Resolute Forest Products Commences Takeover bid of Fibrek

[SharperDingaan]

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

 

[SharperDingaan]

 

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

[Cardboard]

Your logic on FFH and ABH is mostly right since it is neutral to FFH one way or the other. However, MERC can't afford to pay more, at least not much more. Their share price is currently sinking like a rock on Nasdaq and their bid is now only worth $1.265. I have not looked at their financials in a while, but this used to be a very highly levered player.

 

I would have prefered to receive a mostly cash bid from a very well financed company such as Domtar. Or even a mix of shares since they are cheap, have a fortress balance sheet and are in the right products: low cost and leader in uncoated free sheet and market pulp. Cascades would have been better too since they are a leader in recycled tissue. Cascades could have come up with an interesting transaction by retaining the RBK side of the business and selling to ABH, St-Felicien for pretty much the full cost of their acquisition.

 

Finally SD, I think that you have to admit that you have been way too enthusiastic with all your estimates on Fibrek and before that SFK since the beginning of our discussion on this board. You did talk about $5 and even $10 a share values... I mean what is the purpose of that if there is no way for these targets to ever be achieved? Recently, you mentioned something around $3 while the bid out there was $1. You have made money by buying at much lower prices than now and that is very good for you, but by putting out there these numbers you discredit your otherwise very sound analysis.

 

Cardboard

[st96dgx8]

$8.5mm break fee is 2.9% of deal value (standard) and $0.065 per share.  This in no way prevents an ABH overbid.

 

I think ABH will come with an overbid.  Remember, they didn't factor in the $16mm EBITDA PPA in their $1.00 bid.  This is $0.57 per share in value at 4.7X EBITDA.

 

Do the math: $1.00 + $0.57 - $0.065 = $1.50 ABH bid.  Remember, they can afford to pay more than MERC due to synergies.

 

The warrants are only meant to kill the previous hostile bid.  FBK can redeem these if they receive a superior proposal.

 

 

JetsFan--The NPV of a 25 year $16 million PPA is worth $1.11 per share (assuming an 8% discount rate) or $0.91 per share (assuming a 10% discount rate). Both numbers above assume 130 million shares oustanding. The EBITDA flows straight to the bottom line with no additional capex whatsoever. There is also an inflation escalator, which I assume will be 2%.  I also assume a Canadian and Quebec cash tax rate of 27.5%.  FBK meets the requirements of the Hydroquebec program and Canaccord's conversations with the Quebec Deputy Energy minister regarding Fibrek's eligibility were reassuring. Unfortunately, the new PPA may not be signed until April, which is why I was hoping that the poison pill would have been in effect longer. A rushed sale is likely depriving FBK shareholders of significant value.

[st96dgx8]

 

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

 

SD--what makes you think Steelhead would want the RBK plants?

[SharperDingaan]

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

   

 

[SharperDingaan]

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.

 

[triedtestedand]

My $1.30ish worth (vs $1ish last night):

 

- Who at this moment is still going to tender to ABH?

- Because the PPA (the key variable still) is still out there, this bid allows Mr Garneau

  opportunity to upbid while saving face (if he worries about such).

- I asked FBK mgmt a few weeks ago (Jan 30) about timing of PPA, beyond

  "early 2012" as mentioned in public releases. They were hopeful of it

  being within "next 3-4 weeks", but reiterated it was out of their control.

  So this may be resolved quite soon.

- FBK's mgmt gets change of control payments, but their options are still

  underwater unless ABH comes back to the table.  It would be sweet to

  for them to get such cheque w Mr Garneau's signature on it

 

Well played FBK, and excellent crystal balling SD.  I look forward to your next

prescient moment.

[Guest Quebec]

http://www.985fm.ca/economie/nouvelles/le-gouvernement-du-quebec-intervient-pour-empecher-124218.html

 

Some tidbits on the Mercer offer: they will get financing from Investissement Quebec , they say they believes the governement asked resolute to step away (fwiw) , and they would sell the RBK mills.

[triedtestedand]

ABH is not folding their tent yet:

 

http://www.marketwatch.com/story/resolute-extends-offer-for-fibrek-to-february-23-2012-02-13

 

The % of shares tendered has dropped from 57% to 52% (# tendered down from 74M to 66M) so I would presume that the only non-lockup still tendered remains Steelhead (who no doubt are looking to be rewarded for their loyalty), and that all others have rescinded their tenders.  This is getting back close to a 50/50 split ... but as factor in now-close-to-in-the-money management options and the MERC warrants, will need to shift battle lines.

 

 

 

[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   

 

[Uccmal]

I was wrong on the $1.00 limit.  Mercer has surprised me. 

