Background & Prem's Comments on Fibrek & Resolute

[Parsad]

Here is an article from yesterday's Globe & Mail, with some background information on the Fibrek/Resolute bid, as well as comments Prem gave to the interviewer yesterday.  Cheers!

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/hostile-takeover-bid-puts-fibrek-on-the-defensive/article2277573/

[Alekbaylee]

Not very convincing if you ask me. The bid should have been fair. And $1 is not fair. Point.

In reality, this low ball bid equals to stealing shareholders by forcing them to sell, instead of offering them a compelling reason to sell.

[txlaw]

Very interesting. 

 

It appears that HWIC considers ABH shares to be substantially undervalued on a risk adjusted basis to the point where the exchange ratio is fair.  I think I need to do a deep dive into ABH. 

 

I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK.  Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?

[PlanMaestro]

I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK.  Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?

 

txlaw, there is an ABH thread. You  might want to bring it there

[finetrader]

Prem might think that Resolute is undervalued, but i have yet to see cash flows on Resolute's financial statements to convince me the same

[lessthaniv]

Very interesting. 

 

It appears that HWIC considers ABH shares to be substantially undervalued on a risk adjusted basis to the point where the exchange ratio is fair.  I think I need to do a deep dive into ABH. 

 

I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK.  Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?

 

This is what I previously mentioned looked to be the motive for FFH. ABH looks to be worth about $25/share. Valued in the deal at $15.84 giving about 58% upside. The FBK deals kills the guy who wants cash but rewards the investor who adopts ABH, imo. Synergies gained are in addition. Effective value is then $1.58/share and your betting that ABH gets to it's fair value before FBK could.  I personally, don't disagree with this ...

 

My simple answer to all the math occuring in the previous thread is ... "why would FFH want to compete with themselves". FBK and their bankers can frame the value anyway they want. But I highly doubt ABH will up the offer until after the vote. They only need to get 20% more. If they don't, they can extend the offer with a slightly improved price, wait 10 days and find out if that was enough to attract the extra 20%.

 

I personally don't see how the offer comes to $2/share at any point. Don't get me wrong, I'd be happy if it did... but I think those folks are focusing on the cash value only and no looking into the value on the ABH side.

 

;D

[PlanMaestro]

Prem might think that Resolute is undervalued, but i have yet to see cash flows on Resolute's financial statements to convince me the same

 

You might want to see the cash flow and debt reduction over the last year

[PlanMaestro]

I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK.  Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?

 

From the latest Preez: Reduction in annual defined benefit pension contributions from $313 million to $120 million

[txlaw]

I suspect the ABH pension liabilities may be the reason why there is such a divergence of opinion on the value of ABH versus FBK.  Does anyone have any good ideas of how to go about assessing how the pension funding for ABH will work?  Is everything in the public filings, or is there some background material that I should read to get up to speed?

 

txlaw, there is an ABH thread. You  might want to bring it there

 

Good point.

[triedtestedand]

All:

 

The background snippets that are quoted in the G&M article can be found in their full splendour (with timelines, etc.)  from a document that's been posted on the SEC website ... just check out the ABH filings.  Note that Prem didn't want to sell in May (when FBK was at ~$1.70), nor in Sept (when FBK was at ~$.75) ... so why in November, and why at $1?

 

Txlaw:

 

Agree that the deal isn't good for the guy who wants cash ... but it's not necessarily great for the person who wants ABH either ... it's the quality of the balance sheet (vs the stated #'s) that are important ... and ABH is weighted down with $1.1B in pension liabilities (which FBK has much smaller proportionally), and it has future tax assets of $1.7B (which FBK doesn't include on it's balance sheet).  So if you look at current assets less all liabilities, they have a $600M hole.  If you look at same for FBK, they are near $0.  Further, ABH has toxic union relationships (which FBK doesn't appear to have), it has non-insignificant debt still (despite Prem's statement), and doesn't generate the same amount of proportional cash flow/EBITDA.

 

So Prem's "it's simple really" answer isn't really (except for Fairfax) ... as Fairfax's position in both companies precludes him from offering an FBK shareholder centric view of the deal (more specifically ... the deal valuation).  That said, he's a smart guy, so if he's really looking forward a few moves, he may well have been anticipating all this sound and fury.  ;-)

 

We can all grant that ABH has a) size (and thus institutional interest, and thus liquidity), and b) more product lines (and thus diversity) ... but that said, what's better going into a down market ... FBK or ABH?  Or perhaps more importantly ... FBK as part of ABH, but at what price. ;-)

 

[dcollon]

Attached is some data regarding the pensions that I thought might be helpful.

