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

[obtuse_investor]

*** Drum Roll ***

[obtuse_investor]

Fortress Agrees to Sell Fortress Optical Features (ccnm)

 

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 26, 2014) - Fortress Paper Ltd. ("Fortress Paper" or the "Company") (TSX:FTP) is pleased to announce that it has, through a wholly-owned subsidiary, entered into a share and loan purchase agreement (the "Purchase Agreement") with Nanotech Security Corp. ("Nanotech") (TSX VENTURE:NTS), as purchaser, for the sale of all of the shares of its wholly-owned subsidiary, Fortress Optical Features Ltd. ("FOF"), and shareholder loans, for an aggregate purchase price of up to $17,500,000 (the "Purchase Price"), subject to a working capital adjustment and earn-out.

 

The Purchase Price is comprised of $7,000,000 cash, a $3,000,000 secured note, and 5,000,000 common shares of Nanotech at a deemed price of $1.50 per share, 3,000,000 of which shares are to be held in escrow and released to the Company upon the achievement of certain business milestones by FOF and/or Nanotech over a five year period. The transaction is expected to close on or about September 10, 2014 and is subject to certain customary conditions, including Nanotech's required approval from the TSX Venture Exchange and receipt of requisite financing.

 

Pursuant to the terms of the Purchase Agreement, FOF will enter into an agreement to continue to supply optically variable thin film material ("OTM") to the Company's Landqart Mill.

 

Chadwick Wasilenkoff, Chief Executive Officer of Fortress Paper, commented: "The sale of FOF is in line with our strategic plan to focus on the dissolving pulp and security paper products segments, enhance liquidity, as well as unlocking shareholder value. Fortress originally acquired FOF to complement its business at Landqart. The ongoing supply of OTM to Landqart following the sale will preserve this relationship including established synergies, and provide access to volumes at favoured prices going forward. We would like to acknowledge the contributions made by the management of FOF over the years, and we look forward to continuing our business relations with them and Nanotech."

[alertmeipp]

Positive and unexpected.

 

Didnt know it can fetch that much and wonder what it means to landquart.

[obtuse_investor]

I believe their cost was $750K... that is a nice sale price.

[sculpin]

It appears as though this Nanotech Security is a real business too - started in 1984 - perhaps the note and shares will actually result in additional value for FTP. NTS has about 40MM shares out so FTP will have an ownership stake of a little over 10% if Optical meets its benchmarks.

 

http://nanosecurity.ca/about/overview/

 

 

[triedtestedand]

Not a big move, but good.  The world is not static.  Interesting.

 

FOF was a cheap buy (<$750K back in 2010), but was a (small) EBITDA drag on Landqart.  That said, their pipeline was starting to fill, so this does provide good immediate liquidity for FTP, with shared upside, and Landqart continues to provide a channel.

 

http://www.marketwired.com/press-release/fortress-paper-announces-acquisition-optical-security-assets-from-bank-canada-tsx-ftp-1365634.htm

[lessthaniv]

Looks like Nano had $0 long term debt as of Q1/14. They didn't have cash either. So, I'm assuming they have organized a $10M facility and issued some shares to pay for Optical. Effectively, FTP has organized a small LBO for 90% of the Optical division retaining around 10% ownership in Nano depending on earn outs. A nice way to raise cash and keep connected to the supplier. The LBO math likely provides a stable margin to Nano which should make their business more predictable. It will be interesting to see how NTS shareholders view this.

[triedtestedand]

<IV, as you no doubt saw:

 

The transaction is expected to close on or about September 10, 2014 and is subject to certain customary conditions, including Nanotech's required approval from the TSX Venture Exchange and receipt of requisite financing.

 

According to SEDAR, looks like Nanotech had ~$2.7M in net current assets as of Q1/2014, and ~39M shares outstanding, along with revenue of ~$650K/quarter.  FOF had revenue of ~$1M in Q2/2014 (albeit lumpy the past several quarters), so Nanotech get a 2x plus increase in revenue.

 

NTS still halted at this point.