 

Cardboard, Mercer is still running pretty high leverage, but have it attached to specific plants and projects with assorted government backing.  If I had to guess I would think they will do the same with the St. Felecien mill once they have control. 

 

I dont think PQ has any real fondness for ABH.  If anything ABH and its messy labour relations have been a thorn in the side of the province.

 

Given the choice I would definitely prefer to hold Mercer shares rather than ABH.  Mercer is a better run company and isn't reliant on newsprint. 

[finetrader]

Hi Al, I think it was obvious, that with all the REJECT (in capital letter) in their recommandations and specially the fact that  they disclosed in a previous press release that they had received competitive bids, that a higher offer was on the table. The writing was on the wall. Look forward seeing you in April in TO.

[SharperDingaan]

Keep in mind it is highly likely that ABH is probably also sueing for peace, & that it will be a flexible discussion. The result will be an expected winning bid with no interference.

 

Whatever the PQ tells ABH re the PPA, they also have to tell MCI (re fairness). As if you're going to pay the PV of the forthcoming PPA, you need to know the likely terms & get an assurance that it will actually occur.

 

For Quebec, the best long-term outcome is a monopolistic combined St Felecion Mill/ABH chip facility generating power. No RBK plants, & all future discussion with ABH. The PQ makes the rules, & ABH cannot walk away because they have much more in Quebec than does MCI.

 

Obviously, very good for FBK shareholders, but give them a few days to get it done  ;)

 

SD 

 

 

[tyska]

ABH extending their bid is very bullish.  They are continuing to pursue Competition Act approval, which says a lot about their intention to up their bid (they would drop this in a heartbeat if they were not going to re-bid).  I'm buying this morning (at a premium).  My target is still $1.50.  If you look at previous hostiles (RCM and WIN), both bidders announced in 1 or 2 days that they would let their bid expire.  ABH continues to be the most logical buyer.

 

The Street is finally getting bullish.  I see one broker speculating potential for $1.80 ABH bid.

 

Thanks, I was wondering what the logic was behind extending the bid. I was thinking extending it 10 days isn't going to get more shareholders to subscribe at 1 dollar when it's trading at 1.30.

[Guest Dazel]

We have sold our remaining shares here.

 

Good luck all!

 

Dazel

[st96dgx8]

Keep in mind it is highly likely that ABH is probably also sueing for peace, & that it will be a flexible discussion. The result will be an expected winning bid with no interference.

 

Whatever the PQ tells ABH re the PPA, they also have to tell MCI (re fairness). As if you're going to pay the PV of the forthcoming PPA, you need to know the likely terms & get an assurance that it will actually occur.

 

For Quebec, the best long-term outcome is a monopolistic combined St Felecion Mill/ABH chip facility generating power. No RBK plants, & all future discussion with ABH. The PQ makes the rules, & ABH cannot walk away because they have much more in Quebec than does MCI.

 

Obviously, very good for FBK shareholders, but give them a few days to get it done  ;)

 

SD

 

Resolute Applies to Cease Trade Mercer's Offer to Acquire Fibrek

 

 

MONTREAL, Feb. 13, 2012 /CNW Telbec/ - AbitibiBowater Inc., doing business as Resolute Forest Products (NYSE: ABH) (TSX: ABH), today announced that it applied to the Bureau de décision et de révision (Québec), the administrative tribunal with statutory jurisdiction in securities law and regulatory matters in Quebec, for an order to cease trade the proposed offer by Mercer International Inc. (Nasdaq: MERC) (TSX: MRI.U) to acquire all of the issued and outstanding common shares of Fibrek Inc. (Fibrek, TSX: FBK).  Fibrek and Mercer announced the offer on February 10.

 

In its application, Resolute requested that the Bureau exercise its public interest jurisdiction to cease trade the offer on the basis, among other things, that it includes an improperly discounted and dilutive private placement of warrants and an unreasonable break fee.  Resolute requested that the Bureau hear its application on an expedited basis, and will argue that these measures are unlawful and inappropriate defensive measures to Resolute's offer.  On February 9, the Bureau rendered an order to cease trade Fibrek's tactical poison pill effective as of 3:00 p.m. today.

 

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 23, 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.

 

 

 

 

 

Oh the irony... So ABH is now trying to  convince the regulator, Bureau de décision et de révision (Québec), that the $1 per share warrant issuance to Mercer is "improperly discounted and dilutive", when in fact ABH was trying to squeeze out minority shareholders at this very same price.  ABH--If your $1 per share was a "fair" price, then how is it now dilutive and improperly discounted when someone besides yourself gets to buy at that price?