 

FBK_Pension.xls

ABH_Pension.xls

[txlaw]

Attached is some data regarding the pensions that I thought might be helpful.

 

Many thanks, dcollon!

[SharperDingaan]

Keep in mind that Prem is talking the long view - & doing so for a reason.

 

A cynic would note that ABH might well be floating the idea of swapping the roughly 120M+ of cash in this deal (71M in the offer + 50M from FBH credit lines) for ABH stock. Because if the deal settled at $2+/share (or higher), ABH would get an equity issue of 260M+ & materially improve its D/E ratio. Given that it is highly unlikely that ABH could do an equity issue for 260M+ of cash in todays market - for the same number of shares - there is a need to persuade FBK shareholders as to the merits of ABH stock.

 

A cynic might also highlight what junk TODAY'S ABH share currency actually is - & that this deal is being done TODAY. We may well all agree that over the long term ABH should be worth a lot more, but TODAY a FBK shareholder is being asked to swap a stronger credit for a much weaker one. When you want your counterparty to re-assign to a lower credit, you have to pay for the priviledge.

 

A cynic might also note that in a commodity downturn FBK is not only the lower financial risk, but it also has the cash to buy back its own shares. Furthermore, Prem & Coy have so many shares of FBK, their only real exit is to take FBK private. There is a lot more market risk to holding ABH than there is to holding FBK, & for a FBK shareholder to take on that risk - you have to pay for the priviledge.

 

We would actually prefer to take all ABH stock, & agree with Prem that we would expect the ABH holding to double its value within roughly 1.5-2 yrs. Most others would probably take a similar view - but ABH is going to have to add something for FBK improving their Balance Sheet ;)

 

SD 

[lessthaniv]

Keep in mind that Prem is talking the long view - & doing so for a reason.

 

A cynic would note that ABH might well be floating the idea of swapping the roughly 120M+ of cash in this deal (71M in the offer + 50M from FBH credit lines) for ABH stock. Because if the deal settled at $2+/share (or higher), ABH would get an equity issue of 260M+ & materially improve its D/E ratio. Given that it is highly unlikely that ABH could do an equity issue for 260M+ of cash in todays market - for the same number of shares - there is a need to persuade FBK shareholders as to the merits of ABH stock.

 

A cynic might also highlight what junk TODAY'S ABH share currency actually is - & that this deal is being done TODAY. We may well all agree that over the long term ABH should be worth a lot more, but TODAY a FBK shareholder is being asked to swap a stronger credit for a much weaker one. When you want your counterparty to re-assign to a lower credit, you have to pay for the priviledge.

 

A cynic might also note that in a commodity downturn FBK is not only the lower financial risk, but it also has the cash to buy back its own shares. Furthermore, Prem & Coy have so many shares of FBK, their only real exit is to take FBK private. There is a lot more market risk to holding ABH than there is to holding FBK, & for a FBK shareholder to take on that risk - you have to pay for the priviledge.

 

We would actually prefer to take all ABH stock, & agree with Prem that we would expect the ABH holding to double its value within roughly 1.5-2 yrs. Most others would probably take a similar view - but ABH is going to have to add something for FBK improving their Balance Sheet ;)

 

SD

 

None of this addresses the simple question; "Why would ABH compete with themselves?" With so many shares comitted to the deal at $1, the hurdle to overcome in terms of additional votes is pretty low. They only require 4 out of every 10 shares remaining to vote in their favor. Naturally, FBK will come back with a higher valuation. But, that doesn't mean ABH will do anything about it. Why not just take the $1 offer to vote. If they get it they've stole the assets. If they don't they can simply extend the offer provide a small bump and get wait the obigatory 10 days to find out if they are lucky the second time around. Quebec Harvest levels are shrinking and FBK's biggest expense comes from ABH in the form of woodchips.

 

Porter's 5 forces: I think ABH has the power, unfortunately.

 

I don't like ... but I fear this is reality.

 

I hope your right and I'm wrong ...

[Nnejad]

You all do realize that NBSK pulp prices have fallen $200 in the last 6 months, effectively taking the run rate annual cash flow for FBK from 50 million to (optimistically) 10 million.

[SharperDingaan]

lessthaniv:

 

Keep in mind that ABH may well not have the practical ability.

