FGE.to - Fortress Paper (formerly FTP.to)

[triedtestedand]

So did the knife hit the floor today, or are we witnessing another dead cat bounce?

 

One big issue I see with a MBO is the convertibles ... reading thru the prospectuses (prospectii?) recently, I think there's wording stating that they become due if there's a change of control.  As such, it might provide more flexibility to pretty-up Dresden and Landqart first, sell them off, and then pull the proceeds from them back up to corporate level.  If the valuation then didn't follow, they'd have more options, no?

 

In terms of Thurso's valuation in the financials, they apparently used "fair value at acquisition time", which is much different than "replacement value" (I'm not sure about scrap value), the mechanism for insurance purposes, no?  Here's some language from Note 6 of the consolidated financial statements of Dec. 31st:

 

 

On April 30, 2010, the Company completed the purchase of a northern bleached hardwood kraft pulp mill located in Thurso, Quebec through a wholly owned subsidiary, Fortress Specialty Cellulose Inc. (“Fortress Specialty Cellulose” or “FSC”), for $3 million. The Company has since converted the Thurso operations into a dissolving pulp mill.

The recognition of assets acquired and liabilities assumed is based upon estimated fair values at the date of acquisition. Fair values are estimated using market information where applicable; however, directly comparable information is not always readily available so significant estimates and judgment are used. The Company believes it has made reasonable assumptions with respect to determining the fair values recognized. A gain of $41,804 has been recognized as the estimated fair values of the net assets acquired exceed consideration paid. The gain has been included as other income in the statement of operations.

 

[Liberty]

So did the knife hit the floor today, or are we witnessing another dead cat bounce?

 

Guess it depends how many margin calls are left..  :)

[lessthaniv]

I don't see a going private transaction any time soon. Lot's of advantage to being public for a company like Fortress which looking to grow and spin off other businessess.

[alertmeipp]

kind of disappointed with go-private talk.

 

Delivery the cash flow and stock will appreciate.

 

Cost over-run, over optimistic projection and running company to the edge won't help pps.

 

 

[Liberty]

I think going private would be a last resort thing, done after other options have been exhausted (many profitable quarters, maybe buybacks or dividends if acquisitions slow, etc). But saying that he'd consider going private certainly sends a signal about Chad's confidence in the business.

[alertmeipp]

I think going private would be a last resort thing, done after other options have been exhausted (many profitable quarters, maybe buybacks or dividends if acquisitions slow, etc). But saying that he'd consider going private certainly sends a signal about Chad's confidence in the business.

 

Except quiet period rules, anything stop him from buying in the market?

[Liberty]

Except quiet period rules, anything stop him from buying in the market?

 

Yes, he's mentioned at least once (at the end of the Whistler conference) that he's been blacklisted from trading FTP stock from the very start of the company because he's always working on many deals.

 

I can't really know for sure, but I think he'd be backing up the truck if that wasn't the case. I mean, if he's considering buying almost the whole thing, I'm sure he'd be willing to buy a fraction of that in the open market if given the chance :P

[alertmeipp]

should he stop making deals and smooth out the existing operations first?

[Liberty]

should he stop making deals and smooth out the existing operations first?

 

I think he believes that the end result will be better if both are done at the same time. It's probably not as if his personal time & energy is the bottleneck in operations anyway. He's hired lots of experienced operations people, and his best use is probably at a higher strategic level. IMO.

[bathtime]

Is FTP's value proposition at present most cogent as a discount to the sum of the parts? This makes more sense to me than buying it for forward EBITDA - on which it doesn't seem like a bargain based on analyst's 2013 estimates.

[Liberty]

Is FTP's value proposition at present most cogent as a discount to the sum of the parts? This makes more sense to me than buying it for forward EBITDA - on which it doesn't seem like a bargain based on analyst's 2013 estimates.

 

I guess it depends if you trust the analyst estimates (were they right before?).

[bathtime]

Good point, Liberty, thanks.

[triedtestedand]

Sum of the parts (pre-LSQ), using back-of-the-envelope "What might they be able to get relatively quickly?":

 

1.    Dresden ->    $170M 

      (let's say 4.5x FCF of $9.5M/qrtr to a private equity firm)

 

2.    Thurso  ->    $310M 

      ($210M for conversion&cogen + $40M for existing + throw in $60M for 1x FCF because it's up-and-running now)

      uses Terrace Bay as baseline (i.e. sell to the party who loses out in the bankruptcy bid?)

      sounds in-ball-park comparing sale of Swedish mill last year for $340M plus $75Mdebt (for ~250K tonnes/yr)

     

3.    Landqart ->  $40M   

      (total guess ... assume liquidation? ... we know they might get $5M to $10M just from extra land)

 

4.    other    ->    $0

      assume near-term cash sources ($19M Landqart hydro, $17M grants, etc) offset by cash complete Thurso cogen

 

Total is $520M ... less Q1 debt of $180M gives you $340M ... divide by 15.3M fully diluted shares gives you $22/share?