 

 

[lessthaniv]

yes, a while back there was some talk of optical being EBITDA break even at around 16% capacity utilization and I believe it was suggested that a couple deals were looking promising that could take up the difference. i think the expectation was $10M EBITDA at 100%?.

 

  i'm wondering if one/both of those deals are happening in conjunction with this? if so, those contracts would go a long way to solidify the financing. probably why the deal is structure with $7M cash/ $3M note. possibly FTP had to provide the $3M note themselves and will be secondary to the $7M from a bank?

[triedtestedand]

<IV:

 

I don't think the EBITDA expectation for FOF at 100% utilization was that high ... maybe 1/2 of that? ... but there was definitely suggestion  that there were prospects in pipeline for FOF to turn into EBITDA contributor later this year.

 

Anyway, I would presume Nanotech's justification for purchase premised on buying pipeline that has firmed up in interim, and which accordingly will translate into revenues and EBITDA positive contribution in short order, and which would then (help) offset their current cash burn, and which then also secure 3rd party financing for balance of $7M that they pay FTP that doesn't come from their balance sheet.

 

Perhaps this financing is reason that Nanotech is still halted ... i.e. pending news of closing of such?

[lessthaniv]

yes, i think that is likely. can't see how NTS would get financing otherwise ...

 

 

[sculpin]

Nanotech Security to acquire Fortress Optical Features

 

 

2014-08-26 14:17 ET - News Release

 

 

Mr. Doug Blakeway reports

 

NANOTECH SECURITY CORP. TO ACQUIRE FORTRESS OPTICAL FEATURES LTD., A LEADING PRODUCER OF BANKNOTE SECURITY FEATURES

 

Nanotech Security Corp. has entered an agreement with Fortress Global Securities SARL, a subsidiary of Toronto Stock Exchange-listed Fortress Paper Ltd., to purchase 100 per cent of Fortress Optical Features Ltd., a producer of optical thin film (OTF) used as security threads in banknotes in several countries. The definitive share and loan purchase agreement (the "Purchase Agreement") provides for Nanotech to acquire 100% of the issued and outstanding securities of Fortress Optical Features for consideration of up to $17.5 million, of which 3 million Nanotech shares (up to $4.5 million) is contingent on the future operating performance of Fortress Optical Features. Nanotech has also entered into an agreement with Canaccord Genuity Corp. ("Canaccord Genuity") to act as sole lead manager and book-runner, and including Craig-Hallum Capital Group, in respect of a private placement of subscription receipts of the Company convertible into Nanotech common shares ("Shares") and Share purchase warrants ("Warrants") in a targeted range of $9.0 million to $16.0 million as more fully described below. To date, subscription agreements in excess of $8.0 million have been received which is an amount sufficient to pay the cash portion of the acquisition under the Purchase Agreement. All monetary amounts are in Canadian dollars.

 

HIGHLIGHTS

 

The acquisition of Fortress Optical Features will serve as a platform to accelerate commercialization of Nanotech's KolourOptik technology by integrating it into Fortress Optical Features' product line as an addition of KolourOptik images to the OTF threads. Nanotech will acquire Fortress Optical Features' state-of-the-art building and vacuum metal deposition equipment, located near Ottawa. The transaction combines complementary businesses that can leverage established banknote customer relationships to accelerate market entry and leapfrog competitive technologies. To date, Fortress Optical Features' technology has been utilized by 11 international currencies. Fortress Optical Features' CEO Igi LeRoux, and COO, Ron Ridley, will be integrated into the Company's senior management. Fortress has the right to appoint one director to the Nanotech board and Nanotech will appoint a director to a Fortress affiliate concerned with security paper production. Cash portion of the purchase price to be funded by a subscription receipts offering at $1.50, each convertible into a Share and one-half Warrant as fully described below. Concurrent financing and acquisition closings are scheduled for September 10, 2014.

 

"We believe this will be a transformational transaction for Nanotech", stated Doug Blakeway, President and CEO of Nanotech. "By layering our KolourOptik nanotechnology onto Fortress Optical Features' security threads which are currently used in numerous currencies, we will create a next-generation product for the banknote industry".

