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

[OptsyEagle]

I wonder how much will be lost to taxes.  If it was all taxed in Canada I would say $30M to $40M.  If the Germans want some of it, which I suspect they will, I would have no idea.  Anyone know?

[Steady77]

I wonder how much will be lost to taxes.  If it was all taxed in Canada I would say $30M to $40M.  If the Germans want some of it, which I suspect they will, I would have no idea.  Anyone know?

 

Fortress is selling the shares (not business assets).  International tax laws are complex.  Looks like it may only be taxed in Canada (should be the usual 50% inclusion rate I guess) if I read the following article correctly (link below).  IF it ends up being taxed in Germany then tax treaties usually allow for a foreign tax credit in Canada to avoid double taxation.

-------------------------------------

Generally, under Canadian and foreign tax rules and treaties, capital gains arising on the sale of foreign active business assets by Canadian corporate taxpayers are subject to tax in the foreign country and in Canada. In contrast, capital gains arising on the sale of shares of foreign affiliates are only taxable in Canada.

 

http://pwc.typepad.com/tax_exchange/2012/02/enhancing-the-competitiveness-of-canadas-international-tax-system-part-5-.html#more

[alertmeipp]

looks like Chad is going all in to DP.

[Steady77]

looks like Chad is going all in to DP.

 

He is certainly making DP a focus for the company but I wouldn't say all DP.  In the interview he said "lots of options and opportunities" and "new and exciting opportunities".

[lessthaniv]

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.

 

They don't have the option at this point to redeem the convertibles. The 6.5%'s cannot be redeemed prior to Dec 31,2014 and the 7%'s cannot be redeemed before July 1, 2015.

[alertmeipp]

looks like Chad is going all in to DP.

 

He is certainly making DP a focus for the company but I wouldn't say all DP.  In the interview he said "lots of options and opportunities" and "new and exciting opportunities".

 

I guess I start to forget Chad is good in capital allocation.

[jeffmori7]

looks like Chad is going all in to DP.

 

He is certainly making DP a focus for the company but I wouldn't say all DP.  In the interview he said "lots of options and opportunities" and "new and exciting opportunities".

 

So far, let's not forget that Chad has been overpromising and under-delivering, so as a good seller, he will always use words like new and exciting opportunities! Paying down some debts is certainly less exciting, but I would rather prefer that at this point until LQ or Thurso can produce some cashflows. Without Dresden, it's already 9-10M$ less in EBIDTA per quarter and growing.

[Steady77]

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.

 

They don't have the option at this point to redeem the convertibles. The 6.5%'s cannot be redeemed prior to Dec 31,2014 and the 7%'s cannot be redeemed before July 1, 2015.

 

Probably can't redeem them yet but couldn't they buy them on the open market and cancel them?  Isn't a redemption and a buyback different things?  TSX approval usually required for any buyback.  I'm surprised the debentures didn't rise further today with the significantly increased liquidity for the company.  IF he were to do a buyback he would probably look at the shares vs the convertibles to determine which makes more sense to do.

[alertmeipp]

i agree, fixed the DP first.

[Steady77]

Agree that the DP segment has to improve performance.  During the conference call the DP management said their priority and focus is to get Thurso running smoothly and lower the cost structure to their target.

[lessthaniv]

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.

 

They don't have the option at this point to redeem the convertibles. The 6.5%'s cannot be redeemed prior to Dec 31,2014 and the 7%'s cannot be redeemed before July 1, 2015.

 

Probably can't redeem them yet but couldn't they buy them on the open market and cancel them?  Isn't a redemption and a buyback different things?  TSX approval usually required for any buyback.  I'm surprised the debentures didn't rise further today with the significantly increased liquidity for the company.  IF he were to do a buyback he would probably look at the shares vs the convertibles to determine which makes more sense to do.

 

Once they are past the redemption dates, they'll be able to redeem converts on the open market, by tender or by private contract.