(1) FBK was deliberately put into play by FFH - & without the FFH shares in lock-up there would be no bid. If ABH is not seen to pay fair value for FBK they screw their biggest shareholder (s?) out of a significant number of additional ABH shares, & those shareholders have the shares to put ABH itself into play.

(2) ABH is also not competing against itself - it is competing to get the largest possible equity issue under the best possible terms. ABH needs the D/E improvement to build up its war chest.

(3) If ABH could force a vote, it would allready have done so. We rather suspect that if ABH forces a vote, & the minority votes no - the shares come out of lock-up. We also suspect that whatever shares the lock-up group has bought post announcement; are not subject to lock-up - & will be excluded from the vote. Minority shareholders will decide the outcome (friendly), but the lock-up group will retain the abiity to force a privatization should they so wish (fairness). Elegance.

 

Nnejad:

 

Plot the quarterly pulp price & capacity utilization for FBK since the ABH spin-off. The median NBSK price is 776-800/ton at 98-99% utilization. The median RBK price is 731-740/ton at 98% utilization. Today's pulp pricing level is the norm under which these mills operate. 

 

ABH controls the major NBSK margin cost (woodchips), & 33-50% of the RBK has no margin risk as it is sold under cost+. The ABH delivery & S&A costs should also be far lower than the 7.6% of revenue that FBK currently pays ... & all before the additional synergies that ABH is expected to extract.     

 

 

.... Overall we see no real strategic reason why the acquisition would not go ahead, baring a price & currency change. But it does seem that the advisors are a couple of steps behind FFH's elegance.   

 

SD

 

 

 

 

[st96dgx8]

lessthaniv:

 

Keep in mind that ABH may well not have the practical ability.

(1) FBK was deliberately put into play by FFH - & without the FFH shares in lock-up there would be no bid. If ABH is not seen to pay fair value for FBK they screw their biggest shareholder (s?) out of a significant number of additional ABH shares, & those shareholders have the shares to put ABH itself into play.

(2) ABH is also not competing against itself - it is competing to get the largest possible equity issue under the best possible terms. ABH needs the D/E improvement to build up its war chest.

(3) If ABH could force a vote, it would allready have done so. We rather suspect that if ABH forces a vote, & the minority votes no - the shares come out of lock-up. We also suspect that whatever shares the lock-up group has bought post announcement; are not subject to lock-up - & will be excluded from the vote. Minority shareholders will decide the outcome (friendly), but the lock-up group will retain the abiity to force a privatization should they so wish (fairness). Elegance.

 

Nnejad:

 

Plot the quarterly pulp price & capacity utilization for FBK since the ABH spin-off. The median NBSK price is 776-800/ton at 98-99% utilization. The median RBK price is 731-740/ton at 98% utilization. Today's pulp pricing level is the norm under which these mills operate. 

 

ABH controls the major NBSK margin cost (woodchips), & 33-50% of the RBK has no margin risk as it is sold under cost+. The ABH delivery & S&A costs should also be far lower than the 7.6% of revenue that FBK currently pays ... & all before the additional synergies that ABH is expected to extract.     

 

 

.... Overall we see no real strategic reason why the acquisition would not go ahead, baring a price & currency change. But it does seem that the advisors are a couple of steps behind FFH's elegance.   

 

SD

 

SD-- Thanks for your posts. Can you please elaborate on your comment that "ABH delivery & S&A costs should also be far lower than the 7.6% of revenue that FBK currently pays..."?  Also do you know if FBK will receive cutting rights in Quibec under the new policy slated to come into effect in 2013? 

[SharperDingaan]

We used the average for the last 15 quarters from Q3-2011 through Q1-2008. Timeline covers both the peak & trough of the cycle, & starts 1 yr after the RBK mills came on board to minimize any acquisition disruption from those mills. It should approximate the average run-rate for FBK over a cycle.

 

Using Q3/2011 #’s:  S&A (3681)/Revenue (138267) = 2.66%. Delivery (10320)/Revenue (138267) = 7.46%. Total S&A + Delivery for Q3/2011 = 10.12%. The major variable affecting S&A & delivery is total revenue; as most of the expense is fixed cost. Q3/2009 & prior - delivery cost were part of S&A; affects attribution, but not the total S&A & Delivery cost as a % of revenue. We would expect that synergy’s would reduce the fixed cost embedded in S&A & Delivery. 

 

Not concerned re FBK’s 2013 cutting rights as we don’t expect FBK to be independent. If they are part of ABH they will not be squeezed (all else equal). Same thing if FBK is privatized & resold to another major. They are going to get the wood.

 

Merry Xmas.

 

SD