 

Mr. Blakeway added, "Additionally, the transaction will expand Nanotech's current IP portfolio for optical security features to include Fortress Optical Features' 14 current patent applications which should enhance our ability to compete in other commercial spaces such as passports as well as product branding and authentication". Fortress Optical Features' core business is optical thin film material used in security threads incorporated in banknotes in several countries. Originally developed by the Bank of Canada, and subsequently sold to Fortress Optical Features in 2011, this technology was deployed on Canadian banknotes from 1989 until 2011 as well as ten other international currencies. In the twelve month period ending December 31, 2013 Fortress Optical Features generated approximately $2.3 million in revenue and its existing plant could service production of about eight times the level of production which generated this revenue.

 

Fortress Optical Features recently invested $4.2 million to renovate its existing production facility and added $1.0 million in new equipment over the past few years. As part of the transaction, Nanotech will acquire Fortress Optical Features' state-of-the-art production facility and high technology OTF production equipment. Fortress Optical Features is currently pursuing business in some of the world's largest countries and sees potential new opportunities internationally. According to Secura Monde International, the top five banknote producing economies include China, India, the European Union, the United States and Indonesia.

 

TRANSACTION DETAILS AND CLOSING CONDITIONS

 

Under the terms of the Purchase Agreement, Nanotech will pay up to $17.5 million to be satisfied by a combination of $7 million cash, 5 million common shares of Nanotech and a secured vendor take-back note of $3 million with an interest rate of 4% per annum. Of this consideration 2 million shares will have a four month hold period from closing and 3 million shares will be escrowed and shall be released based on certain specific performance milestones based on sales of product to new customers over up to 5 years. Shares may be released early in the event of a sale of the business or change of control of Nanotech. Contingent shares not released after 5 years will be cancelled. Details of the share release formula will be found in the Purchase Agreement to be filed at www.sedar.com. All Shares have a deemed value of $1.50 and the acquisition and financing transactions do not constitute a change of business nor a change of control for Nanotech but will be treated under TSX Venture Exchange policies as a fundamental acquisition.

 

Completion of the transaction will be subject to customary closing conditions, including receipt of all regulatory approvals of the TSXV as well as the listing of the common shares issuable in connection with the transaction, including those underlying the subscription receipts. If Nanotech elects to terminate the acquisition in reliance on an allowable condition, a $600,000 break fee payable in Shares is due to Fortress Paper. Nanotech and Fortress Optical Features anticipate the transaction and financing will close on or about September 10, 2014.

 

RELATED AGREEMENT DETAILS

 

As part of Nanotech's acquisition of Fortress Optical Features, the parties and/or their affiliates have entered into certain ancillary agreements. These include a supply agreement under which Fortress Optical Features will continue to supply OTF security threads to Fortress Paper's Swiss-based Landqart specialty paper division. Landqart will enjoy favoured customer status subject to certain minimum purchase obligations. Under a lease and related shared services agreement, a Fortress Paper affiliate will lease approximately 2/3 of the 100,000 sq ft building being acquired as part of Fortress Optical Features assets and the parties will share the costs of steam production, electrical power, security, and administration services. The $3 million note is fully secured against Fortress Optical Features shares and assets.

 

SUBSCRIPTION RECEIPT OFFERING

 

Nanotech has entered into an agreement with Canaccord Genuity, acting as sole lead manager and sole bookrunner, and including Craig-Hallum Capital Group, to sell on a best-efforts marketed private placement basis, up to approximately 10,667,000 subscription receipts of the Company (the "Subscription Receipts") at a price of $1.50 per Subscription Receipt (the "Subscription Price"), for gross proceeds to Nanotech of up to $16.0 million. The Subscription Receipts will automatically convert, without additional payment, into one common share and one-half of a common share purchase warrant of the Company for each Subscription Receipt upon completion of the transaction. Subject to certain conditions, each whole purchase warrant will entitle the holder to purchase one common share of Nanotech at a price of $1.90 for a period of one year from issuance. The warrants are subject to accelerated expiry in the event that the common shares of Nanotech trade on the TSX Venture Exchange at $2.25 or more for a ten consecutive day period after the four month resale restricted period applicable to the Shares in Canada expires. Completion of the Subscription Receipt offering is subject to certain conditions, including receipt of the approval of the TSXV and all other necessary regulatory approvals.

