Resolute Forest Products Commences Takeover bid of Fibrek

[Liberty]

Liberty: Eastern Townships in La Belle Province!

 

Cool. I know a guy form Sutton. Ça semble être un beau coin! :)

[Cardboard]

Cascades is an interesting stock at current price and pays a nice dividend. They have always managed to remain profitable/breakeven during down cycles due to lower waste paper costs. However, that variable has changed somewhat with much higher demand for waste paper during downturns due to China. On the other hand, capex for projects remain high and debt is also high above book.

 

I like their insiders ownership and the company is buying back shares. All kinds of things that you never saw at FBK.

 

There was someone on this board who was working for Cascades, but I can't recall who that is. Always nice to get a sense of how the people working there feel about the company.

 

Cardboard

[SharperDingaan]

Welcome aboard Quebec - it's great to have some representation from other than Ontario!

 

We're of similar view, but were adding during the recent lows. Cost base is < $1.00, but it would appear that our highly likely 35-40% compounding over the next 18-24 months is going to be c'est le vie.

 

Long term it was enevitable that FBK would get exchanged/swapped into a bigger player. We're happy with taking ABH shares (safety in size) but not the exchange rate. Around 0.1 ABH/share + a cash dividend is probably a reasonable saw-off though.

 

A votre sante!

 

SD

 

 

[EdWatchesBoxing]

In October, I visited Quebec City  for the first time in over 20 years. I loved it there. Vieux-Quebec was lovely!

[beerbaron]

Wow, three fellow Quebecois on this board. Me, Liberty and Quebec. Glad to know there are some people thinking about capital allocation. Maybe FBK would not be so bad if they knew how money compounding would work...

 

BeerBaron

[KFRCanuk]

Interesting that the price was above $1 today.

[triedtestedand]

Interesting the opinions that are starting to be published:

 

http://business.financialpost.com/2011/12/08/moodys-downgrades-paper-and-forest-products-industry/

 

 

[alertmeipp]

Interesting article, Prem's reasoning is weak and given that he participated in the right offering (as the backstopper as well) not long ago... this smells..

 

Anyways, I sold about 40% at about 98 cents....not as optimistic as others on Fibrek getting anything better.

[SharperDingaan]

 

Frankly its nice to see.

 

A standard test for 'fairness' is that if your grandmother read about your offer/deal in the press - would she be proud of you ? , especially when you're on both sides of the transaction. If you come over as bullying & coercive, it is probably not what you intended. The objection is the price, not the deal.

 

Perhaps it is time for a little graciousness ?

 

SD

 

 

 

[Guest Quebec]

Amen, Sharper.

 

It's indeed a price matter because the deal itself makes a lot of sense for both.

 

Together, there's plenty of savings and synergies ahead (and thus upside for the new ABH).

 

Heck, it was not so long ago that SFK alone was distributing as much as the floated price!

[Guest Quebec]

http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=30443659&l=0&r=0&s=FBK&t=LIST

 

One more shareholder feeling offended and writing about it. This is really pervasive imo.

[triedtestedand]

"The objection is the price, not the deal."    Agreed  ... at the right price this should make absolute strategic/tactical sense for all stakeholders.  I'm just as sure how well Richard Garneau has done on the Miss Manners courses compared to Prem. 

 

In all this, am working with incomplete information, so need to discount these public arguments of Prem's (which I do agree with Alertmeipp are both uncharacteristically weak and conflicted), give him the benefit of the doubt, and rather optimistically expect that Prem et al have thought this through several moves ahead, and done this to put FBK into play, expecting FBK's management/board now to do their job and extricate the most value.  Whatever the motives however, it's in play now, so trust actions are ongoing.

[triedtestedand]

PS -> Two other posts from the stockhouse board that are worth a scan

 

http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30426412&r=0&s=FBK&t=LIST&pd=2

http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30435359&r=0&s=FBK&t=LIST&pd=2

 

Interesting the article from jdamo ... and, as a dissenter in another takeover situation, used the courts to force the suitor to cough up a higher price.  Not for the faint of heart, or with expectation of a quick resolution, but definitely something to seriously consider if ABH doesn't revise their offer.

[cwericb]

I am somewhat surprised and disappointed at Fairfax's roll in this opportunistic and incestuous deal.

