Resolute Forest Products Commences Takeover bid of Fibrek

[alertmeipp]

Myth, what you said plus lack of insider ownership were the warning signs..

[SharperDingaan]

Couple of final comments.

 

Agreed, there was no other practical way to take out the institutions other than via a bid for all of FBK. The bid had to be orchestrated from pretty much only one source, & we should all be thankful to get out at $1.00. Agreed EV was around 130M. That was the offer price & it included the typical >30% take-out premium.  The offer was the lowest possible, but fair.

 

If we believe in IFRS accounting, & its associated impairment testing, the BV should be reasonably close to the MV of the assets & liabilities were the business to continue as a going concern. Furthermore, the principle is so well established that ABH will be able to use it - to write-up the value of the net assets acquired to about their former BV. The difference between BV (350.6M) & EV (130M) will result in an accretive 220.6M addition to equity for no new share issuance. Most would argue that how that 220.6M is split between buyer & seller, would be negotiated.

 

The folks around the table are more than capable of coming up with a reasonable saw-off.

 

SD

 

 

[cwericb]

From a press release this morning:

 

MONTREAL, Nov. 30, 2011 /CNW Telbec/ - Fibrek announced today that its Board of Directors, with the support of its financial and legal advisors, initiated a diligent assessment of the current situation and of the intention of Resolute Forest Products ("Resolute") to make an offer to acquire Fibrek, as previously announced. The Board of Directors will also fully consider any other strategic alternatives available to Fibrek and communicate Fibrek's views to its shareholders in due course.

 

The Board of Directors fears that Resolute's unsolicited offer undervalues Fibrek and its future prospects. "The consideration offered under the Resolute proposal does not capture Fibrek's true value for its shareholders", said Pierre Gabriel Côté, President and Chief Executive Officer of Fibrek.

 

Read more: http://www.digitaljournal.com/pr/506703#ixzz1fCkhsQD4

 

[Cardboard]

Well, I am very glad that I sold this thing completely after the disappointing Q1. These guys always had an excuse at every quarter to miss on something: inventories not sold, wastepaper high prices, maintenance, etc.

 

However, right now I think that value may be better realized, especially at this price. The guys at the top now know that the game is over for them. They either need to create a lot of value or find another job. They could create value by doing what many have been calling for here for a long time or trying to split the company and then sell both or only one piece. This is not easy to achieve, but that is why people like this dear CEO is paid the big bucks, no?

 

Based on earlier research, I think that Domtar could be interested in them. I also think that Cascades could be interested in their recycled pulp making. Finally, Tembec is a big Eastern player in NBSK pulp and has been selling some non core assets recently. So there are options available. They needed a solid kick in the ass to finally look at some options.

 

Doc 75,

 

"Couldn't just have invested in CFX.un.  No.  That would've been far too simple & smart!"

 

I think that many here including myself share the same problem, we are "greedy" and we always search for the cheapest stock available. This leads us to the stocks with the biggest discounts, but where behind it lies a lot of hidden trouble which eventually destroys that value gap. I am starting to learn slowly that number 2 and 3 on the list, may be better than #1. Kind of like BAC vs C vs JPM vs WFC right now. They are in order of apparent cheapness, but which one is going to make you the most money or best return? With fewer headaches?

 

Cardboard

[Uccmal]

I just picked up some cfx this morning.  Cheap, cheap, cheap

 

Cardboard: jpm,bac,wfc in that order....perhaps.  Dont know c enough to rank it.

[alertmeipp]

>> I just picked up some cfx this morning.  Cheap, cheap, cheap

 

I want to buy when they cut their dividend.

 

>> Strategic review

 

What a joke - now, they are panic because if they don't find a better way to realize value, they are gone. I think there is good chance they will sell either of their segment and keep their jobs rolling. OR finding a higher bidder.