 

Net proceeds from the Subscription Receipt offering will be used by the Company to partially fund the purchase price payable for Fortress Optical Features and for general corporate purposes.

 

The Subscription Price represents a discount of approximately 6% to the closing price of $1.60 per common share of Nanotech on the TSXV on August 25, 2014 and a discount of approximately 7% over the 30-trading day volume-weighted average price of $ 1.61 per common share of Nanotech on the TSXV, up to and including August 25, 2014.

[triedtestedand]

Some backstory:

 

http://www.montrealgazette.com/business/Fortress+Paper+sells+maker+security+threads+bank+notes/10150226/story.html

[lessthaniv]

Earnouts:

 

The Buyer will issue the Earn-Out Shares at a deemed price of $1.50 per share on the Closing Date which shares will be escrowed and released, pursuant to the Escrow Agreement. The Earn-Out Shares will be released to or at the direction of the Seller, from time to time, upon the Company or its Affiliates (directly or indirectly) achieving the following business development milestones (“Milestones”) set forth below:

(a) 1,000,000 Earn-Out Shares within ten (10) days of the end of the fiscal quarter-end after the Company accepts purchase orders for an aggregate of 300 optical thin film (“OTF”) rolls (collectively, with any equivalent thereof or reasonably similar measure thereto, “Rolls”) for end-use by new customers (including potential customers which have already purchased sample rolls such as customers from China and Indonesia) from one (1) or more Asian countries (and for avoidance of doubt excluding any commercial rolls delivered to any current customers (“Base Customers”) who bought any portion of the last 12 months production of approximately 320 OTF Rolls, excluding any Asian bound Rolls bought by the customers listed in Schedule 2.4 of the Seller Disclosure Statement);

(b) within ten (10) days of the end of the fiscal quarter-end after the Company accepts orders for 300 additional OTF Rolls to non-Base Customers an additional 1,000,000 Earn-Out Shares will be released from escrow. All Earn-Out Share releases shall be proportional to the cumulative number of OTF Rolls sold to non- Base Customers, calculated quarterly on a straight line basis between the 300th Roll referred to in (a) and the 600th Roll. For example, in the quarter when the last Roll that was sold to a non-Base Customer was the 420th Roll, then a cumulative total of 400,000 shares of the 1,000,000 shares contemplated by this subparagraph (b) will be released by the 10th day after that quarter-end;

© 100,000 Earn-Out Shares within ten (10) days of the end of the fiscal quarter-end upon: (i) the Company or the Buyer, directly or indirectly, entering into a partnership, joint venture, marketing, supply, sales agency, licence, agency or distribution or other similar agreement (including oral agreements) with another entity in respect of one (1) or more new Company OTF features or nanotechnology based optical security features or similar individual or combined

products (the “New Features”) produced by the Company or the Buyer for banknote or security paper applications, including, but not limited to, passports, visas, other identification documents, or cheques (collectively with banknotes, “Security Documents”); and (ii) the Company accepting purchase orders for any New Features representing an aggregate of at least 500,000,000 applications of any New Features in Security Documents; and

(d) up to a final 900,000 Earn-Out Shares will be released from escrow within ten (10) days of the end of the fiscal quarter-end where the Company has accepted purchase orders for any New Features for at least 500,000,000 applications in Security Documents with the cumulative number of such Earn-Out Shares released to be calculated quarterly on a proportional straight line basis between the accepted purchase orders representing the 500,000,000th and the 5,000,000,000th applications (rounded to nearest ten (10) million) of any New Features in Security Documents. For example, if at any quarter-end 4,167,500,000 (rounded up to 4,170,000,000) application purchase orders have been accepted, then a cumulative 734,000 of the final 900,000 escrowed Earn-Out Shares will be released by the 10th day after that quarter-end.