 

Excluding the privately placed convertibles;

 

1) $69M 2019's with $31 CP --------------->(This implies potential dilution of 2,225,806 shares)

2) $40M 2016's with $37.50 CP ----------->(This implies potential dilution of 1,066,667 shares)

 

Total potential dilution for these two issues is 3,292,473 shares or roughly 23%.

 

At today's closing price of $10/share the company could use $33M of its new found cash hoard to buy in stock and hold it in treasury. It would offset the dilution risk presented by the converts. If the stock price doesn't get back to the CP's prior to redemption dates, the company could redeem the converts and eliminate the debt and dilution risk. Should the stock price rise past the CP's and shares get issued, the company could simply cancel their treasury stock and offset that dilution. Treasury stock could be resold in a liquidity pinch.

[lessthaniv]

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.

 

I'm thinking TMB has liquidity issues yet needs to continue investing in Specialty Cellulose modernization projects. Their other segments are offsetting corporate costs at the moment but not contributing much. They already carry a heavy debt load. Maybe some type of JV could work? FTP gets exposure to specialty cellulose assets and TMB gets money to fund the modernization projects.  I believe they has spent about $80M so far of their Phase 1 - $190M project. Just a guess on my part and I'm not counting on anything.

[BRK7]

Per the Dec31 financial statements posted on SEDAR, Dresden had EUR22.5 debt, and note 24 “Subsequent Event” describes another EUR 15.3 assumed in March prior to the Dresden deal.  Netting these two figures against the EUR160 purchase price, the net price becomes EUR 122.3 or about CAN$163.  From a tax perspective, I believe that virtually all of this is capital gain, because Dresden was acquired for only EUR 5.

[bonechip1]

I think the capital gain may be less than the $163 m, because I think the Dresden cost basis is higher than €5 million.  The €5 m acquisition cost was from Mercer by the private predecessor pre-IPO of FTP.  Not sure what the current cost basis is of Dresden assets, but from the first financial statements filed by FTP as a public company in August 2007, it shows $9.269 m of PP&E for Dresden, and they have added $43 million PP&E since then, and with D&A brings net PP&E to $28.3 m.  Not sure how depreciation works into taxable basis, but adding in other net assets should bring the cost basis significantly higher than €5m I would think.

[Guest Quebec]

News story on Fortress' Dresden sale with some quotes from our ceo:

 

http://www.vancouversun.com/business/industry/Fortress+Paper+sells+German+mill+million/8092962/story.html

[Steady77]

* Fortress Paper Ltd : RBC raises target to C$10 from C$9; rating sector perform

* Fortress Paper Ltd : Canaccord raises target price to C$13 from C$11; rating buy

* Fortress Paper Ltd : Raymond James raises target price to C$14.50 from C$13.50

 

https://research.tdwaterhouse.ca/research/public/Markets/NewsArticle/1314-L3N0C60WL-1

[OptsyEagle]

I wonder how much will be lost to taxes.  If it was all taxed in Canada I would say $30M to $40M.  If the Germans want some of it, which I suspect they will, I would have no idea.  Anyone know?

 

This is a quote from the TD Research report issued today.  There was no change in ratings or price targets from the analyst.

 

"Excluding debt and after taxes on capital gains we expect net proceeds of $150 million subject to working capital adjustments."

[lessthaniv]

Assuming the deal closes and debt gets paid off at Dresden (including the new $20M) and Landquart , the total debt remaining will be;

 

$105M @ Thurso (non-recourse)

$69M Convertible @ $31

$40M Convertible @ $37.50

$25M Convertible @ $32.28

 

Total Debt = $239M

 

Net cash proceeds received by the company should be around $136M ($20M tax, $57M debt as estimates taken from analysts)

The company had $31.5M in cash + $20M Dresden Debt = $51.5M prior to the transaction. Therefore post transaction we will have on the order of $188M.

 

Net Debt to me looks like $51M post completion. Together with the IQ Loan it would appear that LSQ is close if not fully funded.

 

 

[Liberty]

Cotton still doing nicely these days. BAL up almost 20% YTD.

