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Posted

Jets we'll agree to disagree:

 

- Forcing a compulsory offer is a 2nd step plan. In our example it is just FBK doing it.

- We have read the agreements. Nothing prevents any of them from warehousing additional purchases through somebody else; a very common practice to evade lockup restrictions.

- FBK doesn't need to do a levered recap. They just need another buyer (them) buying a significant number of shares on the open market, at FMV - to establish FMV as the market price. 5-10M shares at FMV is easily within their credit line capacity.

- We both do not know what FBK is going to to, & they still have a lot of options. 

 

SD

 

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Posted

A simple numbers example to illustrate how FBK could force a compulsory offer.

 

-Assume the offer group tenders 112M shares (86%) of all the shares at the $1/share offer. They have FBK minority shareholders - but they dont have to buy them out.

-FBK makes an issuer bid for 6.5M (5%) shares at an assumed FMV of $2.50. Total cost of 16.25M, but the price in the market in $2.50, & the share count is now 123.5M. The tender group has 91% & is compelled to make a compulsory offer at a premum to market - which FBK has established as $2.50/share. The minority gets bought out for cash.

 

SD

 

 

 

 

Posted

All:

 

FBK's director circular has been posted on SEDAR, at:

 

  http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00029948

 

Amongst other info, they've included their own "BACKGROUND TO THE UNSOLICITED OFFER AND RESPONSE OF FIBREK" section.

 

This is getting juicy ... it looks like FBK was a) about to announce an acquisition (in mid-December), AND that b) Fairfax (and potentially an independent director of ABH? ... ) had been briefed on it (ironically, the initial briefing had happened the same day that Prem/Paul just happened to meet with CEO of ABH, where acquisition of FBK itself was discussed.).

 

 

On May 5, 2011, Pierre Gabriel Côté, President and Chief Executive Officer of Fibrek and Patsie Ducharme, Vice! President and Chief Financial Officer of Fibrek, met in Montreal with Messrs. V. Prem Watsa, Chairman and Chief Executive Officer of Fairfax, and Paul C. Rivett, Vice President and Chief Legal Officer of Fairfax and a director of Abitibi. During such meeting, Fibrek's representatives presented to Fairfax a business update as well as Fibrek's most recent strategic plan and informed representatives of Fairfax that Fibrek envisioned effecting a vertical integration acquisition. Certain details of the ongoing negotiations with the Potential Target regarding the Proposed Acquisition were revealed to Fairfax at such meeting and the impact of an equity financing on Fairfax's shareholdings was also discussed. The parties agreed to reconvene at an appropriate time to further discuss this matter.

 

 

Offeror's Circular: On May 5, 2011, Mr. Garneau met with Messrs. Watsa and Rivett of Fairfax in Montreal to explore with them on a preliminary basis the feasibility of a transaction in which Resolute would acquire only the shares held by each of Fairfax, Pabrai and Oakmont. Mr. Garneau noted that Resolute was considering such a transaction because it believed that it could be accomplished quickly and in a manner that would not require Resolute to make a mandatory offer to acquire the remaining Fibrek Shares. Mr. Garneau noted that in order to fall under an exemption from the mandatory takeover requirement, Resolute would not be permitted to acquire the Fairfax, Pabrai and Oakmont positions at a price per Fibrek Share greater than 115% of the then market price of the Fibrek Shares. Mr. Watsa did not believe such a proposal was acceptable to Fairfax.

 

 

 

The circular's background section also notes that the ABH bid has killed the acquisition discussion:

 

"On December 16, 2011, the Potential Target sent a notice to Mr. Côté terminating the negotiations regarding the Proposed Acquisition."

 

 

Posted

Very, very nice ...

 

(1) p12 - Incremental 12M of EBITDA from power generation. p 14 - Incremental 7M of EBITDA from RBK.

(2) p14 - it appears that this bid was to stall an acquisition .... FFH was aware of it, & was acting on insider information. It may have been inadvertant but it was illegal, & it was used coercively to stop an FBK value generating acquisition - BIG, BIG DAMAGES.

