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

[FFHWatcher]

How many times have investors seen this before, where a company buys back their own stock, only to see themselves get into a cash crunch a few years later.  I realize the big debt is non-recourse, but why isn't anyone suggesting they pay it down?  Isn't it debt that causes problems, not having 10M vs. 7M shares outstanding?

[triedtestedand]

FFHWatcher ... I agree with you ... just think there should be balanced approach.  Am not saying they should buy back a lot of shares ... and am saying they should pay down some debt ... just that they could now take advantage of the fact that ~1/2 the debt is convertible, and ~1/2 is non-recourse ... and that 1/2 of the overall debt is not due for another 5 years.    Their balance sheet will be way better once this closes ... they will want to keep it that way.

[motownsf]

Agree...Keep the cash, as this is a capital intensive, cyclical business.

[Liberty]

I'd like to see them keep most of the cash, but a buyback of 10-25 millions would IMO make sense unless share price runs up a lot in the near-term.

 

If things go badly for a while, they'd still have about 190-200m from Dresden, but if things finally go well, they'd have bought maybe 10-20% of the company for what might seem like peanuts a few years from now.

[BargainValueHunter]

http://www.vancouversun.com/business/Fortress+Paper+cuts+more+than+half+nearly+million+higher/8084191/story.html

 

Fortress has spent $225 million so far on the conversion of the mills including the co-generation facility.

 

The company expects dissolving pulp prices will remain under pressure as more industry capacity is added this year. The current price of US$940 per tonne is down 21 per cent from last year but up US$90 since hitting the bottom in mid-December.

 

Fortress has three multi-year supply agreements covering 78 per cent of Thurso's capacity.

 

Mark Kennedy at CIBC World Markets described the fourth-quarter results as favourable on "positive improvements" at Thurso.

 

"The wallpaper business continues with its track record of strong performance. The dissolving pulp operations showed positive improvements in ramping up the Thurso mill but dissolving pulp prices continued to soften in the fourth quarter."

 

I'd imagine if a cash crunch is evenly remotely possible within four years then paying down some of the debt now would be best.

 

[lessthaniv]

Don't forget ...

 

Moody's Investors Service downgraded Tembec's liquidity rating and lowered its outlook on Friday, Feb 9th/12 over concerns about its high debt, weak operating performance and capital spending related to a major boiler and turbine expansion at its specialty cellulose pulp mill. Moody's lowered Tembec's liquidity rating to SGL-4 from SCL-2 and changed the rating outlook to "negative" from "stable."  "The negative rating outlook reflects the company's liquidity pressures and the execution risk of completing the company's significant cogeneration project at its Temiscaming mill in Quebec," said the rating agency. Moody's said Tembec's ratings could be downgraded if pulp market conditions deteriorate, leading to a further deterioration in liquidity. An upgrade would be considered, however, if it generates more cash flow and the ratio of cash flow to capital spending improves. Tembec has about $305-million (U.S.) of rated debt. Moody's anticipates some financial improvement by Tembec over the next 12 months to 18 months.

 

Chad's comments:

 

Chadwick Wasilenkoff, president and chief executive officer of Fortress Paper, commented: "The sale of the Dresden Mill is an important step in Fortress Paper becoming a more focused global leader in the dissolving pulp industry. The transaction was part of our strategic plan to achieve significant liquidity to enhance future growth opportunities.

 

I'm not suggesting that this is something which would happened right away but rather may occur in time. Given Tembec's liquidity issues, the price might be right at some point and remember; Yvon Pelletier was the executive vice-president of Tembec and President of its specialty cellulose and chemical group. As a senior executive at Tembec, Mr. Pelletier has acted as general manager of various dissolving pulp and kraft pulp operations, and has acted as senior vice-president of the company's kraft pulp division, overseeing three mills in Canada and two in France.

 

We have the right man for the job.

 

<IV

[PPINV]

Net Debt is ~$250M, as follows:

 

 

 

~$300M total

    ~$30M at Dresden

    ~$7.5M at Landqart

    ~$40M in 2016 convertible debs at parent (public)

    ~$105M at Thurso (non-recourse to parent)

    ~$25M in 2019 convertible debs at parent (private placement)

    ~$69M in 2019 convertible debs at parent (public)

    ~$20M at Dresden (new)

 

Less about 50M in cash (30M as of Q4 plus 20M from Dresden)

 

 

Principal repayments as follows:

 

2013 7,761

2014 25,071

2015 24,238

2016 63,572

2017 45,048

Thereafter 111,475

 

 

= Lots of flexibility ...

