7.6% of revenue that FBK currently pays ... & all before the additional synergies that ABH is expected to extract. .... Overall we see no real strategic reason why the acquisition would not go ahead, baring a price & currency change. But it does seem that the advisors are a couple of steps behind FFH's elegance. SD

Keep in mind that Prem is talking the long view - & doing so for a reason. A cynic would note that ABH might well be floating the idea of swapping the roughly 120M+ of cash in this deal (71M in the offer + 50M from FBH credit lines) for ABH stock. Because if the deal settled at $2+/share (or higher), ABH would get an equity issue of 260M+ & materially improve its D/E ratio. Given that it is highly unlikely that ABH could do an equity issue for 260M+ of cash in todays market - for the same number of shares - there is a need to persuade FBK shareholders as to the merits of ABH stock. A cynic might also highlight what junk TODAY'S ABH share currency actually is - & that this deal is being done TODAY. We may well all agree that over the long term ABH should be worth a lot more, but TODAY a FBK shareholder is being asked to swap a stronger credit for a much weaker one. When you want your counterparty to re-assign to a lower credit, you have to pay for the priviledge. A cynic might also note that in a commodity downturn FBK is not only the lower financial risk, but it also has the cash to buy back its own shares. Furthermore, Prem & Coy have so many shares of FBK, their only real exit is to take FBK private. There is a lot more market risk to holding ABH than there is to holding FBK, & for a FBK shareholder to take on that risk - you have to pay for the priviledge. We would actually prefer to take all ABH stock, & agree with Prem that we would expect the ABH holding to double its value within roughly 1.5-2 yrs. Most others would probably take a similar view - but ABH is going to have to add something for FBK improving their Balance Sheet ;) SD

Quebec: Keep in mind that there will be a range of values. The lower values will be based on liquidation comparables, the mid & upper values will reflect going concern comparables which will include the power generation, labour peace, & a premium for the lower contribution margin risk from the cost plus contracts. Most would expect that the focus will be almost entirely on the strength, trend, & quality of the forward EBITA - & what multiple you should pay for that quality & stability. The (synergy) negotiation will be over the cost of woodchips (ABH controlled), & improved efficiencies (ABH determined) post sale. Material $ involved. The (assumed) refinancing penalty is also not a obstruction (deduct penalty from the sale price & get the PV of the future interest saving over the remaining term of the debt). It does not mean that ABH will want to pay; but it does mean that it will be difficult for ABH to materially disagree, especially as ABH is part paying with stock - ABH is not Cascades or Canfor, & neither of those two has the capital & debt restrictions that ABH has. Every day horse trading at this point. SD

Quick & dirty .... Prior to the rights offering: 17,443,300 @4.50 [assumed average] ($78,494,850)+7,635,495 @1.01 ($7,711,849) + 8,549,506 @ 1.01 ($8,635,001). Total gross investment of approx $95,241,700. Bid itself at time of launch: Assume 1 in every 3 shares of the missing % ownership. 8,598,233 @ 1.01 ($8,684,215). Total net investment of roughly $100,000,000 (gross of $103,925,915 less $3,925,915 fees/distributions received over the years. Ave cost of $2.37. Bid since launch: Assume 67% collective ownership with 1 in every 3 shares of the additional % 9,225.666 @1.01 ($9,317,923). Total net investment of 109,317,923. Ave cost of $2.12. Assume the max investment is approx $110M, & add an additional $1.5M of aggregate capital recovery, with all the funds invested at 1.01/share. Additional 2,160,472 shares. All-in average cost of +/- $2.05 The wild cards are how 1) many of these additional shares is FFH buying? ; if FFH is taking > 1/3 of them, their cost is lower 2) how much of the arbitraging around the rights issue was FFH responsible for?; if they did around 16M shares at an average spread of $0.45 they reduced their cost by around $7.2M. Conclusion: 1) At about $2.05-$2.12 FFH gets out without a loss, 2) It is about double the intial price, 3) It is around the same number that many others are coming up with. SD

Suspect that it is in the $1-2 range. Closer to $1 end. Keep in mind that FFH would have doubled down with the $1.01 rights offer, & added materially again at the $.80 range. Then .... given that they got a 400K fee ? for backstopping the issue (top of the head), & probably arbitraged some of their position at the same time (as we did) - those 80c shares were probably at minimal net cost. Double down, then add 1M+ shares at no cost. SD