(3) ABH, & the lock-up group (by association), have been shown to be misrepresenting information (cutting rights). They also appear to have been attempting theft through the use of inside information - as they may well have been aware of the potential EBITDA magnitude from the power generation & RBK contracts - SETTLEMENT MAGNIFICATION

(4) This is the 2nd time ABH has been caught abusing its position - first time out it was 6M for breaking the wood chip supply agreement. A very dangerous position for a company that doesn't have many provincial friends, & which appears to have a habit of abusing the smaller players. 10 MINUTE PENALTY ? 

(5) At this point the bid is still live, but it is effectively stalled. Implementing the poison pill will also make it very difficult to get over the 66% 

 

Damages can be settled - & they settle quickly & favourably when there are whiffs of possible insider trading. The question is what do we want as compensation ?

 

Might we humbly suggest that we want ABH's St Feliceon wood chip facility at a dirt cheap price ;) ... And for the right price we can all be friends again - & avoid a whole lot of very bad press, penalty time, & embarrasment  ;)

 

It's a bad time to be shy, & the clock is ticking.

 

SD   

 

Posted

Sorry SD, but I don't see anything illegal done by Fairfax. There has been no insider trading since no share have been traded yet and this is not the first time that a large shareholder tries to block management from doing something they don't like. Fairfax also knew that all this information would show up in the background information of management's circular. It was certainly reviewed by their lawyers and they are no begineers with such process.

 

I actually think that you guys should be thankful for this to have happened. Fibrek was looking at more shares being issued to finance an acquisition. Right at the bottom or in November! Where would be Fibrek share price had this moved ahead? Fairfax also refused a partial take-over by Abitibi at much higher price than $1. They could have left the game at a much better price with no opportunity for the small guy to get anything. IMO, the information disclosed in the circular shows that Fairfax is certainly not  your enemy. Cote clearly did not want to part with any portion of Fibrek. This has now changed weather he likes it or not. 

 

Cote seems to be a clear case of an entrenched manager wanting to keep his job and expanding the corporate empire. Instead of exploring a sale of the RBK business to a company that is already in the tissue business (someone like Cascades) or some joint venture, he is trying to build this from the ground up. Where is going to be the profitability in this with no scale? Competing with Kimberly Clark, P&G, Georgia Pacific and even the Irving family.

 

Now, maybe that the acquisition was a chip supplier for the NBSK business, but I doubt it since they explored a sawmills joint venture with Abitibi and cancelled the project and I recall a discussion about a year ago about expanding in the tissue business. The fact that they even considered getting into the sawmills business should raise big red flags to most of you. One of the best in the paper business or Domtar is trying to get rid of sawmills as much as they can to focus on the manufacturing of uncoated free sheets and pulp. Do you think that small Fibrek can out do the best?

 

Another red flag, what are the changes to Cote's employment agreement and for other top executives as discussed in the circular? Cote already has a 3 year severance payment upon change of control. This is as long as it gets.

 

The good news as I said before is that management now has their back on the wall. Shareholders now want at least $1 for their shares since this is the bid. It now creates a lot of pressure on management and the board to explore alternatives that they did not want to before: "Since the announcement of the Unsolicited Offer, your Board, together with Fibrek's Management, and its financial and legal advisors, have been working to evaluate a range of strategic alternatives that may enhance and crystallize value for Shareholders. Fibrek has initiated contact with a number of third parties who have expressed an interest in exploring a transaction with Fibrek to acquire either all or certain significant parts of Fibrek's business."

 

That is where the opportunity lies and one can only hope that management won't try to enter into bad deals just to retain their jobs or forcing Abitibi to drop its bid. The formal valuation should help drive some specific moves to get the price there: some deal or force Abitibi to raise its bid towards it. 

 

Cardboard

Posted

Cardboard, agreed the purpose of the bid is to show value, as of today.  However, FBK’s management is required to ‘fight the ship’ & maximize TODAY’S value any way they can - & that includes acquisitions, joint ventures, asset sales, share buy-backs, poison pill share issuance, etc. As owners, we compensate management to do exactly this under change of control conditions, & we certainly cannot fault them for their actions taken to date.  But also as owners, if we dislike the possible long term outcomes, we are free to sell at today’s MAXIMIZED price & buy something else if we so choose.  It is in both the FBK’s owners, & its managements, interests to get the highest price possible TODAY - & if ruffles feathers, so be it.

