Resolute Forest Products Commences Takeover bid of Fibrek

[cwericb]

“FFH, Pabrai, Oakmont etc are well within their rights to lock up shares to an offer”

 

They certainly are, but the situation has changed since that time and just because they are within their rights still doesn’t mean that their offer is either “fair or friendly”. I guess that if someone goes through a red light in front of me I would be within my rights to hit him, it still doesn’t make it the "right" thing to do.

 

The real situation here is simply that our shares are up for sale and we have two offers, one is $1.30, the other is $1.00. Related parties are colluding to force us to take a the lower offer and also eliminate any other potential offers.

 

They voted their shares in a manner that they believed gave them the best opportunity for success at the time.

 

Yes but that was many months ago when there was no other offer on the table. If I make an offer to buy your car for $10,000 and you say,”No that isn’t enough, I know my car is worth a lot more than that”. Then someone else comes along and says “I’ll give you $13,000 for your  car”. Then you might expect for the first guy to come back with a higher offer, but when he says "I’ll still give you $10,000 for your car” should you not be free to accept the second offer? Sure in the FBK situation there are lots of technicalities involved and that is why this mess is in court.

 

What really ticks me off is that when this gets settled, what will FBK be worth after all the expenses that they have been forced to assume?

[racemize]

Yes but that was many months ago when there was no other offer on the table. If I make an offer to buy your car for $10,000 and you say,”No that isn’t enough, I know my car is worth a lot more than that”. Then someone else comes along and says “I’ll give you $13,000 for your  car”. Then you might expect for the first guy to come back with a higher offer, but when he says "I’ll still give you $10,000 for your car” should you not be free to accept the second offer? Sure in the FBK situation there are lots of technicalities involved and that is why this mess is in court.

 

(Disclosure, I've only watched this by reading this thread, and am just curious).  Didn't the lock-up have a period associated with it?  Could they have switched over at this point? 

 

Is it possible that they think the outcome for FBRK is better under ABH than MERC?  Probably true for themselves, but is it possible that they just think the MERC offer is a bad direction to go for the future of FBRK?

[lessthaniv]

They certainly are, but the situation has changed since that time and just because they are within their rights still doesn’t mean that their offer is either “fair or friendly”. I guess that if someone goes through a red light in front of me I would be within my rights to hit him, it still doesn’t make it the "right" thing to do.The real situation here is simply that our shares are up for sale and we have two offers, one is $1.30, the other is $1.00. Related parties are colluding to force us to take a the lower offer and also eliminate any other potential offers.

FFH is not buying FBK. FFH is selling their shares to ABH who are hoping to buy FBK. This talk about FFH not adhereing to their "fair and friendly" acquisition mantra is ridiculous. They are acquiring nothing. They are trying to surface the value of their deflated FBK shares on behalf of the FFH shareholders. They obviously feel ABH was the best option at the time.

 

Yes but that was many months ago when there was no other offer on the table. If I make an offer to buy your car for $10,000 and you say,”No that isn’t enough, I know my car is worth a lot more than that”. Then someone else comes along and says “I’ll give you $13,000 for your  car”. Then you might expect for the first guy to come back with a higher offer, but when he says "I’ll still give you $10,000 for your car” should you not be free to accept the second offer? Sure in the FBK situation there are lots of technicalities involved and that is why this mess is in court.

 

Respectfully, your metaphor is wildly off base on many levels, cwericb.

 

At the time of ABH's offer to acquire FBK - FFH and others committed under a "hard lock" agreement to support the ABH bid.  In layman's terms they cannot tender their shares to another deal, for a fixed period of time - subject of course to all kinds of conditions. Remember, at the time FFH made that commitment the stock price was $.70 heading into a falling pulp market with no apparent interest in the assets from other parties. If you want to be pissed at someone then how about the management team of FBK?

 

Ask yourself why the management team of FBK were looking to do an acquisition financed through further dilution instead of trying to sell this company to Mercer for $1.30/share or higher in 2011? Self preservation perhaps? FBK management should have been way more active putting the company assets in play to surface our value. Instead, they wanted to spend more of our money on a venture that carried significant risk. But, they would get to keep their jobs...