 

 

[bathtime]

Thanks triedtestand!

 

That's a great straightforward breakdown. There are so many (moving) parts to this company that I sometimes lose track of the whole when focusing on concerns over the details.

 

The way I'm thinking about it now is that it's at a likely discount to sum of the parts with the kicker of earnings leverage if we see operating success and earnings improvements with Thurso and Landquart.

[motownsf]

Sum of the parts (pre-LSQ), using back-of-the-envelope "What might they be able to get relatively quickly?":

 

1.    Dresden ->    $170M 

      (let's say 4.5x FCF of $9.5M/qrtr to a private equity firm)

 

2.    Thurso  ->    $310M 

      ($210M for conversion&cogen + $40M for existing + throw in $60M for 1x FCF because it's up-and-running now)

      uses Terrace Bay as baseline (i.e. sell to the party who loses out in the bankruptcy bid?)

      sounds in-ball-park comparing sale of Swedish mill last year for $340M plus $75Mdebt (for ~250K tonnes/yr)

     

3.    Landqart ->  $40M   

      (total guess ... assume liquidation? ... we know they might get $5M to $10M just from extra land)

 

4.    other    ->    $0

      assume near-term cash sources ($19M Landqart hydro, $17M grants, etc) offset by cash complete Thurso cogen

 

Total is $520M ... less Q1 debt of $180M gives you $340M ... divide by 15.3M fully diluted shares gives you $22/share?

 

Dresden is worth more than $170m...There is over $400B in PE dry powder right now. Average EBITDA (disclosure: I hate EBITDA and this is very lazy) multiples in middle market are 7-8x.  At a 7x multiple (this is a growing, world leader in its niche), we are above $250m.

[bathtime]

http://blogs.wsj.com/privateequity/2012/06/22/sp-lbo-multiples-below-2010-levels/

 

----

U.S. buyout firms paid an average of 8.2 times Ebitda, below the last two years’ levels, according to LCD. Firms paid an average of 8.8 times Ebitda last year and 8.5 times Ebitda in 2010. Purchase-price multiples hit a post-crisis low in 2009, when firms paid 7.7 times Ebitda on average, according to LCD.

----

 

Also:

 

http://www.midcapadvisors.com/resources/blog/market-insights/394-size-means-more-than-financial-performance-in-private-equity-deals.html

 

At the AGM Chad indicated that the problem was that buyers can't get the 3.5-4x leverage in borrowing from the banks.

[triedtestedand]

motownsf:

 

I don't disagree ... just using fire-sale type prices to look at a base swag.  A PE firm in Europe might be most likely tactical buyer (vs a NA firm? i.e. given that Dresden is in Germany), and as bathtime noted, Chad indicated that credit is a bit harder to get these days in Europe ... seems like governments are sucking it all up. ;-)

[motownsf]

motownsf:

 

I don't disagree ... just using fire-sale type prices to look at a base swag.  A PE firm in Europe might be most likely tactical buyer (vs a NA firm? i.e. given that Dresden is in Germany), and as bathtime noted, Chad indicated that credit is a bit harder to get these days in Europe ... seems like governments are sucking it all up. ;-)

 

Got it. I understand where you are coming from. YTD, Euro M&A is down over 20% in deal count and is down almost 8% in deal value. If tactical means a strategic buyer (not sure what you mean), they will pay more than a buyout firm would.

[tombgrt]

I'll bite on valuation: We should think in terms of probability and come to some sort of expected value. I like to think of 2015-2016 and what FTP could look like. There is a very wide range of possible outcomes but that doesn't mean you can't estimate value, something the broad market will always miss as it hates uncertainty. Say you expect these probabilities (just plucked them out of thin air for now based on not much) for EBITDA (to keep it simple):

 

 

22,50% chance at $50m ebitda

35,00% ... $100m

30,00% $225m

10,00% $300m

2,50% $400m

 

You get expected EBITDA of $153,75m or +- $8,3/share on say 18,5m shares. I don't think those numbers are agressive. This method at least gives you the chance to think about bad scenario's and avoids anchoring. That's really how I try to think about it as we just don't know all that much.