 

Furthermore, as Jetsfan pointed out earlier, a breakup fee of 2.9% of the EV is standard.

 

Can anyone come up with a scenario where the regulator might conclude that it is in the "public interest" to cease trade the Mercer offer? 

 

 

[Alekbaylee]

This is totally stupid!

If ABH really wanna swallow FBK, they got to bid up. Point.

Otherwise, let MERC take it and move on!

 

[tyska]

 

 

Can anyone come up with a scenario where the regulator might conclude that it is in the "public interest" to cease trade the Mercer offer?

 

Isn't there a saying, when in a hole, stop digging. None of this seems very well thought out on ABHs behalf.

[SharperDingaan]

More to the point is why does ABH feel they have to be so aggresive, to extend the bid by only 10 days or so. This was approved by the top of the house, & you don't do this kind of bupkis without a very good reason.

 

- They think FBK will announce terrible earnings, & hope to use it to reduce the eventual price ?

- Its optics to make an eventual concession look bigger than it is ?

- Its to divert attention from something else ? 

- They're frustrated, & have cracked ?

 

Not our game, but you have to wonder how long it will be before a hedge fund ot two chooses to buy up a few million FBK & short ABH to pay for it. And suddenly ABH ends up dealing with 2 or more other big shareholders.

 

SD

 

 

[KFRCanuk]

Got a call at 20:45 from FBK asking me if I'm going to tender my shares to mercer. I told them that i'm going to wait but I would not be submitting them to Resolute.

 

I hold less than 20K in shares.

[lessthaniv]

I'm not so quick to conclude that FBK will be allowed to do the warrants. The regulators will want to know that the issue was truly needed for corporate reasons and not just as an anti-takeover tactic. Given that the funds have gone to escrow and would likely be redeemed should Mercer win their bid the courts may side with ABH. Fibrek went to great lengths to state the purpose of their issue in the press release but I'm not so sure the courts (or exchange) will approve. Fibrek is trying to force ABH to come with a bigger bid and should they turn the offer friendly the warrants can be redeemed. Not sure that is going to fly ...

 

From the release:

 

Mercer has also agreed to purchase 32.32 million special warrants of Fibrek on a private placement basis, at a price of $1 per special warrant for total subscription proceeds of $32.32-million. 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 five-week market shutdown of the Fairmont mill effective Feb. 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 Toronto Stock Exchange, but is not conditional on the successful completion of the Mercer offer. In the event the Mercer offer is not completed, the private placement will provide Fibrek with necessary financing to continue operations and the execution of its strategic plan

[st96dgx8]

I'm not so quick to conclude that FBK will be allowed to do the warrants. The regulators will want to know that the issue was truly needed for corporate reasons and not just as an anti-takeover tactic. Given that the funds have gone to escrow and would likely be redeemed should Mercer win their bid the courts may side with ABH. Fibrek went to great lengths to state the purpose of their issue in the press release but I'm not so sure the courts (or exchange) will approve. Fibrek is trying to force ABH to come with a bigger bid and should they turn the offer friendly the warrants can be redeemed. Not sure that is going to fly ...

 

From the release:

 

Mercer has also agreed to purchase 32.32 million special warrants of Fibrek on a private placement basis, at a price of $1 per special warrant for total subscription proceeds of $32.32-million. 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 five-week market shutdown of the Fairmont mill effective Feb. 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 Toronto Stock Exchange, but is not conditional on the successful completion of the Mercer offer. In the event the Mercer offer is not completed, the private placement will provide Fibrek with necessary financing to continue operations and the execution of its strategic plan

 

I'm not sure that FBK has to show that the issue was truly needed for corporate reasons.  The law is unsettled.

http://www.moyak.com/papers/canada-business-corporations-act.html

 

The most significant Canadian case in the past sixty years on the subject of directors' fiduciary duties in resisting a take-over bid, Teck proposed a more lenient version of the proper purpose test.(98) The facts are briefly as follows. The plaintiff Teck, a major mining company, desired to join with a junior mine, Afton Mines, in a venture to develop a promising deposit already owned by Afton. Afton's directors, however, led by Millar, chose instead to negotiate a deal with Teck's rival, Canex. In the face of Afton's continued rejection of Teck's offers, even though they were better than the terms offered by Canex, Teck decided to obtain control of Afton through share purchases. To stave off Teck's hostile bid, Afton accordingly accelerated its negotiations with Canex and ultimately reached a deal which entailed the issuance of sufficient shares to deny Teck control, one day after Teck had accumulated a fifty percent ownership in Afton.(99) Teck subsequently brought a derivative action as a shareholder of Afton against its directors, alleging that the agreement with Canex was void because it was made for an improper purpose.