 

 

It may seems obvious for some member but I'm wondering if the the price paid includes Dresden debt.  If that's the case, the 30M debt that Triedtestedand provided should be removed from Fortress debt calculation. no? Unless it is at the parent company level.

[triedtestedand]

PPINV:

 

Have same question myself.  Based on the following sentence in the press release, I'm guessing that FTP ( the "Company") takes the debt:

 

"Pursuant to the terms of the Share Purchase Agreement, the Company has agreed to guarantee the obligations of FSP and Glatfelter has agreed to guarantee the obligations of Glatfelter Gernsbach thereunder."

 

The press release also indicates that the transaction is to close "no later than June 30, 2013".

 

[triedtestedand]

IV:

 

Here are top 4 shareholders of Tembec

 

WAYZATA INVESTMENT PARTNERS LLC                              19,991,044 19.99

Trilogy Capital, LLC                                                          18,015,281 18.02

Steelhead Partners LLC                                                      12,890,000 12.89

Restructuring Capital Associates LP                                    12,805,975 12.81

 

Recognize any names there? Are you thinking Chad looks to emulate Richard Garneau and do a Fibrek style steal?  If that ever crossed his mind, he'd be wanting a much higher share price to use as (partial) currency.

 

[OptsyEagle]

Net Debt is ~$250M, as follows:

 

 

 

~$300M total

    ~$30M at Dresden

    ~$7.5M at Landqart

    ~$40M in 2016 convertible debs at parent (public)

    ~$105M at Thurso (non-recourse to parent)

    ~$25M in 2019 convertible debs at parent (private placement)

    ~$69M in 2019 convertible debs at parent (public)

    ~$20M at Dresden (new)

 

Less about 50M in cash (30M as of Q4 plus 20M from Dresden)

 

 

Principal repayments as follows:

 

2013 7,761

2014 25,071

2015 24,238

2016 63,572

2017 45,048

Thereafter 111,475

 

 

= Lots of flexibility ...

 

 

It may seems obvious for some member but I'm wondering if the the price paid includes Dresden debt.  If that's the case, the 30M debt that Triedtestedand provided should be removed from Fortress debt calculation. no? Unless it is at the parent company level.

 

The skeptic in me is very curious as to why this announcement was issued today and not Monday, before the CC.  An obvious answer is that not all the i's were dotted and t's crossed.  The other answer is that he didn't want to get into the nitty gritty details with the CC listeners, for some reason.  I am not saying this is not great news.  Certainly there is plenty of cash to see the company through their milestones.  I would just like some clarity on the Dresden debt, the taxes that will be paid on this capital gain, and a few other things. 

 

The other explaination for the delay was that curious stock trading that took place on Monday.  Up almost 10% on no news.  Then down about the same on Tuesday as investors realized that Q4 did not explain it.  And then we have today.  Obviously there was a leak and perhaps Chad wanted to make it look like anticipation of Q4 caused the runnup on Monday and not this news.

 

Anyway, they need to tighten up the ship.  Loose lips sinks ships, I think they say.  Nice day all things considered.

[Liberty]

IV:

 

Here are top 4 shareholders of Tembec

 

WAYZATA INVESTMENT PARTNERS LLC                              19,991,044 19.99

Trilogy Capital, LLC                                                          18,015,281 18.02

Steelhead Partners LLC                                                      12,890,000 12.89

Restructuring Capital Associates LP                                    12,805,975 12.81

 

Recognize any names there? Are you thinking Chad looks to emulate Richard Garneau and do a Fibrek style steal?  If that ever crossed his mind, he'd be wanting a much higher share price to use as (partial) currency.

 

Actually, I don't recognize those names and haven't followed Fibrek very closely. Could you be a bit more explicit about what you are thinking here? Thanks.

[jose]

The pessimist in me wonders if they were a little extra motivated to sell off Dresden now because of a horrible Q1 at Thurso.

 

FTP is turning in to a little anti-berkshire: Selling off profitable businesses with a moat to keep the losing businesses with no moat up and running. Ha.

 

I am (way) long FTP but am ambivalent on this move. 

 

FTP = zero moat + hi commodity cycle leverage + cash + chad, with the emphasis overwhelmingly concentrated on the second factor.