 

Agreed that the spiking of opposing actions is not unusual, but expect a no holds barred hockey game – spearing, slashing, charging, & concussion are all fair game in grudge match pond hockey. We have refereeing because it’s too easy to get badly hurt, & Quebecois players have seldom been ones to back away from a fight.   

 

Fundamental to FFH’s deal flow is the reputation for dealing fairly in small to mid-sized companies when it is very easy for them to abuse their privileged position; & so much so that FFH cannot afford to wear any whiff of insider trading. FBK does not need to prove insider trading in a court – it is sufficient to release corroborated evidence into the public domain in defence against the hostile bid, & then publicly draw on that evidence to support reasonable claim(s) of insider trading. The purpose is to deliberately hurt FFH’s business by attacking FFH’s future deal flow, & smearing FFH with the allegation. FBK just needs to publicly show that this is how FFH sometimes treats its partners, & it could be you – they don’t need to win a court battle.

 

The use of ABH stock as currency is a key variable;

 

The ABH name would appear to smell in too many of the wrong places, & the obvious targets are its Quebec cutting rights & its senior management. It is very easy for the Province of Quebec to change cutting rights rules, they can do it very locally, & NDP politicians are in the business of getting re-elected. FBK needs to sell the powers that be on putting ALL the cutting rights around St Feleceon up for auction – & if ABH doesn’t pay an inflated top $ to keep those rights - & gives up it plant; FBK will be more than willing to save those jobs in return for a break on the auction price. Credibly threaten ABH’s Quebec cutting rights, & the ABH share price will fall.

 

ABH’s senior management were good for the BK restructuring, but now they are a lightning rod. They have exposed shareholders to what could be a significant damage settlement, & exposed their key backers to allegations of insider trading ... so far. Credibly threaten the replacement of ABH’s senior management, & the ABH share price will fall. So far the ABH share price is barely > 14 ... 10% below where they started, & still falling.

 

ABH stock is highly exposed to short selling. Selling today in anticipation of a damaging FBK defence further depressing the ABH share price. Then add to it, a possible increase in dilution resulting from a higher &/or follow-up bid price. And the more ABH shares decline in price ... the greater the run on the shares, & the more pressure to replace senior management.

 

Highly damaging to all, but it will MAXIMIZE today's price for FBK.

Or they can all act like adults - & kiss & make up (for terms) before it gets out of hand.

 

SD

 

Posted

Dude.. you're sounding crazy. You've started by calling a legal transaction illegal, and then proposed a host of illegal or unethical remedies to solve the problem.

 

Stab in the dark, but if Fibrek was trying to vertically integrate, the only major public option would have been EACOM - a high cost, Eastern Canadian lumber producer which is losing money on an EBITDA basis and is a very risky producer. The valuation on a buy-out would be ridiculous.. and its perfectly rational to want to stop such a bad plan.

 

And you're completely exaggerating the extent of this take-under. If FBK was run rating 60 mil EBITDA, and now NBSK pulp prices are down from 1040 to 840, on 350k tons per year, you've just lost all your earnings power.

 

Under ABH, you can cut a lot of costs, and you vertically integrate even the RBK business, and this makes sense... so as a FBK holder, you benefit by participating in ABH's success.

Posted

Dude.. you're sounding crazy. You've started by calling a legal transaction illegal, and then proposed a host of illegal or unethical remedies to solve the problem.

 

Stab in the dark, but if Fibrek was trying to vertically integrate, the only major public option would have been EACOM - a high cost, Eastern Canadian lumber producer which is losing money on an EBITDA basis and is a very risky producer. The valuation on a buy-out would be ridiculous.. and its perfectly rational to want to stop such a bad plan.

 

And you're completely exaggerating the extent of this take-under. If FBK was run rating 60 mil EBITDA, and now NBSK pulp prices are down from 1040 to 840, on 350k tons per year, you've just lost all your earnings power.

