Resolute Forest Products Commences Takeover bid of Fibrek

[alertmeipp]

Whatever .. I just want this to be done quick. Lots of opportunities cost on holding this one ever since the beginning.

 

The valuation comes lower than I thought. Anyone knows what're include/exclude?

[finetrader]

From Berkshire Chairman's Letter 1988:

^{To evaluate arbitrage situations you must answer four}

^{questions: (1) How likely is it that the promised event will}

^{indeed occur? (2) How long will your money be tied up? (3) What}

^{chance is there that something still better will transpire - a}

^{competing takeover bid, for example? and (4) What will happen if}

^{the event does not take place because of anti-trust action,}

^{financing glitches, etc.?}

 

I forgot to ask the 2nd question in my arbitrage analysis in FBK's case and the answer is : most probably, not very long

 

 

[Guest Quebec]

Canaccord valuation now available on Sedar. Little incremental value attributed to the new likely PPA.

[Guest Quebec]

What has to happen is a decision friday by the Bureau that declares its an insider bid and breaks the hard lockup which deprives smaller shareholders from getting fair and full value because of large holders accruing it all to them. Then an offer from a white knight can come out and be voted on its merits. Bidders can make their own assessment of value which i am sure is above the fomal evaluation range. See std96 basic numbers and it comes out a much better case. Bidders can see it too.

[triedtestedand]

Based on the 3 valuation methodologies, it looks like they went for roughly the lowest high and the highest low to derive the recommended valuation range.

      - The DCF methodology yielded the highest low (and high).

      - The Comparable Company analysis based it's EV/EBITDA comparisons primarily against those of Canfor and Mercer, and implies a ~5x multiple

      - The Precedent Transaction analysis derived an estimate of $550 to $625/tonne as value of NBSK mill, and $50 to $125/tonne range for the two RBK mills (but with no real comparable transaction ... they excluded FBK's purchase of the mills a few year's back.)

 

For all three, a "net debt" of ~$118M is assumed (a figure that apparently was provided by management) ... But shouldn't that # arguably be lower?  The $118M takes a big bite out of all three valuations.  {At Sept. 30th, accounts payable roughly equalled accounts receivables ... AND long-term debt roughly equalled inventories ... so in my mind, net debt is more a wash (save for the $26M pension liability).}

 

It looks like, until it is signed, they value the 33MW power contract at 25% to 50% of it's potential ... and that such translates to a value of $.18/share to $.36/share ... so if (when?!) it is signed it's valuation (w/sh)ould go to $.64/share ... which just so happens to correlate w SD's valuation (SD ... maybe they should have paid you the $900K for the valuation, eh?).

 

The US operations have tax losses of ~$98M that would be lost in a transaction, while the Canadian operations have tax losses of $71M that could be used.

 

 

Anyway ... any bids that are in, are in ... and the hearings are over today ... so we shall see soon.

 

 

[cwericb]

"The US operations have tax losses of ~$98M that would be lost in a transaction"

Would that still be the case if the US mills were sold to a US company?

[st96dgx8]

Based on the 3 valuation methodologies, it looks like they went for roughly the lowest high and the highest low to derive the recommended valuation range.

      - The DCF methodology yielded the highest low (and high).

      - The Comparable Company analysis based it's EV/EBITDA comparisons primarily against those of Canfor and Mercer, and implies a ~5x multiple

      - The Precedent Transaction analysis derived an estimate of $550 to $625/tonne as value of NBSK mill, and $50 to $125/tonne range for the two RBK mills (but with no real comparable transaction ... they excluded FBK's purchase of the mills a few year's back.)

 

For all three, a "net debt" of ~$118M is assumed (a figure that apparently was provided by management) ... But shouldn't that # arguably be lower?  The $118M takes a big bite out of all three valuations.  {At Sept. 30th, accounts payable roughly equalled accounts receivables ... AND long-term debt roughly equalled inventories ... so in my mind, net debt is more a wash (save for the $26M pension liability).}

 

It looks like, until it is signed, they value the 33MW power contract at 25% to 50% of it's potential ... and that such translates to a value of $.18/share to $.36/share ... so if (when?!) it is signed it's valuation (w/sh)ould go to $.64/share ... which just so happens to correlate w SD's valuation (SD ... maybe they should have paid you the $900K for the valuation, eh?).

 

The US operations have tax losses of ~$98M that would be lost in a transaction, while the Canadian operations have tax losses of $71M that could be used.

 

 

Anyway ... any bids that are in, are in ... and the hearings are over today ... so we shall see soon.

 

I would also note that:

1) Canaccord's DCF valuation used a dubious 6.4% size premium to arrive at a cost of equity of 13.6%!!