 

It's great for Fairfax, and a perfect fit for Resolute, but a pretty raw deal for us small shareholders who have stuck in there for several years. I bought in at $1.72 several years ago, a lot more at $0.53 and then took "advantage" of the rights offering at $1.01. After watching this drop from nearly two bucks to 70 cents I dumped a bunch at $0.75 just before the deal was announced. I'll do okay because most was purchased at the 53 cent level, but my timing has been pretty lousy.

 

At $1.20-$1.40 it would still seem pretty cheap for Resolute and a lot more fair to shareholders, but I can't see that happening.

 

[rmitz]

PS -> Two other posts from the stockhouse board that are worth a scan

 

http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30426412&r=0&s=FBK&t=LIST&pd=2

http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?&p=0&m=30435359&r=0&s=FBK&t=LIST&pd=2

 

Interesting the article from jdamo ... and, as a dissenter in another takeover situation, used the courts to force the suitor to cough up a higher price.  Not for the faint of heart, or with expectation of a quick resolution, but definitely something to seriously consider if ABH doesn't revise their offer.

 

I'm willing to join such a group based on this current offer.

[SharperDingaan]

We're not a fan of the legal route when it is friendly parties. You may win the battle, but you too often lose the war.

 

We also suspect that prem may well be quite pleased with the dissent - as FBK was put into play for a reason. Diligence requires that FBK 'fight the ship', & the more 'vigorous' that dissent the easier it is to support an improved valuation. A valuation that may well also move the FFH holding into the money (elegance itself !).   

 

SD

[triedtestedand]

If not apparent already, it seems Richard Garneau likes to juggle multiple balls ...

 

a) He's closing a paper machine in Saguenay region just before Christmas, and that has sparks flying (use Google translate to get the gist of things):

 

http://www.lesaffaires.com/bourse/nouvelles-economiques/clement-gignac-lance-un-ultimatum-a-resolu/538788

http://blogues.cyberpresse.ca/lapresseaffaires/cousineau/2011/12/12/la-bombe-politique-de-lusine-kenogami-vient-de-sauter/

 

 

b) Some are having a bad taste after he secured $50M of gov't funds to keep a plant open in Nova Scotia:

 

http://thechronicleherald.ca/thenovascotian/41614-corporate-bully-resolute-left-dexter-little-choice

 

 

Not sure if any of this will play within the context of the proposed Fibrek deal, but the politics are intriguing.

 

What are peoples' thoughts of timing of formal announcement?  The clock can tick until December 30th according to the lock-up agreements ... do you think it'll go that long?

 

 

[SharperDingaan]

We would expect FBK to put out a slew of announcements by late this week/early next week. Most likely to accept some kind of improved offer &/or to announce a conditional cash dividend. Mr Market's trading > $1.00 over the last few days, & on significant volume, would seem to agree. They've had a panel of experts for +/- 2 weeks to work out the details

 

Frankly we think the industry needs the bare knuckle operators, & it is highly likely that all the FBK plants would be more profitable under the approach. For deal purposes the synergies should be higher (bigger pie).

 

The reality is that if ABH backs out, FFH is going to have to take the instititutional stock tendered at $1.00/share, end up with majority ownership, & essentially have to make an offer to take FBK private. ABH also cannot prevent FBK from declaring a conditional dividend, & FFH cannot exit FBK as its holding is too big. Everybody needs the deal.

 

Given that your first loss is your smallest loss, it is in the FFH interest to be gracious.

 

SD

[triedtestedand]

Formal offer now proceeding as of this morning:

 

http://resolutefp.mediaroom.com/index.php?s=28238&item=96690

 

 

[SharperDingaan]

Not a surprize, but the condition speaks volumes: "Fibrek not having implemented or approved any issuance of shares or other securities or any other transaction, acquisition, disposition, capital expenditure or distribution to its shareholders outside the ordinary course of business, and the absence of occurrence or existence of any material adverse effect or material adverse change"

To negate the deal all FBK has to do is breach a condition (ie: do a distribution)

 

Just to ensure that ALL avenues get considered ...

 

ASSUME that Prem/Pabrai already have the 67% (87.1M shares). Then ASSUME that FBK makes an offer for 50M shares (not a breach of condition as it is not an adverse effect) at $1/share - the market price that the ABH tender has established. 130M of established value over the now 80M shares, produces a market price of $1.63. To get out Prem/Pabrai would effectively have to take FBK private - & then resell FBK to an industry player (assume ABH). At the 40% premium that the ABH offer has established, a market price of around $2.28.

 

.... now notice how we keep coming back to around the $2.00/share mark.