 

Concluding that it was not "sound to limit the directors' exercise of their powers to the extent required by Cramphorn," Berger J. for the British Columbia Supreme Court held that directors are entitled to resist a take-over bid if they meet a two-part test: (1) they must act in good faith in resisting the bid; and (2) they must believe, on reasonable grounds, that the take-over will cause substantial damage to the their company's interests. In this particular case he found that the directors of Afton had satisfied their fiduciary obligations. Berger J. placed the burden of proof on the plaintiff to show either that the directors' purpose in rejecting a bid was not in the best interests of the company, or that the directors did not have reasonable grounds for believing that the take-over would have caused the company substantial damage.(100) Furthermore, in assessing the best interests of the corporation, Teck provided that the directors may consider a variety of differing interests: 1) who is seeking control and why (assess the reputation of the offeror, previous experiences with the offeror, policies of the offeror, etc.); 2) the interests of employees and consequences to the community in general; and 3) the impact on the corporation and shareholders. Thus, Teck represented a clear departure from the strict proper purpose test of Cramphorn, with Berger J. concluding that the courts should only find a directors' exercise of power to be improper if their purpose was not to serve the best interests of the corporation.

 

 

 

 

In Re Olympia & York Enterprises and Hiram Walker Resources Ltd, the hostile bidder, Olympia & York, tried to block financing extended by the board of the target, Hiram Walker, to Fingas, a corporation jointly owned by Hiram Walker and Allied Lyons, a white knight purchaser of a portion of Hiram Walker's business. This financing allowed Fingas to make a higher bid for Hiram Walker's shares than Olympia and York's initial offer. As a result, Olympia and York sought injunctions, arguing that the action of the Hiram Walker directors was for the purpose of entrenching themselves in the management of the corporation, and as such, a breach of their fiduciary duties.

 

Applying the Teck formulation, Montgomery J. held that the directors of Hiram Walker had acted in the best interests of the corporation and in good faith and, that as a consequence, it was irrelevant that they had also benefitted from their actions [by becoming more entrenched in the company]. While reinforcing the existing rules of the Teck test for directors' use of anti-takeover defenses, Re Olympia & York also supplements it with the following additional principles(105) : 1) it is the duty of directors in a take-over contest to maximize the value to all shareholders; 2) directors are entitled to rely on professional advice as to the adequacy of a bid, and such reliance will constitute evidence of acting in good faith and upon reasonable grounds; and 3) self-entrenchment will not necessarily be inferred where retaining control is secondary to the primary purpose of acting in the best interests of the corporation and in good faith.

[SharperDingaan]

Mercer's bid is just below where the FBK management options kick in, & FBK management was given change of control severance premiums well before the Mercer bid was announced. FBK management gets enriched only if there is a higher bid. Keeping their jobs is not a factor as we would still have to pay our existing management, or their counterparts, for the work we have hired them to do for us.

 

FBK & Mercer could easily rescind the warrant issue & simply replace it with a backdated private placement @ $1.00/share. It has the same effect on dilution. FBK simply argues that they need the money for general corporate purposes, & the market offered a unique opportunity by which they could obtain the funds cheaply. ABH to PROVE otherwise.

 

Its not about the legal, ABH wants the attention diverted somewhere else.

So again .... why

 

ABH needs to look the victim ? All this bad mouthing we cant defend against, our share price being attacked & workforce indirectly threatened. We're the ones being bullied! - just ahead of a negotiation with the PQ?   

 

Perhaps ABH needs reminding that those institutions holding ABH are also those getting paid to lend it out for shorting - & they may well also be amongst those buying the shares back at depressed prices as well. The target isn't FBK, its ABH, & all that those institutions have do is make large blocks of ABH stock available.

 

You play fair for a reason.

 

SD

 

 

   

 

 

[Alekbaylee]

I guess we have no choice but tender to the MERC offer here (i.e. not expecting any higher price) :

 

Fibrek Inc. (FBK-T1.34----%) announced today that, in light of the Bureau de decision et de revision's (Quebec) Feb. 9, 2012 decision to issue a cease trade order with respect to Fibrek's shareholder rights plan, the Toronto Stock Exchange has determined to reject the Plan for filing. The Board of Directors continues to unanimously recommend that shareholders accept and tender their common shares to the offer made by Mercer International Inc. (MRI.U-T8.29----%) to acquire all of the issued and outstanding common shares of Fibrek by way of take-over bid and to reject and not tender their common shares to the unsolicited offer made by AbitibiBowater Inc (ABH-T15.12----%).