2) Canaccord uses a 15 year DCF for the potential new $16 mm PPA with Hydroquebec, when in fact Hydro is accepting proposals  of up to 25 years.

3) The RBK mills are valued at ~2X the 5 yr avg historical EBITDA! Factor in the new $7 million take or pay contract and the implied Canaccord RBK mill "fair value" is closer to 1X EBITDA!

 

You can always count on the sell side/investment banking lemmings to alter their assumptions to bring their "fair value" estimate close to the current market price.

 

With regards to the $16 million PPA--it looks like time is not in our favor. The new PPA is unlikely to be signed until mid-March at the earliest. Unfortunately, the Quebec regulators may not allow the rights plans to remain in effect for much longer and therefore mgmt may be forced to accept the highest offer (which in all likelihood is unlikely to reflect the full NPV of the $16 million/year cash flow.) Note to Quebec residents: Please express your concerns with the Bureau de décision et de révision or  the Autorité des marchés financiers within the next 24 hours. I'm in the US so they might not consider my complaint. The 46% hard lock-up was entered into before the largest shareholders knew about the $16 million PPA contract. This is potentially a very material change and minority/majority  shareholders must not be rushed in to a sale. 

 

I am looking into legal options... Is it fair to rush the sale of the company when there could be a contract that could nearly double the fair value of the equity? $16 million in free cash flow discounted for 25 years at 10%, with a 2% inflation escalator results in an NPV of $119 mm or $0.91 per share. (A spin-off of the green-energy cash flows in a partnerhip structure could garner a lower discount rate of 8%, that values this cash flow stream at $144 mm or $1.11 per share.)  Why not keep the poison pill for another month or so to see if this contract comes to fruition?

 

Alternatively, I would urge shareholders to pressure mgmt to negotiate for Contingent Value Rights with any sale of the company or the St Felicien NBSK mill that assigns little or no value to a potential $16 million cash flow contact . CVRs are a type of right given to shareholders of an acquired company (or a company facing major restructuring) that ensures they receive additional benefit if a specified event occurs. A contingent value right is similar to an option because it often has an expiration date that relates to the time the contingent event must occur.

 

 

[alertmeipp]

Why would Prem agree to it in the first place? He would obviously get a steal if somehow he gets this at 1 buck.

[SharperDingaan]

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

 

[Alekbaylee]

Not very good results for ABH...

 

http://www.winnipegfreepress.com/business/breakingnews/resolute-forest-posts-6-million-fourth-quarter-loss-on-one-time-items-139006939.html

[finetrader]

Why would Prem agree to it in the first place? He would obviously get a steal if somehow he gets this at 1 buck

 

Maybe he vote against a competing higher offer, but I really doubt that minority shareholders will vote for ABH offer at this point. So we would be in a situation where no offers get appproved.. But the way I see it, a higher offer from ABH is likely to happen. So to resume, lots of probabilities FBK get acquired at a higher  price  than 1.00$ by whoever want it the most.

 

[triedtestedand]

" ... but I really doubt that minority shareholders will vote for ABH offer at this point."

 

Finetrader -> Given value of the PPA, you'd need to seriously want to liquidate to do otherwise.

[Uccmal]

CFX just reported weak earnings.  They have not started to produce power yet and are well ahead of fbk in that regard.  They reduced the dividend from 0.40 to 0.25 for now. 

 

Fbk is in a far worse situation than cfx.  That is why FFH, Pabrai, et al, are looking to get out of this.  I say it goes for $1.00, not a penny more in the end.  Fbk is at least a year from producing power, pulp prices are in the dumper, management was going to blow cash on a dubious acquisition.  What more can I say....

 

Does anyone really believe that anyone wants this other than ABH?  Getting ABH shares is no real bargain either.

[Cardboard]

I think that there could be other interested parties as they said they received "proposals". We shall know very soon since bidding closed Friday at 5 pm and Abitibi's offer currently expires Monday next week at 5 pm.

 

Then the fair valuation came out on Monday with a range of $1.25 to $1.45. Which is not too far from ABH's bid and likely right around where other parties might have bid to just beat ABH. That is the support the board needed to make shareholders accept an offer at what looks like opportunistic prices based on very recent history.

 

Every additional dime costs Abitibi around $13 million, but considering the cost involved in these transactions and the fact that they are paying for the shares and assuming the debt and pension of FBK, it is probably worth paying a little more just to close the deal. The only way that I see the current ABH bid succeeding is that no other offer is made and that shareholders currently unwilling to tender start to panic. I would say that the odds of that are low since very few of the shares needed have been tendered so far, management will likely continue to reject the offer and shareholders believe the offer is too low and see the power deals down the road.