 

SD 

[FFHWatcher]

Sharper, when you say 'we' keep coming back to $2., aren't you referring to you?  Who else is coming up with $2.? 

 

Don't get me wrong, I would love to see $2. but what are the odds this gets over $1.20?  I am not basing my comments on valuation, simply on what the market is telling me/us and so far, no one is willing to pay over $1.01 and no other corporation has said anything publicly yet.  While I am long as well, I have lost lots on this stock and it sounds like you may have some ownership bias (not sure if that is the exact right phrase).  I get it all the time, as it would seem given the abysmal performance of my portfolio as of late. 

 

Edit at 4:21pm.  SD, who just bought at $1.02 at 3:59pm and made my point above inaccurate?

[triedtestedand]

SD:

 

Not that I don't think FBK still have options, but you lost me with your second scenario ...

[triedtestedand]

PS:  Filings are up on SEC website (not yet on SEDAR though) ...

 

http://www.sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=abh&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany

 

 

[triedtestedand]

Well, at least I'm learning a lot:

 

"If Fibrek should declare or pay any cash or stock dividend or make any other distribution on, or issue any securities, rights, warrants or other interests or distributions in respect of, Fibrek Shares after the date of the Offer (and without prejudice to our rights described under Section 4 of the Offer to Purchase, “Conditions of the Offer”) which is payable or distributable to Fibrek shareholders on a record date prior to the date of transfer into the name of RFP Acquisition (or its nominee or transferee) of Fibrek Shares deposited pursuant to the Offer, such dividend, distribution or rights will be received and held by the depositing Fibrek shareholder for the account of Resolute or RFP Acquisition, as the case may be, and (i) to the extent that such cash dividends or cash distributions or payments do not exceed the cash distribution payable to the depositing Fibrek shareholder pursuant to the Offer, the amount payable to the depositing Fibrek shareholder will be reduced by the amount of any such dividend, distribution or payment; and (ii) the amount by which any such cash dividend or cash distribution or payment exceeds the amount payable in cash to the depositing Fibrek shareholder, or, in the case of any non-cash dividend, distribution, payment or rights, assets, property, securities or other interests, the whole of any such dividend, distribution, payment, assets, property, securities or other interests shall be remitted promptly by the depositing holder to the Depositary or another person designated by us for our account accompanied by appropriate documentation of transfer. Pending such remittance, Resolute or RFP Acquisition, as the case may be, shall be entitled to all rights and privileges as the owner of any such dividend, distribution or rights and may deduct the value thereof from the amount payable in cash by it pursuant to the Offer to the depositing Fibrek shareholder."

 

Resolute Common Stock to be received by Fibrek shareholders as a result of the acquisition will carry different rights than the Fibrek Shares.

 

"Following completion of the Offer and any Second Step Transaction, Fibrek shareholders will no longer be shareholders of Fibrek, a corporation governed by the CBCA, but will instead be stockholders of Resolute, a Delaware corporation. There are important differences between the current rights of Fibrek shareholders and the rights to which such shareholders will be entitled as stockholders of Resolute. For example, the CBCA provides an oppression remedy that enables a court to make any order, whether interim or final, to rectify matters that are oppressive or unfairly prejudicial to or that unfairly disregard the interests of any security holder, director or officer of a corporation governed by the CBCA whereas there is no oppression remedy available to stockholders of corporations incorporated under the DGCL, such as Resolute. Also, dissent rights are available to stockholders of corporations incorporated under the DGCL in more limited circumstances than under the CBCA. See Section 19 of the Circular, “Comparison of Shareholder Rights” and Appendix A to this document."

 

We have the right to waive the Minimum Tender Condition and, if we were to do so, there can be no assurance that we would be able to successfully consummate a Second Step Transaction.

 

"Under the terms of the Offer, and subject to the terms and conditions of the Lock-up Agreements, we have the right to waive one or more of the conditions of the Offer, including the Minimum Tender Condition. In the event we were to decide to waive the Minimum Tender Condition and were to take up and pay for more than 50% of the Fibrek Shares, we may not be able to successfully consummate a Second Step Transaction or our ability to do so may be delayed. In addition, the market for Fibrek Shares not tendered in the Offer may be less liquid than the current market for Fibrek Shares and the Fibrek Shares may be potentially delisted from TSX. In such event, it is possible that Fibrek would become a controlled but not wholly-owned subsidiary of Resolute."

 

Our Credit Agreement and the 2018 Notes indenture may restrict our ability to respond to changes or to take certain actions.