 

Under ABH, you can cut a lot of costs, and you vertically integrate even the RBK business, and this makes sense... so as a FBK holder, you benefit by participating in ABH's success.

 

You're actually also exaggerating here.  FBK was never selling pulp at 1040...they are mostly locked into contracts at closer to the current spot price anyway.

 

The truth is somewhere in between...

Posted

No, there's the market price and then the realized price, which traditionally is a 10% discount. The market price has fallen from 1040 to 840. It would be akin to me saying realized prices have fallen from 936 to 756, but I'm not trying to bog down the argument away from the main point, which is that: 1) the NBSK pulp business is highly cyclical, and 2) right now, FBK's mill is barely making any money.

Posted

At the end of the day, after you adjust for all of that, I think your calculation will come out close to mine, which is basically near breakeven. Now what I like about the transaction is that there will be synergies, and so it makes this an attractive investment for ABH even when conditions are depressed.

 

And as someone pointed out, the analyst gave zero value for the RBK mill, and that's about right. You do not want to be relying on recycled fiber right now - the competition over inputs with China is tremendous, and I don't see how this will ever change. The best you can hope for on the RBK side is a zero return. It was a bad acquisition, and in all likelihood, this other planned acquisition was not going to be any better.

Posted

FBK fights back.

 

http://www.newswire.ca/en/story/901167/fibrek-files-directors-circular-rejecting-the-abitibibowater-insider-bid

 

Some interesting tidbits :

 

The Insider Bid does not provide adequate consideration for the unique value of our NBSK pulp and the strategic importance of the Saint-Félicien Mill. In addition to the production of NBSK pulp, the Saint-Félicien Mill has the ability to produce quantities of renewable electricity at low cost. Fibrek will also sell 9.5 megawatts (MW) per year of electrical power co-generated by burning biomass to Hydro-Québec, starting in December 2012, pursuant to a power supply agreement signed on February 12, 2010. Management believes that the Saint-Félicien Mill also qualifies as a renewable energy producer under the Government of Québec's new program to purchase electric power produced by cogeneration announced in October 2011. As a result, the Saint-Félicien Mill, whose existing green energy installed capacity currently stands at approximately 33 MW, could generate an incremental EBITDA of approximately $16 million in the event Fibrek were to secure a power purchase agreement for all of the mill's available megawatts, without any additional capital expenditure required.

 

The Insider Bid also significantly undervalues Fibrek's RBK segment. In accordance with its strategic plan, Fibrek has signed a new long-term agreement on April 11, 2011 with a major tissue producer to supply, on an exclusive basis, 90,000 tonnes per year of RBK pulp under a cost-plus agreement, allowing both RBK pulp mills to base-load their business and eliminate low margin export sales. Deliveries in connection with this contract are scheduled to start in the fourth quarter of 2012. This take-or-pay contract will also (i) give the opportunity to reduce freight costs, (ii) improve wastepaper mix usage, and (iii) reduce exposure to wastepaper price volatility. Based on a study completed by an external consulting firm, Management believes that the additional EBITDA generated by this contract will be, on average, approximately $7 million per year.

 

Wonder how much they're making in their new food packaging segment also.

 

Will vote against the bid, but don't want FBK to go on a buying spree either. Just continue to clean up/strenghten the balance sheet and wait for a compelling offer to sell and unlock shareholder value.

Posted

FBK fights back.

 

http://www.newswire.ca/en/story/901167/fibrek-files-directors-circular-rejecting-the-abitibibowater-insider-bid

 

Some interesting tidbits :

 

The Insider Bid does not provide adequate consideration for the unique value of our NBSK pulp and the strategic importance of the Saint-Félicien Mill. In addition to the production of NBSK pulp, the Saint-Félicien Mill has the ability to produce quantities of renewable electricity at low cost. Fibrek will also sell 9.5 megawatts (MW) per year of electrical power co-generated by burning biomass to Hydro-Québec, starting in December 2012, pursuant to a power supply agreement signed on February 12, 2010. Management believes that the Saint-Félicien Mill also qualifies as a renewable energy producer under the Government of Québec's new program to purchase electric power produced by cogeneration announced in October 2011. As a result, the Saint-Félicien Mill, whose existing green energy installed capacity currently stands at approximately 33 MW, could generate an incremental EBITDA of approximately $16 million in the event Fibrek were to secure a power purchase agreement for all of the mill's available megawatts, without any additional capital expenditure required.