 

As you pointed out, risk and cyclicality of this business is simply too large for companies to pay some of the valuations suggested on this board. The buyer has to get something in return for forking over so many dollars. The power deals might be necessary to entice buyers into buying a firm that may lose money or break-even overall for the next 2 to 3 years on its pulp business. So I would say that it will get settle in the fair value range unless ABH wants to outbid an offer made and accepted by management in that range. A bidding war is the only way here to make a lot of money, at least short term.

 

Cardboard

[SharperDingaan]

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

 

[finetrader]

I just had an idea while reading ABH latest report. Maybe Prem should start managing ABH's pension fund that is almost 1.5B$ in the hole and that will probably require a sizable amount of cash flow to be directed to it in years to come.

[newbee]

Rights plan/poison bill is cancelled by the bureau. Not a good news for fbk management

 

http://custom.fmg.dowjones.com/custom/tdameritrade-com/html-story.asp?guid={2aaef310-979a-4ed8-8588-d135e25912c8}

 

Resolute Announces that Fibrek's Shareholder Rights Plan has been Cease Traded

Last update: 2/9/2012 6:42:00 PM

MONTREAL, Feb. 9, 2012 /PRNewswire via COMTEX/ -- AbitibiBowater Inc., doing business as Resolute Forest Products ("Resolute") (ABH)(CA:ABH), today announced that the Bureau de décision et de révision (Québec) has ordered that all rights and securities issued or issuable under the shareholder rights plan (the "Rights Plan") of Fibrek Inc. (CA:FBK) ("Fibrek") be cease traded effective as of 3:00 p.m. (Eastern Standard Time) on February 13, 2012.

The offer to acquire all of the issued and outstanding shares of Fibrek made by Resolute, together with RFP Acquisition Inc., a wholly-owned subsidiary, is more fully described in the offer circular and other ancillary documentation that Resolute filed on December 15, 2011, on the Canadian Securities Administrators' website ("SEDAR"), as varied and extended. The offer will expire at 5:00 p.m. (Eastern Standard Time) on February 13, 2012, unless it is extended or withdrawn by Resolute. Resolute continues to work diligently with a view to obtaining all required approvals from the Canadian regulatory authorities.

[alertmeipp]

the new is non event - the outcome won't change. ABH won't get enough vote.

[finetrader]

here is the Mercer offer

 

http://www.theglobeandmail.com/globe-investor/news-sources/?data-ipsquote-timestamp=20120210&archive=cnw&slug=C3141

 

Offer price of $1.30 per Fibrek Inc. ("Fibrek") common share payable in cash, Mercer International Inc. ("Mercer") common stock or a combination of cash and Mercer common stock (subject to proration).

The offer represents an 81% premium over the closing price the day before the announcement of the unsolicited bid of AbitibiBowater Inc. (doing business as Resolute Forest Products) ("Abitibi") and a 30% premium over Abitibi's unsolicited bid.

Fibrek's Board of Directors has unanimously determined that it would be in the best interests of Fibrek and its shareholders to support the Mercer Offer and recommends that shareholders tender their common shares to the Mercer Offer

[Alekbaylee]

Still below my expectations. Can't believe it's being sold for less than $1.60, but then...

[SharperDingaan]

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

[Cardboard]

- $8.5 M breakup fee may really hurt ABH improve its bid much past $1.30. Had to be expected, but it just makes it tougher.

 

- If this offer with Mercer does not go through or there is no higher bid, then Mercer will be holding 32 million shares bought at $1. Seems like a poison pill to me since if Fairfax and others reject Mercer then they will have to deal with one large shareholder.

 

Smells to me. Spinning off power assets as some have suggested and selling the other assets could have created much more value. They have not been very creative here. It seems now that the only viable option is for ABH to match or just slightly exceed $1.30. They could argue that ABH is more liquid that MRI.U for Canadian investors and with the support of major shareholders should get enough votes to pass.

 

Cardboard

[SharperDingaan]

(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

[Alekbaylee]

Somebody thinks it's worth more than $1.30.

$1.34 right now...

 

ABH is punished for being too greedy.

[Cardboard]

"+ the 20% of the incremental gain on ABH's improved offer. "

 

Only if the improved offer by ABH or someone else is not approved by Fibrek: "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."

 

I am afraid that ABH may walk here with that thing. I think it is Fibrek's management that is being greedy with this condition. ABH is forced to make a superior offer, how superior is dependent on Fibrek's management judgement and bad blood looks like is there now. If they just try to match, they may garner enough votes, but then will have to pay an additional amount or the difference between the new bid and $1 for the 32 M additional shares.

 

Not sure that this thing is legal by the way. I have not seen this done before, so I have a feeling that this may go to Court. I am also puzzled by the need for Fibrek to get more cash on hand. It may just be fake explanations to justify this poison pill or it may not be. If not, their financial condition is much weaker than we thought.

 

Cardboard

 

Cardboard