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Abitibi Recapitalization Proposal


Hoodlum
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I wonder how much Fairfax is involved now?  Going from ~60M shares to potentially almost 600M shares is significant dilution for existing shareholders.  But the lower debt will help them become more competitive.

 

 

 

http://business.theglobeandmail.com/servlet/story/RTGAM.20090313.wabitibi0313/BNStory/Business/home

 

Under the proposal, $2.9-billion of Abitibi-Consolidated notes are to exchanged for $321-million in new notes paying 12 per cent interest and $810-million in 11 per cent notes, along with 86.7 million shares of AbitibiBowater and 230.7 million warrants in three series to buy stock at prices ranging from $1.00 to $1.50 per share.

 

There also is to be a $350-million offering of new notes with a face value of $389-million attached to 222.2 million warrants to buy shares at $1.25 each.

 

The company plans to repay $413-million of 13.75 per cent notes due in 2011.

 

 

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I have been watching this.  Not a good time to be an ABH common shareholder. 

 

FFH's notes entitle them to a portion of the company such as it is.  I hope they can hold onto them for now to collect the interest rather than converting them to equity. 

 

Look for a repeat throughout the industry. 

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The more I think about the pulp and paper business as a whole the more I am certain that we are entering a railroad type of scenario.  The industry is beyond deep value into buggy whip territory.

 

As Peter Lynch says it is darkest before the pitch black! 

 

The same can probably be applied to paper news.  The small paper in Seattle that closed today is an example of what the future holds for most newspapers.  And Toronto has four of them, not including the free dailies. 

 

FFH is a shareholder in a few companies that are potential non-entities.  I happy they have spent more money on PFE, JNJ, GE, WFC, and other big caps than on Torstar, Abitibi, and SFK pulp. 

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Common Al, Buggy whips? 

 

Its certainly not out of the realm of possibility but prior to the crisis demand for paper had been growing YoY at a rate slightly higher than population growth, during a period of strong digitization.  1 economic crisis won't be the death knell of paper, I believe it'll have to wait for the generation born in the 80's and 90's to take charge and change the way things are done. 

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Al, I agree that I do not understand many of the Canadian investments at the prices that were paid... TS, CGS, ABH, IFP.A, SFK, BRK.UN, JAZ.UN, Mega Blocks etc. All are severely under water. Some have lots of debt... Some have pretty poor management... I am just trying to understand what the common theme is and how they are going to pay out over the medium term (i.e. 5 to 10 years). I am not trying to be an armchair quarterback... FFH has made many, many more great decisions over the past two years. Unfortunately, the above names have done quite a job on Northbridge performance the past 12 months. 

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Oldye, Put it this way.  This space has caused me nothing but grief.  I am staying clear of anything with Pulp or paper in its name.  So maybe it is time to invest, or maybe not.

 

Sfk.un has to be one of my biggest all time losers.  Bought for all the right reasons too.  I even understood the business.  Is it a case of bad luck, bad timing, or a really bad business (the pulp business as a whole).  I held the company through the top of the price cycle and lost money.  I hold it through the dropping of the Canadian dollar and lost money.  The drop in energy prices and lost money.  FFH (NB) has lost far more than I have, it just hurts less.  So, I will leave the too hard pile for them since they can take advantage of diversification. 

 

Lumber will bounce back when construction improves. 

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http://business.theglobeandmail.com/servlet/story/RTGAM.20090319.wabitibi19/BNStory/Business/home

 

In for a penny, in for a pound.  FFH is investing another 180 Million. 

 

 

Wow!  I wonder why Prem thinks this is a good idea?  I wonder whether he is just stubbornly refusing to admit defeat?  $180m is another $10/share.  Surely there must be better opportunities out there for a large block of money like that?

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They've lent them over 400 million @ around 18%, by now we should take it that they know where their circle of competence is and are likely operating well within it.  I find it funny that these so called "lenders" from the article aren't actually named, ask why would bond holders want the so called fire sale? 

Sounds like someone might be trying to light a match.

 

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At this point I think FFH is expecting to be a major owner of a debt free ABH when all the conversions are done, and the debt is eliminated.  The company may well be privatized and equity holders wiped out.  It is sure trading as if that were the case.  Probably smart to get rid of outstanding shares. 

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http://www.glgroup.com/News/What-if-AbitibiBowater-Is-Forced-Into-Bankruptcy--36012.html

 

"It is by no means certain that AbitibiBowater will be forced into the bankruptcy courts. However, if something of that sort does occur, creditors will find that the company operates a number of assets which, if stripped of debt, would compete quite effectively in their markets."

 

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I still firmly believe that Prem has made a big mistake by investing in these guys. They have been extremely slow at curtailing their production during previous downturns and have piled up an unsustainable amount of debt and other liabilities. He will likely end up with a large stake in the company (if things go right with secured debt holders), but the average cost per share will be heavy relative to what it could have been. New management seems better, but the legacy is heavy.

 

My money is on Catalyst Paper. The management is top notch. They have no debt due until 2011 other than a small non-recourse amount due this year. They generate free cash flow and that number is growing fast. They have renegotiated with their union and their relationship seems way better than the one at Abitibi. Their costs are coming down and management seems relentless about it.

 

A very different situation with ABH if you ask me. Yet, the share price has been decimated offering insane potential. If you are interested in the sector, please compare the two before investing. By the way, Third Avenue owns around 38% of CTL which they acquired in the public market.

 

Cardboard

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Hi Cardboard, Of all the FFH investments I know about I feel ABH has the highest potential for a complete wipeout, and a minimum potential for any return at all.  If FFH has to convert their debentures to keep ABH afloat then they lose the high interest payments.  If not, it will at least break even in 5 years or so. 