 

[triedtestedand]

Jose:

 

Or look at it this way ... Of late Berkshire has bought moats and kept them.  Chad is building them then selling them (which is essentially what has been done at Dresden).  If you're going to build moats, it's a bit messier ... every now and then you're going to get wet.

 

Then the argument (over long term) is which is more profitable.  The latter is more a la Fairfax, with lumpy results.

[roundball100]

Jose:

 

If you're going to build moats [...] every now and then you're going to get wet.

 

 

Surely this will become a quotable quote, if it is not already!

[jose]

Surely this will become a quotable quote, if it is not already!

 

+1

[Liberty]

Jose:

 

If you're going to build moats [...] every now and then you're going to get wet.

 

 

Surely this will become a quotable quote, if it is not already!

 

Indeed, interesting imagery :)

 

Chad has always described himself as a contrarian deep value investor who goes into out of favor industries. IMO he saw that Dresden was running about as well as it ever would and he could probably build more long-term value by cashing out and putting that money to work in something that is at the bottom of its cycle and more undervalued (the good ol' "sell high, buy low").  That's certainly a more dangerous game than just sitting on good assets and letting them earn a steady return, but if you do a good job of allocating capital, it's potentially more lucrative when what you got at the bottom of the cycle becomes more in vogue. We'll see how it turns out.

[Steady77]

Chad was on bnn just before the close of the markets.

[Liberty]

Chad was on bnn just before the close of the markets.

 

Hmm, was all that BNN scheduling SNAFU about Dresden and not about Q4? Were they supposed to announce it a week ago (or whenever he was first scheduled) and then it was pushed back for whatever reason..?

[triedtestedand]

If you saw it, was there anything of note?

[Liberty]

If you saw it, was there anything of note?

 

I haven't seen it, I'll have to wait for the video to hit the website.

[jose]

http://watch.bnn.ca/the-close/the-close-march-2013/the-close-march-13-2013/#clip883968

[jose]

If you saw it, was there anything of note?

 

It was interesting that they had been looking to sell Dresden for a year and a half. 

 

Chad has mentioned in the past that any asset is for sale at the right price, but this sounded like they were actively looking.

 

So the sale isn't just a knee-jerk reaction to Thurso issues.

 

This sort of confirms by action (not just words) that the long term strategy is build and sell not keep.

 

 

[triedtestedand]

Agree w idea it wasn't knee jerk. 

 

Just watched the clip ...

- Chad was calling in from Switzerland ... Hmmm??

- Stated that price was more than fair (term used by the buyer in conf call earlier today), given European challenges, compression in valuation multiples, etc. ... and that buyer would be a good custodian. At 5.x times TTM EBITDA (160M EUROS vs 30M EUROS), I think that's fair as well.

- Portion of proceeds into LSQ (obviously) other reserved for other strategic.  Of course they will be very vague on any use of proceeds until after deal closes.

 

Paul Quinn of RBC (who was on buyer's conf call asking about valuation multiples) had reduced his target to $9 this morning (from $12) ... presumably after yesterday's earnings ... will he change it again after this news?

[tombgrt]

How many times have investors seen this before, where a company buys back their own stock, only to see themselves get into a cash crunch a few years later.  I realize the big debt is non-recourse, but why isn't anyone suggesting they pay it down?  Isn't it debt that causes problems, not having 10M vs. 7M shares outstanding?

 

This. I can only hope that Dresden was mainly sold for this reason and that Chad doesn't go crazy buying back shares. I have little interest in seeing 5% increase in future IV if that increases the risks of a future cash crunch. Get interest expense down, get Thurso and Landqart to break-even and create some stability.

 

Btw, what did you guys think of the selling price? Great IRR but not an EBITDA-multiple you pay for a "moated" company. Hard to say to what degree it's moated anyway so I guess it's "oke". I somewhat understand tho, the fast liquidity is preferable, they can refocus on the rest and the end of Dresden's growth was probably in sight.

 

Btw, Landqart close to break-even next Q? We have heard this already. I'm not pleased in the least with the quarter and what's coming next.

[Steady77]

Paul Quinn of RBC (who was on buyer's conf call asking about valuation multiples) had reduced his target to $9 this morning (from $12) ... presumably after yesterday's earnings ... will he change it again after this news?

 

 

 

Paul Quinn released a "First Glance" comment today saying the impact was positive and will give the company a lot more room to maneuver.  He also said that it was a pleasant surprise and the additional liquidity will go a long way in easing investor concerns.

 

I believe most analysts will view this as a positive development.