 

Note security:

 

interest bearing promissory note of the Buyer issued in favour of the Seller in the principal amount of $3,000,000, accruing interest at a rate of 4% per annum with a term of three years forming part of the Purchase Consideration and secured by: (i) a Subsidiary Guarantee; (ii) a Share Pledge over the Company Shares sold hereunder; (iii) a Hypothec; and (iv) a Security Agreement over the Company’s assets, all of which are in the forms set forth in Exhibit E (i) through (iv) to the Seller Disclosure Statement.

 

Buyer shares: will a 4 months restrictive legend. 2M shares.

[alertmeipp]

Some backstory:

 

http://www.montrealgazette.com/business/Fortress+Paper+sells+maker+security+threads+bank+notes/10150226/story.html

 

Interesting. I hope they finally will really be break even by end of this year. That will be a great milestone.

[triedtestedand]

Some interesting tidbits:

 

 

Section 3.2 Conditions to Obligations of Buyer

 

(d) Financing Condition. The Buyer will have received the proceeds of at least $9,000,000 in new common share equity no later than concurrently with the Closing.

 

 

Section 4.5 Certificate Legends for Buyer Shares

 

"Without prior written approval of the TSX Venture Exchange and compliance with all applicable securities legislation, the common shares underlying represented by this certificate may not be sold, transferred, hypothecated or otherwise traded on or through the facilities of the Exchange or otherwise in Canada or to or for the benefit of a Canadian resident until [four months and one (1)

day from Closing].”

 

 

Section 5.17 Taxes

 

(10) The Seller is a non-resident of Canada within the meaning of the Tax Act.

 

(11) The Company Shares and the Loan are not “taxable Canadian property” within the meaning of the Tax Act.

 

 

Section 5.20 Customers and Suppliers

 

... For the avoidance of doubt, neither the Seller nor the Company is making, or has made, any representation or warranty as to obtaining any future Contracts or subcontracts or that any contractors, subcontractors, prime contractors, or other entities that have provided funding for, or otherwise entered into agreements with the Company with respect to, the Company’s products and services will continue to do so in the future.

 

 

Section 6.1 Title To and Validity of Shares and Loan

 

The Seller has good and marketable title to and unrestricted power to vote and sell the Shares, and to sell and assign the Loan on the Closing Date, in each case free and clear of any Lien (excluding, for this purpose, any applicable securities laws restrictions) ...

 

 

Section 9.4 Financing

 

The Buyer shall use its best efforts to complete a financing of common share equity for aggregate gross proceeds of at least $9,000,000 prior to or concurrent with the Closing.

 

 

Section 12.5 Effect of Termination and Abandonment

 

(b) If Buyer fails to satisfy the condition set forth in Section 3.2(1)(d), then the Buyer shall within five (5) Business Days following termination of this Agreement, either (A) pay to the Seller $600,000 by wire transfer of immediately available

funds or (B) deliver to, or as directed by, the Seller a number of Buyer Shares as has a value of $600,000 calculated based on the lesser of $1.50 and the volume weighted average trading price of Buyer Shares on the TSXV over the five trading (5) days following the public announcement of the termination hereof, subject to a deemed floor price of $1.00 per Buyer Share.

 

 

[sculpin]

Some interesting statements in that Gazette article...

 

"Fortress plans to use proceeds for working capital, perhaps reducing its $250-million debt and seeking acquisitions after its dissolving pulp operations, also in Thurso, recover over the next three to six months."

 

"We are making good progress there so even in a very depressed dissolving pulp market we will be on a run rate of break-even before the end of the year," Wasilenkoff said.

 

"Fortress is also in talks to sell its inactive Global Cellulose mill in Lebel-sur-Quevillon, Que., while a Norwegian mill was recently sold and will be dismantled and moved to Vietnam. The Quebec mill might or might not remain in the province if sold."

[sculpin]

The CIBC report from Aug 10th

FTP_latest.pdf

[lessthaniv]

sculpin,

 

do you recall the additional cost saving per/MT that conversion to natural gas would create?

capital cost?