 

This really bothers me because there is so much out there at such low prices that is so much safer.  The numbers are getting staggering - 530 M by my count so far.  That is their biggest non-insurance investment other than Munis - that to me is scary.  I truly hope I am wrong but this investment mistake is beginning to remind me of certain textile factories often discussed by Buffett.

 

I stick by my guns that newsprint is a really crappy business going through a permanent secular change that will leave 20-30% of the demand there once was.  I think paper in general is going through a permanent secular downturn of less severity.  In every part of my life we are using less and less paper all the time.  I am sure there is a bottom at some point but I dont know when it will be reached.  At work, where we used to give out binders with 100 pages for every meeting, and training program, there is now two sheets of paper and a little jump drive with everything else.  And my employer is one of the biggest employers in Canada. 

 

My father in law commented last weekend how thin the Toronto Sun, and Toronto Star, were getting.  I simply will not invest in this sector on my own no matter how cheap it is, especially when everything else is cheap.  Its just not logical.

 

Let the flames proceed!

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Uccmal

 

I have to agree with you. Viking posted earlier that he couldn't understand FFH's investment in companies like TS, CGS, ABH, IFP.A, SFK, BRK.UN, JAZ.UN or Mega Blocks. Frankly neither can I. Why aren't they buying into companies like LUK instead or even more JNJ? I think the results five years from now would favor LUK over any of the above. I know FFH has done very well over the longterm (19+%) in equities but still I have to wonder. There seems to be better, safer opportunities.......

 

cheers

Zorro

 

 

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Well, correct me if I'm wrong, but it's too soon to conclude something about the Abitibi investment.

 

I've always prefered the good quality businesses, because time is the friend of them and the enemy of the mediocre. I like to have time on my side.

 

That being said, I understand that there might be good liquidation value investment, hidden assets, sum of the parts, etc. but that's not where I try to hit homeruns.

 

Look at FFH overall scorecard on the investment side. It's terrific. So I trust them on their homerun zone.

 

I don't know any hockey player that never had a bad game. If a hockey player play a bad game, he analyse his mistakes, put his skates and try to do better next time.

 

That being said, correct me if I'm wrong, but to me it's too soon to say that ABH has been a "bad game".

 

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Hi Partner,  Obviously no one knows how this will end up.  So I will state my concerns differenty:

 

Buying JNJ, LUK, PFE, etc. assures us of at least an average 15% average annual return going forward 5 years with limited downside from the present prices. 

 

ABH offers no downside protection that I can determine with the present debt levels.  With the present levels of debt they will be unlikely to remain a going concern.  This means at least part of FFHs 530 Million investment (US) will have to be converted.  This will give them shares in a company that has low grade forest assets, some other more valuable assets in hydro and utilities, and a number of p&p mills of dubious value.  They will sacrifice large interest payments to own a portion of an operation that has a low margin of safety, if any, IMO.  The restructured ABH will still have a debt that is probably larger than their actual assets.  I have read several times about the value of the Berkshire Mills and properties when the company was sold and auctioned off (the property value was never disclosed since it is still held by BH Realty).  I have no reason to believe the assets of ABH, other than hydro plants, have any more value than this. 

 

Could I be wrong.  Very possibly... but this one is still large enough to make me nervous.  If it was a small investment like sfk.un I probably wouldn't care much.  But I personally think that FFH is miscalculating the effect of secular changes with a number of their Canadian Investments outlined above by Viking. 

 

I fully understand the process of G&D investing but I also understand that there is a time to hit homeruns, such as Buffett did in the 1970s. 

 

Anyway, still a shareholder.   

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Without knowing their rationale for buying the likes of ABH, CGS, etc, it may be unfair for us to second guess their decisions. One thing we know for sure is that HWIC are not dumb investors and they must have had their reasons.

 

One possibility I've considered is that they felt that they wanted to balance out their very bearish portfolio positioning last year with some stocks that would have done very well if the economy had turned out to be less depressed than they had predicted - a form of insurance, if you like.

 

Pure speculation on my part, though.

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Guest ericopoly

but this one is still large enough to make me nervous.

 

Pretty sure the initial $400+m was already substantially written down by end of Q4 08.

 

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One possibility I've considered is that they felt that they wanted to balance out their very bearish portfolio positioning last year with some stocks that would have done very well if the economy had turned out to be less depressed than they had predicted - a form of insurance, if you like.

 

Or maybe it can be seen as an inflation hedge - in case inflation should run wild some time down the road

 

Cheers

 

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Or maybe it can be seen as an inflation hedge - in case inflation should run wild some time down the road

 

Not sure about that. I don't see ABH as an inflation hedge. Wide moat businesses that can pass the cost increases to their customers are more efficient as inflation hedges in my opinion. A business that has overcapacity in it's industry and secular declining demand don't basicaly have time on it's side.

 

That being said, that's just my 2 cents opinion and that's just my opinion for my personal investments.

 

I don't second guess Fairfax neither. When I have a Babe Ruth kind of investor, I give him a bat and watch the show. In the end, I'll see if ABH has been either a homerun, a 3 strikes out or a base hit. And even if it's a 3 strikes out one, I will judge Fairfax on overall batting average, not just on one presence on the home plate (500 millions is significant, but it's not the end of the world).

 

That's just my opinion respectfuly submitted,

 

Cheers!

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Well Partner, respectfully, Is there no reason we cannot intelligently analyze or complain about the investment?  :)

 

Above, I should have said: I am an FFH shareholder not an ABH shareholder.  In fact, I am deliberately staying clear of FFH G&D type investments which includes Vikings entire list so I am not double investing.

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