 

[triedtestedand]

Looks like Aditya Birla got the OK from the bankruptcy judge to proceed with purchase of Terrace Bay, precluding late bid from chinese firm:

 

http://www.cbc.ca/news/canada/thunder-bay/story/2012/07/19/tby-terrace-bay-pulp.html

 

 

[tombgrt]

Corn, soybeans and wheat making new highs on a daily basis (because of US drought?)...  Should help cotton pricing over time. Let's see if Chad's [40% NBSK + 60% Cotton]-formula is still valid by then.  ;)

[colinwalt]

In terms of selling off assets to raise cash, I feel it would definitely make sense to sell off Landqart in the not too distant future - hopefully for a valuation based on the results due to the latest orders - which should show up in the numbers over the next 6 months or so. 

 

I know Chad has presented numbers showing that the use of cash is actually growing, but this article: http://tech.fortune.cnn.com/2012/07/09/dorsey-square-death-cash/ indicates that digital cash is making steady inroads.

 

I think cash could easily (inevitably?) and almost overnight vanish from our lives - similar to what happened to film use once digital photography took off.

[OptsyEagle]

Not sure if this article was ever posted.  It is from May 7, 2012.  This blog has a $50 target price on the stock.  But hey, that was like, 2 months ago.  Surely, securing all the financing they need for Thurso and some of LSQ, as well as confirming the ramp up is proceeding very well and costs are well below selling prices, and of course reducing the concerns with Landqart must warrant a 70% reduction from that price.  I mean this is the stock market.

 

http://amp2012.com/2012/05/08/fortress-paper-a-double-target-4-50/

[sculpin]

Update from Dundee Securities today:

 

 

Maintaining A BUY But Lowering Our Target to $35

 

We are lowering our target on Fortress Paper (FTP-T) to C$35.00/share from C$42.00/share, after decreasing our dissolving pulp (DP) price assumptions. We continue to rate FTP a BUY.  Our target price is based on a target forward EV/EBITDA multiple of 4.7x (unchanged) applied to our normalized EBITDA forecast of C$145 million (was C$155 million), and have accounted for the recently issued convertible debentures as equity.

 

Cotton Markets Remain Weak But Close To Bottoming & DP Contracts at Thurso Holding

 

Cotton markets remain weak… Cotton and DP are highly correlated (~89% correlation coef.) as rayon (the end product of dissolving pulp) and cotton are substitutes in textile production (Exhibits 1-2). With the recent free fall in cotton prices, we were not surprised to see DP prices (and rayon prices) following. Prices of cotton are currently at US$0.72/pound, down 13% MoM, 23% YTD and more than 30% YoY (Exhibits 3-4) on the back of expectation for a slowdown in demand as slower economic growth concerns reemerged, and significant buildup in global cotton inventories (world stock to use of 66% vs. 50Y average of 46% - Exhibits 5-6).

 

…but we can see the bottom…While cotton demand/supply fundamentals seem pretty bleak at the moment, we believe that most if not all bad news is already priced in. Here, we would like to highlight the considerable divergence of cotton prices from the three major food crops (corn, soybean, and wheat - Exhibit 8). Prices of these commodities have skyrocketed in the past several months (up between 25% and 50% MoM - Exhibit 7) as the massive drought in the US has been killing the crops and yields have been expected to come down, and this is on top of already low stock-to-use ratios. While the recent drought conditions have impacted yield expectations for cotton as well, we highlight that cotton is a fairly drought-resistant crop, so the damage has not been as bad so far. Having said that, if weather conditions worsen, and Texas and the rest of the Southwestern US (where the majority of cotton is planted) continues to get no rain in the upcoming weeks, we might see more deterioration in yields (see Exhibit 9).

 

…as farmers switch acreage to other profitable crops & traders start short covering. As a result of the spike in corn and soybeans (both at all time highs), we expect that during the next planting season, farmers will switch some of the acreage currently devoted to cotton to other crops to profit from the higher margins (Exhibit 10). This should put a limit to further declines in cotton prices as supply diminishes. Finally, considering the amount of speculative shorts on cotton (see Exhibits 11-12) we would expect a surge in short covering interest should we see a sustained upturn in prices.

 

DP prices to follow cotton price trends… Prices have fallen to US$950/tonne and given our outlook on cotton, DP prices should have bottomed at this time. Looking at past correlation data, DP prices should be slightly higher (~US$100/tonne more) given where cotton trades today. We have lowered our long term DP price forecast by US$50/tonne (to US$1,150) to reflect continued weakness in the cotton market, and given the fairly high supply additions in the DP market (Exhibit 13).

The good news… contracts at Thurso are holding…Thurso is price protected to a large degree with three separate contracts covering almost 80% of the mills' future DP production (5-10 years @ an average  min price at US$1,150/tonne depending on the contract - see Exhibit 14 for full disclosure). 

 

[Arden]

Why aren't you talking about the convertible bonds?