Very nice to read .... We have an authoratative independent assessment that the bid price is inadequate, a systematic/open process by which to establish the true value for FBK, & an implied agreement to sell if the price is fair. Standard defence, they have elected to 'fight the ship', & focused the dispute on the price - not the merits of the deal itself. They can go the knock-down gutter route if needs be, but it is not in anyones interest. The simple solution is to pay up against independent valuation assessments - & Prem has to be more than happy with the FBK response. FFH cannot be in the same room, FFH has too many shares to get out without the deal, & FFH will now almost certainly get out at a gain over their average cost. Elegant. SD

Same day sell from taxable accounts & buy from the tax-free/tax-deferred accounts < Dec-31. Sell from the tax-free/tax-deferred accounts by the end of the 2nd week in Jan. Repurchase in the taxable account > Jan-31. ;) The tax-free/tax-deferred accounts pick up the year-end tax selling gain. The taxman gives you a refund on your taxable account. You reset your cost-base without wash-trading interference. SD

tiedtestedand: Under the conditions of the offer FBK cannot pay a distribution, but there is nothing to prevent them buying in their stock as it does not have an adverse effect. Instead of paying out 50M in a one-time distribution (using cash from the credit lines), they could use the 50M instead to buy in their shares & still keep the offer. Because the offer remains live they can use the offers enterprize valuation to price the shares. Assuming a $50M buyback & $1/share (the cash price/share being offered) they would buy in 50M shares ... But as the offers enterprize value of 130M did not change, the remaining 80M shares must value at a higher price - specifically $1.63 [80M shares x 1.63 = 130M EV]. Furthermore it would have to be a proportionate buy-in so that all shareholders benefit equally. ABH/Prem/Pabrai would still have 67%, but now they only need an additional 18.4M of the remaining shares to get up to the 90% required to force privatization. To go private you have to offer minority shareholders a premium over the market price, & this live ABH offer has established that 40% is the relevant premium applicable to FBK. The base market price resets at $1.63 as 3 buyers are trying to acquire a significant number of additional shares, & would continue to do so up to a price of about $2.28 (1.63+40% privatization premium). ABH/Prem/Pabrai would need roughly 26.4M additional shares. Assuming an average cost of 1.96 [(1.63+2.28)/2], an additional 52M. Against which they got 67% (33.5M) of the 50M that FBK used to buy its stock back. A net incremental cost of 18.5M [18.5=50-33.5] that falls the more of its stock that FBK can buy in. And the more FBK can buy in the fewer additional shares ABH/Prem/Pabrai need to buy. ABH/Prem/Pabrai can't walk away as the conditions were not breached, and they can't hinder FBK buying in everything it can - because it helps them. Calls the bluff. FFHWatcher: We are a little biased, but we put forth the following: 1) In the early days we advocated taking the offer of $1.00/share per the offer, & FBK paying out a conditional 75M (+/- $.58) distribution which thet weren't restained from doing. Total of +/- $1.58 2) The possibility of Quebec government involvement was raised & it came out to +/- $1.63 3) Adverse press announcements emerged, & we advocated a 10-20% face saving bump (not uncommon) & 75M of conditional distribution. Total of +/- 1.15 + .58 to get to about $1.73 4) More direct adverse comment emerged & the suggestion of .1 ABH (1.55) + 50-75M (+/- .48) in distribution. Total of $2.03 5) We advocated that price was the issue, not the deal itself, & that we wanted to come out at around 2x the exchange rate. Total of +/- $2.04 to $2.18 depending on the ABH share price. 6) Then today ... a path that could get us to +/- $2.28 without a cash distribution. It is a negotiation - & a lot of external & smart people are pretty much independently concurring. The price has also moved up 44% from $1.58 to $2.28 which is also what you would expect. As owners - we would also expect our strategic committee to be reaching similar/better conclusions than we are. Looking forward to hearing what our company has to say! SD

Not a surprize, but the condition speaks volumes: "Fibrek not having implemented or approved any issuance of shares or other securities or any other transaction, acquisition, disposition, capital expenditure or distribution to its shareholders outside the ordinary course of business, and the absence of occurrence or existence of any material adverse effect or material adverse change" To negate the deal all FBK has to do is breach a condition (ie: do a distribution) Just to ensure that ALL avenues get considered ... ASSUME that Prem/Pabrai already have the 67% (87.1M shares). Then ASSUME that FBK makes an offer for 50M shares (not a breach of condition as it is not an adverse effect) at $1/share - the market price that the ABH tender has established. 130M of established value over the now 80M shares, produces a market price of $1.63. To get out Prem/Pabrai would effectively have to take FBK private - & then resell FBK to an industry player (assume ABH). At the 40% premium that the ABH offer has established, a market price of around $2.28. .... now notice how we keep coming back to around the $2.00/share mark. SD