 

"The 2018 Notes indenture and the Credit Agreement contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability to: incur, assume or guarantee additional indebtedness; issue redeemable stock and preferred stock; pay dividends or make distributions or redeem or repurchase capital stock; prepay, redeem or repurchase certain debt; make loans and investments; incur liens; restrict dividends, loans or asset transfers from our subsidiaries; sell or otherwise dispose of assets, including capital stock of subsidiaries; consolidate or merge with or into, or sell substantially all of our assets to another person; enter into transactions with affiliates; and enter into new lines of business.

In addition, the restrictive covenants in the Credit Agreement could require us to maintain a specified financial ratio if the availability falls below a certain threshold, as well as satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and there can be no assurance that we will meet them.  A breach of the covenants under the 2018 Notes indenture or under the Credit Agreement could result in an event of default under the applicable indebtedness. Such default may allow the holders to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the Credit Agreement would permit the lenders thereunder to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Credit Agreement, those lenders could proceed against the collateral over which they have priority granted to them to secure that indebtedness. In the event our lenders under the Credit Agreement or holders of the 2018 Notes accelerate the repayment of our borrowings, there can be no assurance that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be limited in how we conduct our business, unable to raise additional debt or equity financing to operate during general economic or business downturns or unable to compete effectively or to take advantage of new business opportunities. These restrictions may affect our ability to respond to changes or to pursue other business opportunities."

 

And then there's a whole section "BACKGROUND TO THE OFFER" which makes for good reading ...

[SharperDingaan]

tiedtestedand:

 

Under the conditions of the offer FBK cannot pay a distribution, but there is nothing to prevent them buying in their stock as it does not have an adverse effect. Instead of paying out 50M in a one-time distribution (using cash from the credit lines), they could use the 50M instead to buy in their shares & still keep the offer.

 

Because the offer remains live they can use the offers enterprize valuation to price the shares. Assuming a $50M buyback & $1/share (the cash price/share being offered) they would buy in 50M shares ... But as the offers enterprize value of 130M did not change, the remaining 80M shares must value at a higher price - specifically $1.63 [80M shares x 1.63 = 130M EV]. Furthermore it would have to be a proportionate buy-in so that all shareholders benefit equally.

 

ABH/Prem/Pabrai would still have 67%, but now they only need an additional 18.4M of the remaining shares to get up to the 90% required to force privatization. To go private you have to offer minority shareholders a premium over the market price, & this live ABH offer has established that 40% is the relevant premium applicable to FBK. The base market price resets at $1.63 as 3 buyers are trying to acquire a significant number of additional shares, & would continue to do so up to a price of about $2.28 (1.63+40% privatization premium).

 

ABH/Prem/Pabrai would need roughly 26.4M additional shares. Assuming an average cost of 1.96 [(1.63+2.28)/2], an additional 52M. Against which they got 67% (33.5M) of the 50M that FBK used to buy its stock back. A net incremental cost of 18.5M [18.5=50-33.5] that falls the more of its stock that FBK can buy in. And the more FBK can buy in the fewer additional shares ABH/Prem/Pabrai need to buy.

 

ABH/Prem/Pabrai can't walk away as the conditions were not breached, and they can't hinder FBK buying in everything it can - because it helps them. Calls the bluff.

 

 

FFHWatcher:

 

We are a little biased, but we put forth the following:

 

1) In the early days we advocated taking the offer of $1.00/share per the offer, & FBK paying out a conditional 75M (+/- $.58) distribution which thet weren't restained from doing. Total of +/- $1.58

2) The possibility of Quebec government involvement was raised & it came out to +/- $1.63

3) Adverse press announcements emerged, & we advocated a 10-20% face saving bump (not uncommon) & 75M of conditional distribution. Total of +/- 1.15 + .58 to get to about $1.73

4) More direct adverse comment emerged & the suggestion of .1 ABH (1.55) + 50-75M (+/- .48) in distribution. Total of $2.03

5) We advocated that price was the issue, not the deal itself, & that we wanted to come out at around 2x the exchange rate. Total of +/- $2.04 to $2.18 depending on the ABH share price.

6) Then today ... a path that could get us to +/- $2.28 without a cash distribution.

 

It is a negotiation - & a lot of external & smart people are pretty much independently concurring. The price has also moved up 44% from $1.58 to $2.28 which is also what you would expect. As owners - we would also expect our strategic committee to be reaching similar/better conclusions than we are.

 

Looking forward to hearing what our company has to say!

 

SD