 

reallocation of this capital may also make sense to projects such as this ... got to dig through my notes as i seem to remember some commentary on this a while back.

 

edit:

 

from your CIBC report ...

 

Additionally, Fortress’s management is in the process of looking at cheaper fuel

sources for the lime kiln at Thurso, which is currently fired on oil. A conversion

to CNG could lower total mill fuel costs by approximately $3 million per year. We

have not at this point factored in these cost reductions. To the extent that this

and other cost initiatives (chemicals, materials, labor etc.) at Thurso are

successfully completed, Thurso could see another $4 million to $6 million of

lower costs.

[triedtestedand]

<IV:

 

My recollection r.e. natural gas is that it would be in that $3M/yr + range, which would be cost savings of $15/tonne + (based on 200K tonnes/yr).  Not sure about capital costs though.  Last year the Quebec utility board nixed paying to extend pipeline, which was/is the primary hurdle (getting the gas there).  There was then chatter in the spring about FTP trucking gas in from Ontario instead.  Presume there's obvious cost/benefit of different options ... and perhaps utility board/municipality/etc. will revisit.

 

It would obviously help, but it would also take some time, and cost some money to get started.

[lessthaniv]

Last year Sodra was forced to shut down an under preforming mill. It has just been sold to Vietnam Trading Engineering Construction and will be the largest pulp mill relocation project in the world beginning in September. It was sold for EUR 18.8M which is roughly $27M CAD. Capacity was about 400k. It would be nice if LSQ assets could be purged for a reasonable amount in a similar type transaction which could overcome the non compete. 

 

Source:

 

http://www.papnews.com/biggest-pulp-mill-re-location-in-the-world-till-now/

 

 

http://www.sodra.com/Documents/PDF/Finansiellt/eng/Södra’s%20interim%20report%20Jan-Apr%202014.pdf

 

 

 

[jose]

That may be a good number to anchor LSQ at. Since annual capacity estimates for LSQ are at 236K, we can discount it at ~60% of Sodra's 400k.  So that puts us at 16M CAD. Then there is that pesky one time 8M environmental fee so that puts as at around 8M.  And we'll just knock off 25% to be extra conservative, so that says LSQ is worth about ~6M.  A pretty arbitrary number but I'm not sure there is a much better estimate.

 

Of course, if DP prices harden up over the next year then the numbers change very quickly.

[Guest Quebec]

No way Jose !

 

Seriously, I'm hoping we keep LSQ and not let it go for a few millions. It's not much of a drag. It's that "billion dollar" asset and it has got the wood supply, environmental and cogen sorted out. It can be the seed for a dissolving or specialty pulp once the markets are healthy again. It's our growth path. And if we ever sell the whole pulp biz, I'm sure a buyer will value this potential.

 

Since we're all-in on pulp after all the investments and at a low point, I'd much rather see LandQart go once its firing on most cylinders.

[lessthaniv]

Not sure what the best strategy would be. Just pointing it out as a reference given the commentary about FTP being in talks to sell it.

 

A huge part of the negotiation, if that ever did occur, would be the logistics involved. If one  could liquidate it for a reasonable amount and utilize the capital to buyback debentures at $.50 on the dollar, the analysis would get more interesting.

 

With the high tariff at LSQ on future production, not sure this asset is worth waiting on when the company's liquidity is getting tighter. Nor am I sure that making pellets or operating as a stand alone energy producer could do better?

 

 

[Guest Quebec]

I know we're just brainstorming on the value and such... An attractive offer could arise for LSQ. We may need to turn LSQ into cash. But we have not sunk much there and the replacement cost is incredible. Having the wood resources and cogen customer is a structural advantage. If we hold to it, many outcomes are possible that would mean more than a few millions in a desperate sale

 

-Chinese tarifs could change

-Production of vsf may migrate/expand elsewhere than China

-Mill could be converted straigth to specialty

-Mill could revert to nbsk in 8 years if market is good then

-Domtar may relax nbsk restriction for some price/agreement

-Dissolving pulp price could increase enough