 

After the fact, the Mercer bid enters the picture. FFH cannot break their agreement at this time. They are already committed. Once the hard lock agreement expires, then FFH would be able to consider other options. But until such time they are contractually bound and unable to tender to the Mercer bid.

 

I'm sure if Domtar entered the picture tomorrow and offered $1.50/sh in straight cash, Fairfax and friends would be wishing they could tender to that offer, no doubt. But, ABH was aware of this possibility from day one and intelligently only committed to the takeover of FBK with the knowledge that 46% of the shares were locked to their offer.

 

Steelhead holds the trump cards.

They also own ABH, FBK and MERC.

 

 

 

 

 

 

[cwericb]

“FFH is not buying FBK. FFH is selling their shares to ABH who are hoping to buy FBK. This talk about FFH not adhereing to their "fair and friendly" acquisition mantra is ridiculous. They are acquiring nothing.”

 

That’s simply a matter of technicalities and semantics. Yes ABH is buying FBK. But Fairfax is the driving force behind the takeover, the largest shareholder of ABH, and a VP of Fairfax sits on Abitibi’s board. By no stretch of the imagination are they an unrelated party and they are orchestrating this takeover of FBK through ABH. Through ABH they are attempting to take over FBK - of which they are also a major shareholder.

 

I know the car analogy over simplifies the situation, but the bottom line is that there are two offers and shareholders are being forced to accept the lower of the two. It is not so far astray if you look at the situation from a shareholder of FBK’s point of view.

 

I fully agree with what you say about FBK management and I have never been a fan. I now find it ironic that their goals are finally in line with shareholders.

 

With the agreement of the participants, could not the hard lockup price be increased if they were so inclined? If they are locked into a position that they cannot get out of, why are they perusing legal action to push the matter so hard? If they want the company, offer a fair price, don’t try to force shareholders to take an lower offer

[lessthaniv]

With the agreement of the participants, could not the hard lockup price be increased if they were so inclined? If they are locked into a position that they cannot get out of, why are they perusing legal action to push the matter so hard? If they want the company, offer a fair price, don’t try to force shareholders to take an lower offer

 

Sure they could raise the $1 bid but why would they? They stand a good chance of winning the auction as it is. From the perspective of the ABH shareholders, would you want your company to increase their bid just to appease the minority shareholders of the target? I would suggest that you'll only see a price increase if that's their only option left.

 

 

Remember the ABH deal was for $1/share or roughly $130M. But only $71.5M (55%) can come in the form of cash. The remaining (45%) will come in the form of ABH stock. Assuming many investors will want cash, the cash payout will likely be maximized. Therefore, we are most likely to get $.55/share in cash and .0284 (.0632 * 45%)of ABH stock per each FBK common. Hence, it's imperative to form an opinion on what the ABH paper is worth.

 

I don't want to hijack this thread and turn it into a discussion on the value of ABH but suffice it to say that one should study ABH ( MERC too) and form an opinion.

 

It's interesting to note that Neil Gilmer of Canaccord Genuity holds a value of US$25/share on ABH, currently. I bring to the table this analyst opinion only becuase Canaccord Genuity is the firm that did the independent valuation work for Fibrek citing value between $1.25 - $1.45/share of FBK.

 

The ABH deal values ABH stock at $15.83/share.  So, according to the analyst you're relying on for your FBK valuation of $1.25 -$1.45, this deal undervalues ABH paper by 58%.

 

For each 1000 shares of FBK, under my example, you'll get:

 

$550 and 28 shares of ABH. However, Neil Gilmer is telling you ABH shares are really worth $25. Therefore, total deal value is intrinsically worth more :

 

$550 + (28 * $25) = $1,250.

 

The Intrinsic Value of this offer (according to Neil Gilmer) is $1.25/share of FBK.

 

______________________________

 

For Balance, Neil also covers MERC and holds a $10/share target.

 

130M shares * $1.30/share = $170M

Max cash offer = $70M

Remaining in MERC paper = $100M

 

MERC paper being valued $8.44 in deal. On a per share basis we will get  $.54 in cash + .0903 in MERC stock.