 

 

 

[FFHWatcher]

I think they have the right buyer.  Hopefully the wrong price.  I think the price they are getting is pretty cheap but which shareholder wouldn't?  Since I am a betting man, I bet that they raise the price.  There are always tactics with offers, especially ones that are this low.  Not entirely shocking that FFH has agreed on the price (ok, a little surprised) but I am surprised that Pabrai locked up his shares.  As I recall, he just bought last year and he bought at or around currently pricing.  Was he incorrect in his valuation, has something changed, does he see better opportunities elsewhere, did he underestimate his liquidity, or if Prem says jump, does Pabrai say,  how high sir? (written in humour but I think most here would also say, How High Sir).

 

I think it is a reasonable prospect to add significantly at these prices.  I haven't, doubt I will, as my cumulative losses are enough at this point.  I could change my mind.  This isn't FFH buying nor is it Prem buying, it is Abitibi.  If it was Prem, I would more likely double down knowing that I might make 5-10+% in a short period of time, with limited downside.  I think the odds are good that the deal could go through at 10-20% more with minimal discomfort to Abitibi.  $1.50 seems like a pipe dream at this point.  If mgmt and the board at Fibrek push for a higher price or some sort of reorganization with a division being sold, etc., there is a reasonable chance that the stock could go higher but I would say there is a great chance we will eventually see a return to 75 cents.  Fibrek could also commence talks with Abitibi regarding what they really want.  Do they want St Felicien or US Recycled Pulp ops?  Maybe sell them one for $100 or $200M or whatever it is worth.

 

At least there is a catalyst now.  I was hoping the catalyst was a dividend or (the sale of the US Recycled Pulp ops + debt reduction with proceeds + initiation of a dividend with St Felicien free cash flow). 

 

Summary : 60% chance that deal will go through as contemplated, 20% chance price will be 10-20% higher and deal will go through, 20% chance it will fall through and FBK mgmt will come up with another option.

 

Does anybody else feel that there is a reasonable chance that Abitibi increases their bid?

[SharperDingaan]

We're inclined towards >80% chance of a price increase.

We also think the transaction will ultimately go through, but probably with some modification along the way.

 

Example: Assume ABH only wants the St Feliceon mill (SPECULATION).

(1) ABH could take all of FBK, ring-fence the RBK mills in their own sub, & sell the mills &/or spin off the sub via an IPO. Simplest, but more new ABH share issuance. FBK rises because the exchange rate improves.

(2) ABH takes just the RBK mill, but FBK has to buy back the tendered stock at the offer price. Less ABH share issuance, but they need to pay enough cash to ensure that FBK can buy back its stock. FBK rises because the share count drops.

 

The folks around the table are more than capable of arriving at a solution.

 

SD   

 

 

 

 

 

[SharperDingaan]

 

Just to ensure that FBK 'gets' point (2) ....

 

Per the Q3-2006 acquisition of the RBK mills, St Felicion made up roughly 74% of the capital assets at that time. If MV approximately equals BV, & the mills have been maintained, then St Felicion is worth around 274M +/-  as at Sep-30-2011.

 

Were ABH to agree, FBK could pay off its entire debt (103M), buy back every share issued (130M), & still increase cash by 41M. If FBK just bought back 75% of their stock (97.5M), cash would increase by 71.5M, & BV (=MV) would be around 7.77 on 32.5M shares. 

 

Lot of ways to slice & dice, but they all result in a higher share price for FBK

 

SD

 

[Cardboard]

SharperDingaan,

 

"Per the Q3-2006 acquisition of the RBK mills, St Felicion made up roughly 74% of the capital assets at that time. If MV approximately equals BV, & the mills have been maintained, then St Felicion is worth around 274M +/-  as at Sep-30-2011."

 

You can look at book value all day, but it means squat. The only value that is worth something is what a party dealing at arm's length is willing to pay for an asset. There are plenty of examples of companies selling their business for less than book value. ABH will simply book as cost whatever they are paying for FBK and the difference will simply disappear. Just an accounting entry. If no one else shows up with a higher bid or if management does not find a way to extract more money, that is all you are going to get.

 

Cardboard

[Guest Dazel]

 

 

My take...fairfax has had enough...they were thinking how we were...value in the assets and management would do the right thing for shareholders ie the options given...they decided to take their salaries...and fairfax will add this value to another holding.

It is not a discount because the management was unwilling to create value for shareholders. I think it is done at a buck. I am happy that at least the new management will create value through the management...resolute has been selling non course assets for a while.