 

The Insider Bid also significantly undervalues Fibrek's RBK segment. In accordance with its strategic plan, Fibrek has signed a new long-term agreement on April 11, 2011 with a major tissue producer to supply, on an exclusive basis, 90,000 tonnes per year of RBK pulp under a cost-plus agreement, allowing both RBK pulp mills to base-load their business and eliminate low margin export sales. Deliveries in connection with this contract are scheduled to start in the fourth quarter of 2012. This take-or-pay contract will also (i) give the opportunity to reduce freight costs, (ii) improve wastepaper mix usage, and (iii) reduce exposure to wastepaper price volatility. Based on a study completed by an external consulting firm, Management believes that the additional EBITDA generated by this contract will be, on average, approximately $7 million per year.

 

Wonder how much they're making in their new food packaging segment also.

 

Will vote against the bid, but don't want FBK to go on a buying spree either. Just continue to clean up/strenghten the balance sheet and wait for a compelling offer to sell and unlock shareholder value.

 

 

Does anyone know if the $16 million incremental EBITDA is per year or in total?

Posted

Sorry SD, but I don't see anything illegal done by Fairfax. There has been no insider trading since no share have been traded yet and this is not the first time that a large shareholder tries to block management from doing something they don't like. Fairfax also knew that all this information would show up in the background information of management's circular. It was certainly reviewed by their lawyers and they are no begineers with such process.

 

 

A couple thing to remember is this is Quebec and 1. they have a different legal system and 2. this is Quebec  ;). Fairfax has proven before their weakest link is in their P.R. dept. so a media war isn't going to look favourably on them.

Posted

Does anyone know if the $16 million incremental EBITDA is per year or in total?

 

Fibrek said it expects to gain $16 million in annual operating income from a future power-purchase agreement with Hydro-Québec covering surplus power from a new cogeneration program at its big St-Félicien softwood pulp mill in the Saguenay

 

Read more: http://www.montrealgazette.com/Fibrek+tried+fend+takeover+Resolute/5940745/story.html#ixzz1iQRoQTHR

Posted

Just another log for the fire ...

 

If FBK wanted to be REALLY hostile - all they have to do is short-sell sufficient ABH, & use the proceeds to tender for enough shares of FBK (at what they determine the Market Price to be) to force ABH into a compulsory bid - at a premium. It doesn't violate the tender conditions, there is nothing ABH can do to stop it (FBK's BOD decides, the BOD does it based on the independently valued alternatives presented, & FBK's shares are illiquid in volume), FBK shareholders (including FFH/Pabrai/Oaktree) get a short gain on ABH's falling price increasing the premium for their remaining shares, & FBK's management gets the satisfaction of forcing ABH to cover their short.

 

Competing offers (with a break-up fee) to substantiate the market price, & pull the trigger. FBK shareholders get more $ value, & a lot more ABH shares as the ABH share price is also lower. ABH gets happy shareholders, & an elegant end to the whole sorry episode.

 

We're happy to take all ABH stock (& would prefer to) - but we're going to get paid for it.

We get paid most, & with the least risk, if ABH is forced into a compulsory offer  ;) Consolation prize is to flip the shares into the competing offer (if ABH withdraws) & buy in ABH directly at the depressed price  ;)

 

No matter what, as FBK shareholders we get paid - & we get paid very well.

...... which is the whole point of this bid.

 

SD 

 

Posted

"I believe that if the ABH bid wasn't out there, the current stock price would be above $1.00."

 

Lucky if it would be $0.75 per share. They would have made that acquisition and diluted the heck of your shares. You would by now be questioning management's judgement and be afraid of constantly declining pulp prices, its effect on EBITDA and potential liquidity issues due to the portion in cash used to finance this acquisition. 2013 is a long way out waiting for potential earnings.