 

Per 1000 shares of FBK (to make it comparable to ABH) you'll get;

 

$540 in cash + 90 shares of MERC. However, the Canaccord analyst values those shares at $10. Therefore the intrinsic value of this deal is $540 + (90 * $10) = $1,440.

 

The Intrinsic Value of this offer (according to Neil Gilmer) is $1.44/share of FBK.

 

Note:

 

ABH with the lock ups in place sits on the bottom end of Neils fair value range of $1.25/share

MERC without any lock ups in place sits on the high end of Neils fair value range of $1.44/share.

 

Both deals, as per Neil are fair deals but having the hard locks in place is affording ABH the luxury of sitting on the low end. Without the same share committment, MERC has to be on the high end to try and swing the remaining shareholders to meet their minimum tender of 50.1%

 

IMO, I think Steelhead has acted most intelligently for their own benefit.

 

They own MERC, ABH and FBK in their own accounts and I believe they saw an opportunity to control the direction of this deal for their own benefit.

 

Paying $.90 for FBK or paying $1.02 didn't matter to them. Why? Because both prices paid are well below the intrinsic value of the deals. But by acquiring the shares they also acquired the swing votes which puts them in the drivers seat.

 

At a price of $1.02/share for FBK Steelhead held virtually no downside and can essentially control the outcome of this deal which matters to them immensely as shareholders.

 

 

 

 

 

 

[SharperDingaan]

The independent valuation of $1.25 to $1.45 is meaningless if there is a PPA. As most would expect the PV of the PPA to be around 130M, we need to see $2.25 to $2.45. Simply adding the expected PV of the PPA to the Mercer bid produces $2.30.

 

A bid at $2.30 for all of FBK (assume a 2nd stage bid) will kill the dilution issue. ABH would have the better offer, & Mercer would appear to benefit from regulatory lagresse, as well as the break-up fee. But ABH would need assurance that the PPA is there, & that a new 20% of FBK stock is not going to suddenly appear. It is the regulator that called the 'secret' meeting, & we know that ABH (& possibly Steelhead) was a participant.

 

We have repeatedly suggested that Steelhead's target is the US Mills. We have also highlighted that if there is a new owner for those mills, they need to be assuming operational control right around now. If the consideration is Steelheads FBK stock + cash, there are only 124M shares o/s & the bid could be 5% higher

 

[bookie71]

The whole thing doesn't pass the smell test.

jmho

[Guest Quebec]

Sharper, curiosity, what hinted you to think that Steelhead might be targeting the US mills ? Are they some kind of operators of assets (like Onex) in addition to a stock portofolio manager? I recall an article where Mercer was quoted as wanting to shed the us mills if they bought fibrek

[lessthaniv]

SD,

 

Right now, the dilution is not an issue for ABH.  As it stands the Quebec courts (as you know) have ruled against the warrants. I place a small probability on the Supreme Court of Canada granting permission to appeal. Although, the way this case is going, nothing will surprise me.

 

Recently, ABH's minimum tender was reduced to 45.7% and the deal was extended to April 11th.  The minimum tender is important because it's below the amount of shares held under the hard lock agreements which is 46.4%. The date is also important. There is a special 2 day settlement in place for shares traded on April 11th. They settle April 13th which happens to be  the day that the hard lock agreements expire. So, as of April 11th - I suspect ABH will take up the 46.4%. If they don't, they would lose those committed shares. ABH can then extend the offer at $1 at which point Steelhead is open to tender their 5%. If ABH takes up the 46.4%  next week and extends I believe its for a minimum of 10 days. That takes us out to April 23rd.

 

During that period if Steelhead decides to tender- the Mercer deal is dead. At this point, for me,  the only catalyst that I can conceive changing Steelheads mind is a potential PPA announcement. Realistically, do you expect a PPA to be signed/announced by then? 

 

Without the PPA, I would think Steelhead tenders and ABH follows up with another extension again at $1 and sees who of the remaining shareholders tender without another competing offer on the table. 