[alertmeipp]

so if they paid off the Quebec debt, then Chinese will have no excuse to tax them to death?

[lessthaniv]

so if they paid off the Quebec debt, then Chinese will have no excuse to tax them to death?

 

not sure that's the case but really, they'll need to reborrrow immediately for LSQ anyway.

[lessthaniv]

Cotton still doing nicely these days. BAL up almost 20% YTD.

 

It's a double edged sword, Liberty.

 

Personally, I wish it would soften a bit. Farmer's are seeing corn prices drop to $5 and cotton prices rise to $.85 - $.90. They get an additional profit from cottonseed ($.05-$.10 on top). So, as that gap contracts, more farmer's will be considering planting cotton instead of rotating to corn. Farmers without irrigation need to plant corn crops before mid May, otherwise they take a big risk that their fields won't get enough water. So, we are down to crunch time. I'd preferr to see a big rotation to corn this year, thereby reducing inventories over the cycle and make the cotton price more sustainable.

 

With the rise in cotton futures, farmers can secure prices and not worry about the influence of Chinese inventories.

 

It's interesting that BAL is up significantly today because China announced they are increasing sales from inventory. They are hoping to sell 4.5M t by summer from inventory.

 

 

[Liberty]

It's a double edged sword, Liberty.

 

I was actually thinking about exactly the same thing earlier today (though you've put it very well).

 

But I do wish cotton would raise to a level that brought DP to around 1200. No need for crazy prices like we had a couple years ago, as that would just lead to oversupply and another crash, but something a bit higher, around the level at which high-cost DP producers start to break-even, sounds like it could be fairly stable and provide nice margins for FTP.

 

Your point about timing is good, though, and I wouldn't mind softer prices in the short term if that helps on that side.

[tombgrt]

Cotton doesn't influence DP as much as it should at this point and this purely because of current oversupply. Remember Chad talking about "DP price= 60/70% cotton + 30/40% NBSK". So how high should DP be now then? Should be a lot higher if his definition with "very high correlation" was correct.

[BRK7]

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.

 

They don't have the option at this point to redeem the convertibles. The 6.5%'s cannot be redeemed prior to Dec 31,2014 and the 7%'s cannot be redeemed before July 1, 2015.

 

Probably can't redeem them yet but couldn't they buy them on the open market and cancel them?  Isn't a redemption and a buyback different things?  TSX approval usually required for any buyback.  I'm surprised the debentures didn't rise further today with the significantly increased liquidity for the company.  IF he were to do a buyback he would probably look at the shares vs the convertibles to determine which makes more sense to do.

 

Once they are past the redemption dates, they'll be able to redeem converts on the open market, by tender or by private contract.

 

Excluding the privately placed convertibles;

 

1) $69M 2019's with $31 CP --------------->(This implies potential dilution of 2,225,806 shares)

2) $40M 2016's with $37.50 CP ----------->(This implies potential dilution of 1,066,667 shares)

 

Total potential dilution for these two issues is 3,292,473 shares or roughly 23%.

 

At today's closing price of $10/share the company could use $33M of its new found cash hoard to buy in stock and hold it in treasury. It would offset the dilution risk presented by the converts. If the stock price doesn't get back to the CP's prior to redemption dates, the company could redeem the converts and eliminate the debt and dilution risk. Should the stock price rise past the CP's and shares get issued, the company could simply cancel their treasury stock and offset that dilution. Treasury stock could be resold in a liquidity pinch.

 

Assuming that mgmt/board determines that the company has ample liquidity to fund LSQ etc, what precludes the company from buying converts in the open market?  I'm not talking about calling the converts at par at the redemption dates (i.e., redeeming), I'm talking about buying converts in the open market (currently at a discount to par:  about 74.5 cents on the dollar for the 7% converts due Dec 2019, and about 84 cents on the dollar for the 6.5% converts due Dec 2016).  I presume they'd need TSX approval (as in the case of buying stock in the open market), but is there another obstacle to making open market purchases of converts?