 

Fairfax saved you big bucks here. While I agree that $1 is too low, it is now up to management to figure out how to get more. If they spend all their time figuring this out instead of ways to do some vertical integration  ::) you will likely be pleased with the outcome.

 

I may actually buy some as a form of risk arbitrage. $0.20 more or a 20% higher bid is $25 million. Only 10% more than the Enterprise Value. When you consider how much is spent between lawyers and bankers during these bids, it is not a huge additional sum for ABH to close the deal. To get more than that, then you need another player to show up and that is again up to management.

 

Cardboard

Posted
Disagree.  While I can't speak on the merits of the proposed (unknown) acquisition, CFX is up 28.5% since Nov 28.  While NBSK prices have temporarily dropped (to their 5 year average price) due to inventory concerns, the street seems bullish on 2012-2013 prospects for prices (see CIBC's initiating report on CFX for a good macro overview).

 

And MERC is up 22%+ in same timeframe ...

 

yeah but we all know that FBk has lagged those two in the past..

Posted

"yeah but we all know that FBk has lagged those two in the past.."

 

You know, as much as this has been touted ... I think that's actually open for at least some debate, depending on timing of purchase (e.g. if you bought in FBK at the $.20 lows).  Anyway, that's water under the bridge ... the point is that the market is turning upwards, and even if it lags ... the water has to get under the bridge sometime.

 

Moving away from the stock price debate, and moving to the business valuation ... you could argue that FBK has outperformed both MERC and CFX in terms of improving their balance sheet over the past 3 years.  MERC is a Giordian knot, and CFX just pumps cash up to the parent (nothing wrong with that, but not really improving the long-term valuation in doing so).

Posted

Keep in mind that the investors, & the owners, view of a business are not the same. As investor, we want maximum (but often low quality) EBITDA because we price off that metric; & to get it, we maximize debt & do all kinds of gymnastics to force the EBITDA multiple up - MERC & CFX being shining examples. As owner, we want BS flexibility, & high quality EBITDA. The 'discount' to the MERC & CFX approach is meaningless UNTIL WE SELL THE BUSINESS.

 

FBK handily beats MERC & CFX on most BS metrics, & does so primarily because FCF over the peak of the cycle was diverted to debt retirement versus dividend payouts. Terrible investment for the short-term orientated investment community though, because FBK wouldn't play the game of paying a dividend & keeping the share price > 5, so that institutions could trade it. Hence, FBK's name is dirt. 

 

But ..... all of FBK's BS re-building was akin to winding up a spring, & now we have material additional EBITDA from power generation, as well as significantly higher quality EBITDA from the cost plus RBK sales. We're now only minimally sensitive to SOP prices, & our mills are more efficient - so we don't need as high a market price for our product. Our biggest exposure is our NBSK fibre supply, & the solution is really the direct purchase of a chip supplier (vertical integration). With that supply - St Feleceon may well be one of the 3 lowest cost producers in Canada. Because FBK is unloved it is also possible for FBK to buy-back their shares at prices well below IV, & fund those purchases from operating CF - benefiting long term shareholders. We (long term shareholders) get 30-40% annual compounding for some years - & then get to capitalize it if there is a take out. Hardly surprizing that 'theft' underlies part of today's bid lexicon. 

 

If FBK bought someone else's NBSK fibre, ABH's plant would be orphaned; & would more than likely eventually fall into FBK's hands for a song (ABH rationalization). ABH/FBK is just one of many combinations, & partly defensive - therefore it will require a premium.

 

FBK is a very attractive combination to most buyers as beyond the merely operational - it can also carry the cost of its own acquisition. Even MERC could buy it, & they would be more than willing to because of the high multiple that attaches to their EBITDA. And the MERC's of the world - would make a bid - if they could also get a sizeable break-up fee to make it worth their while.

 

Analysts/advisers are paid to push their clients case, & keep their bid 'on message' - their message. As shareholders (including FFH/Pabrai/Oaktree) we keep an open mind, & pay our senior management to demonstrate the alternatives. As long as we can collectively exit, it doesn't have to be ABH that takes it.

 

SD

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