 

Any increase in price would have to be extended to the entire offer. That gets expensive. If they let this offer die and start the process again at a later date they could change the price without having to pay it to all the shareholders but that would also change the definition of who the "minority" is for any future majority of the minority vote. In other words, assume on the second stage offer they get to 68%. The 51.4% acquired in the first transactions would be excluded as part of the minority. If they somehow got to 68% on this stage 1 offer  those share should count as part of the minority as its based on what was owned prior to the deal. It's much easier for ABH to complete this deal that way.

 

 

 

[SharperDingaan]

Lessthan: We beg to differ.

 

The dilution is a major problem. They would fail to make the 45.7%, the lock-up group would be defrauded out of $.30/share - & the lock up groups fiduciary responsibilities will force them to sue. Best ABH can get is an external acceptance of their bid, but no physical shares. At < majority, ABH is not legally required to make a 2nd stage bid; we all have to take ABH's word for it, AND believe the dilution will not go through.   

 

Steelhead does not need to see the PPA right now, or operate the US mills. Steelhead could very easily take the US mills (tommorrow) for their FBK stock + cash + a sale adjustment if the bid price goes up - & resell (on the same day) to someone else. The new buyer is in the mills next week, Steelhead is done with the Marx brothers, & they get out with their reputational damage repaired.

 

ABH is going to have to put up, & no amount of legal is going to change that.

 

 

[lessthaniv]

Lessthan: We beg to differ.

 

The dilution is a major problem. They would fail to make the 45.7%, the lock-up group would be defrauded out of $.30/share - & the lock up groups fiduciary responsibilities will force them to sue. Best ABH can get is an external acceptance of their bid, but no physical shares. At < majority, ABH is not legally required to make a 2nd stage bid; we all have to take ABH's word for it, AND believe the dilution will not go through.   

 

Steelhead does not need to see the PPA right now, or operate the US mills. Steelhead could very easily take the US mills (tommorrow) for their FBK stock + cash + a sale adjustment if the bid price goes up - & resell (on the same day) to someone else. The new buyer is in the mills next week, Steelhead is done with the Marx brothers, & they get out with their reputational damage repaired.

 

ABH is going to have to put up, & no amount of legal is going to change that.

 

SD:

 

All I'm saying is right now the dilution isn't a factor because the current ruling stands in ABH's favor. To make the dilution relevant again, the Supreme Court of Canada first must be willing to hear the application for leave to appeal and the appeal itself.

 

Reading your comments it's as if you've bypassed that entire step.

 

I guess that is where we differ at this point. I'm not sure the Supreme court will even grant the application for leave to appeal let alone overturn the under courts decision.  I certainly agree that if the Supreme court agrees to here the appeal AND overturn the previous ruling ... then the dilution is relevant again.

 

I just have a low probability assigned to that event. We obviously differ here. What gives you such confidence?

 

If ABH ends up with only a minority position after the take up of the lock up shares ... I can't imagine that they would not follow up with another tender. As you correctly state, their is nothing that forces them too, but I don't think they want to end in the position. That's why I suggest Steelhead holds the trump cards. But, judging by Steelhead's actions it would appear that they have been committed to the ABH deal from the get go.  I believe their recent press release suggesting they won't tender until the minimum tender has be taken up ... is just a bunch of CYA.

 

 

 

[cwericb]

As a poor dumb, humble, small FBK shareholder, here is what I see - and remember in the public eye, perception is everything.

 

I see one party offering me $1.00 for my shares while another offers me $1.30. Great we have a bidding war for our shares. But then I learn that the first party wants to force me to take the lower bid and that doesn’t sit well and seems to be contradictory to any form of bidding that I have ever of. What next, are we going to go backwards - do I hear 90 cents? 80?

 

That tends to tick off us little guys. But when it appears that Fair & Friendly Fairfax is manipulating this hostile and unfair situation (to us FBK shareholders) and forcing this lower bid, one starts to question the limitations FFH applies to their credo of  “Fair & Friendly”. "Aaah, nobody knows were here let's rip off FBK shareholders and everyone will blame ABH. (Perhaps a little strong but remember 'perception')"

 

Of course everyone is operating in their own best interests. But only FBK (and again this may be a first) is operating in my interests so is any one surprised that we FBK shareholders are not happy about this situation? But since many of us here are also shareholders of Farfax this doesn't sit so well.