In the small cap world you have to be able to tolerate extreme volatility & be able to capitalize on it. As the impact is worse the less diversified you are, you really need at least 2-3 small caps offset against a significant T-Bill holding. A 40% valuation drop is not unusual - & it may be for no other reason that your favourite stock is just unloved, hence there is no liquidity. Similarly a 50% jump simply because of a change in the 'story' - when the fundamentals haven't moved. Hence the reason for the T-Bills. SD

Dwy000: Agreed re the credit risk inclusion in Basel II & III, but they were baby steps. The gaming around credit related regulatory capital needs regulation, & it needs to go the risk drivers. You mentioned that not all sovereign risk is the same, & that a bankrupt bank shouldn't be able to write-up its equity. We would add that bad asset repo's over period ends should be excluded, most securitizations should be treated as recourse, and all (OTC & market) net derivative exposure should carry a capital requirement based on the counterparty's capital ratio (published monthly by Basel). If you did this now, it would instantly shut down Euroland. You would also kneecap the unregulated hedge fund industry - as any time the hedge fund industry is a counterparty, a Basel regulated bank would have to hold capital against it. Were Basel to make the capital requirement on a hedge fund counterparty higher than a bank, Basel would force the unregulated hedge fund industry into the regulated bank world. Big, bad, & ugly - but largely enevitable. Basel is a phazed-in approach for a reason. Protagonists may be able to resist change today, but at some point their bargaining power will weaken - & the noose will tighten. Basel IV as version 1, version 2, etc. SD

Keep in mind that Basel III is in the pipe & that it will require capital against operational risks. Most would also suggest that there may well be a Basel IV taking capital for credit risk, & possibly a Basel V laying out the composition of the capital cushion against a VaR model breakdown. In short, significant & material additional capital requirements for at least the next 10 yrs, & widespread industry consolidation. Once its done - global banks will be super stable, their back-office operations systems will be state-of-the-art, & they will all have material incentive to keep their systems current (no legacy systems). Profitability may modestly improve but the return on capital will be rock-bottom. To get there ..... the banks will need to overcome years of underinvestment at the same time they need to put up additional capital. Significant & material dilution risk. Long term you might be willing to pay a higher multiple, but only on much lower earnings. If you did it today, you'd also discount by maybe 50% in anticipation of future dilution over the next 10 yrs or so. Put bluntly you're paying for brand name - not the earnings. Not the conventional wisdom .... Numbers example: Assume you have a $3000 portfolio, BAC is $5, you compound at 15%, have a 10yr horizon, & on average you weight 33% of your portfolio to banks. As the portfolio doubles every 5yrs, your $1000 allocation should be $4000 at the end of yr 10. Of the expected $4000, you might invest just 15% ($600) in BAC today, & the remaining $3400 over the next 10 yrs as dilution presents itself. SD

You might want to have a plan for the unexpected ... as a certain party used to be a very successfull bootlegger as a kid - pulling in a lot of cash every week when a $ was actually worth something. The parents had a heart attack when they found out! The solution was to allow the business to continue, with a CA grandparent as banker, & 35% revenue confiscation as taxation - with the money going to a local charity every quarter. Lot of bitching at the time, & no amount of fudging the numbers worked, but the lessons learnt were priceless. Apparently, the party referred to was a very slow learner! Beware of what you wish for. SD

We would expect FBK to put out a slew of announcements by late this week/early next week. Most likely to accept some kind of improved offer &/or to announce a conditional cash dividend. Mr Market's trading > $1.00 over the last few days, & on significant volume, would seem to agree. They've had a panel of experts for +/- 2 weeks to work out the details Frankly we think the industry needs the bare knuckle operators, & it is highly likely that all the FBK plants would be more profitable under the approach. For deal purposes the synergies should be higher (bigger pie). The reality is that if ABH backs out, FFH is going to have to take the instititutional stock tendered at $1.00/share, end up with majority ownership, & essentially have to make an offer to take FBK private. ABH also cannot prevent FBK from declaring a conditional dividend, & FFH cannot exit FBK as its holding is too big. Everybody needs the deal. Given that your first loss is your smallest loss, it is in the FFH interest to be gracious. SD

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