 

Lessthan & SD.

 

Thank you both and please keep up the debate. This is the value of our board to those of us who are less knowledgeable than others. When smart guys like yourselves argue the pros and cons you present a balance of information not available elsewhere and that is appreciated by myself and I am sure others.

[FFHWatcher]

Why doesn't Resolute just buy FFH, Pabrai and Oakmont's FBK shares for $1.00 and become a large shareholder of FBK.  If FFH wants to give away their shares for $1.00, let them.  Then, they can look at buying the other 50% or so that they don't already own.  I'm am not sure of the laws in this case, but if 40-50% of the shareholders feel the price is too low, can they forcibly cause almost 50% of shareholders to tender their shares at $1.00?  50.1% seems crazy. 

I don't recall a discussion of the legal implications in this case.  Is it standard, a fixed percentage, different on a case by case situation, etc.?

[cwericb]

"If FFH wants to give away their shares for $1.00, let them."

 

Now there's an interesting thought. If FFH was asked to sell their shares to an unrelated party for a buck, would they?  Or would they consider that an unfair offer?

[triedtestedand]

"Now there's an interesting thought. If FFH was asked to sell their shares to an unrelated party for a buck, would they?  Or would they consider that an unfair offer?"

 

Cwericb -> That question's been answered already.  FFH turned down MERC at $1.20 a few weeks before locking up with ABH at $1.00 ...

[Guest Quebec]

To answer cwericb: they would not sell at 1.00 . They were offered 1.20 by Merc and answered they wanted 1.50. That was just before the ABH bid. It's pretty easy to figure out what's going on.

 

Edit: it's also convienient that they HARD lockup at 1.00 hey... Sorry, we can't accept a better bid...

[cwericb]

Yup, there goes the "Fair" part and the "Friendly" part was never in the equation. Sorry to harp on this and I'll try to let it go now. QED

[lessthaniv]

Why doesn't Resolute just buy FFH, Pabrai and Oakmont's FBK shares for $1.00 and become a large shareholder of FBK.

If FFH wants to give away their shares for $1.00, let them.  Then, they can look at buying the other 50% or so that they don't already own.  I'm am not sure of the laws in this case, but if 40-50% of the shareholders feel the price is too low, can they forcibly cause almost 50% of shareholders to tender their shares at $1.00?  50.1% seems crazy. 

I don't recall a discussion of the legal implications in this case.  Is it standard, a fixed percentage, different on a case by case situation, etc.?

 

I'll share my understanding FFHWatcher:

 

<50% lands them as a large shareholder without control

 

>50% puts them in a control position but restricts some things (like flowing dividends upstream)

 

>66.66% allows them to call a meeting and proceed with a majority of the minority vote:

 

a) If ABH got >66.66% tendered on the original offer, those shares would be considered part of the minority. Hence, they will easily have a majority of the minority and the minority shareholders will be rubbed out.

 

b) If ABH got > 66.66% but did so over two separate offers (ie: Take up everything they can now, and offer a higher price down the road in a completely separate offer) then the definition of minority would exclude the shares they already own. Hence, when the majority of the minority vote occurs they may or may not win.

 

You could have a look at Sears Holdings Corporations run at Sears Canada a while back. The circumstances are different but you will see what can happen when the definition of what constitutes the minority changes.

 

http://www.searsholdings.com/pubrel/pressOne.jsp?id=2006-11-14-0004474235

 

>90% would allow for a compulsory acquisition. Simple and cost effective statutory process to complete in about a months time.

 

My best guess at this point:

 

1) ABH takes up the 46.4% that is currently tendered under their bid as the hard lock ups expire on April 13th.

2) ABH extends the offer again.

3) Steelhead is now open to tender their 5% as the minimum tender condition was met.

4) This gives ABH 51.4% and control. The mercer bid in now dead as they cannot get their minimum tender of 50.1%.

 

ABH's perspective from this point? You're guess is as good as mine:

 

5) ABH extends again to see who will now tender knowing there are no alternatives. If they can get to 66.66% as above, they will call a meeting for the majority of minority vote but their 51.4% will be part of the minority. Therefore, they will easily win and acquire FBK successfully.

 

6) if ABH cannot get to 66.66% they may be content as a controlling shareholder of FBK going forward or,

 

7) they could try upping their bid to get to 66.66% but this could get expensive.  Under Canadian Securities laws, as the consideration paid for one security must be pari passu with another security that possesses identical features, ABH could not up the price on their current tender without doing so for the entire group. They may or may not be prepared to do that. 

 

8.)  they could also try a follow up offer down the road but they would have the 51.4% shares ownership excluded from the majority of the minority vote should they get to 66.66%. They may not be able to force the rub out. 

 

And it's important to note that lot's of other things could also change. If the Supreme Court decides to grant leave to appeal and the decision is overturned, yet again, Mercer's warrants are back in play and ABH gets diluted.

 

SD seems to think this has a good chance to happen? Perhaps he would be willing to share his thoughts?

I rank it as a low probability event.

 

But, we'll all find out shortly...

 

Happy Easter - time to go paint some eggs with the kids.

:)

 

 

 

[link01]

Why doesn't Resolute just buy FFH, Pabrai and Oakmont's FBK shares for $1.00 and become a large shareholder of FBK.

If FFH wants to give away their shares for $1.00, let them.

 

it may also be simply that each of ffh, pabrai, & oakmont see a much brighter future for abh, particularly after a buyout of fbk at $1 (price matters, & $1 may be their estimate of value with an appropriate margin of safety), while they are less optimistic about fbk & its mngt as a stand alone going forward.

[SharperDingaan]

P(ABH bid gets control of the 46%): 100%. P(ABH actually pays the $1.00, etc):  <25%. There is a big difference between beneficial ownership vs actual ownership, & we find it very unlikely that the lock-up group will sell at $1.00 when we know that they refused an offer at $1.50. We think the tendered shares will go to a trust, & the trust will release the shares to ABH at whatever the final price turns out to be.

 

P(Steelhead tenders to ABH at the current $1.00): < 10%. Steelhead holds the control block, & control blocks go for a premium because they decide the winner. At present the Mercer offer takes it, but we would expect that Steelhead is expecting better; probably > $1.50.

 

P(ABH walks away): <20% . This is about St. F. Combine it with the chip plant & the power generation & it will be one of the lowest cost mills in the country. Sell the US Mills, plus the power generation, & you will get St F for a net cost of close to nothing. Ego investment, reputation, & job security, are further incentive to keep bidding – and win.

 

P(ABH re-prices the bid): >90%. There is no try again later - ABH has to top Mercer by enough to satisfy Steelhead, & it is in the Steelhead interest to demand that the firmer PPA be priced in – by either ABH OR Mercer.

 

The dilution thing is moot were ABH to put up a real offer that the FBK board can agree to. FBK can drop its Supreme Court appeal at any time.

 

No-one, other than Steelhead, knows what they will do - all we know is that they will act in their best interests. There interest would have best served if they had bought a control position in FBK, successfully bid for the US mills, re-packaged/re-sold the mills to someone else, & agreed to pay with a combination of cash & FBK stock. The more FBK sells for, the better they will do.

 

[triedtestedand]

This deal has been in limbo soooo  long ... the NBSK prices that were dropping back in Nov/Dec are now back on the rise ... $30/tonne for Apr

 

www.foex.fi

[alertmeipp]

why can't they just pay 35 cents and close this crap.

[Alekbaylee]

http://www.winnipegfreepress.com/business/fibrek-says-canadas-top-court-has-agreed-to-fast-track-appeal-of-quebec-ruling-146957975.html

[alertmeipp]

And MERC increased their offer to 1.4!

[gordoffh]

How can fairfax possibly want this to go to the supreme court. Can,t see how that do not come out of this looking real good. The money continues to be spent. Is there some rainbow of riches here everyone is missing. Makes no sense. Where is the payoff