Resolute will do well by this trisection as will fairfax...fbk shareholders will likely do better

With this transaction than without because fbk management are thinking about themselves.

 

Dazel.

[SharperDingaan]

Like everyone else, we're happy we can get out ... but it will not be at 37c (130M/350M [assumed approximate market value]) on the $. We're sorry - but even a blind, & one-eyed monkey can do a lot better than this!

 

This is hostile, lowball, "all or nothing" bid for the entire company - & highly likely to succeed. But there is NOTHING .... to prevent FBK borrowing every nickel it can on its credit lines (130M-150M) & paying out a 'special' div of $1.00/share before the close date. ABH may win, but it gets a sucked out shell - & 130M+ of additional debt!

 

This pig is going to release its value - but the pie will be a lot bigger if the parties negotiate.

Easy to change FBK's management if its a show-stopper.

 

SD

 

 

 

 

 

 

 

 

[doc75]

But there is NOTHING .... to prevent FBK borrowing every nickel it can on its credit lines (130M-150M) & paying out a 'special' div of $1.00/share before the close date.

 

I'm far from an expert, but this has me scratching my head. Surely such moves are contemplated and prohibited by any buyout plan.  I presume the buyout offer is scuttled by material changes in the balance sheet.  (Obviously a company can't just divy out all the cash on the balance sheet  and still expect the buyout to close at the same $/share!)

 

So are you just saying that FBK could use this method to force a low-ball buyout to fall through?  This seems a lose-lose move, since they'd exit the process in a precarious state (maxed out credit lines and an unhappy bank!). 

 

 

[triedtestedand]

Well actually, if my math is correct, FBK doesn't have quite that much immediate access to cash ... but they're not without significant ammo.

 

FBK has $150M of credit facilities, with $75M taken out on the term loan, and the remaining $75M on the revolving credit line.  Against the credit line,  it had $20M drawn on it as of end-of-Q3 (offset by $7M in cash).  For argument sake, if FBK generated another $10M-$15M in FCF this quarter , and with the existing cash, and with no changes to AR/AP ... they'd be able to zero their credit line, and thus have about $75M in credit room to work with ... which they could then either pay out as a special dividend, fund a partial buy-back, etc. ... so SD makes a point that even without any asset sales or white knights, it's not like management/board doesn't have any options ... something they did not have luxury of even just 18mo ago.

[doc75]

Well actually, if my math is correct, FBK doesn't have quite that much immediate access to cash ... but they're not without significant ammo.

 

FBK has $150M of credit facilities, with $75M taken out on the term loan, and the remaining $75M on the revolving credit line.  Against the credit line,  it had $20M drawn on it as of end-of-Q3 (offset by $7M in cash).  For argument sake, if FBK generated another $10M-$15M in FCF this quarter , and with the existing cash, and with no changes to AR/AP ... they'd be able to zero their credit line, and thus have about $75M in credit room to work with ... which they could then either pay out as a special dividend, fund a partial buy-back, etc. ... so SD makes a point that even without any asset sales or white knights, it's not like management/board doesn't have any options ... something they did not have luxury of even just 18mo ago.

 

I understand how they could maneuver to have enough credit to pay a substantial dividend.  I just don't see the point.

 

Let's suppose they could pay out $0.50/share by maxing out the credit line.  It would be a material change, so I figure the buyout would either be repriced $0.50/share less, or ABH would walk away completely and we're back to just being FBK for the foreseeable future. In that case we'd have a temporary spike in price (until it goes ex-div) and then we'd own a company worth .50 less per share with a much weaker balance sheet and no suitor.

 

Maybe I'm just misunderstanding what you're saying?

 

It seems to me that the only "option" management has is to somehow convince the market that their assets are worth substantially more valuable than the current bid, AND that they know how to realize this value.  Their track record is awful on the second point, and I don't think maxing out a credit line for a special dividend should count as "realizing  value".  For the first option we basically need another potential buyer for all or part of the company.

 

 

[Uccmal]

I would say Abitibi holds all the cards at the moment.  Since they announced the proposed transaction I am betting they have been buying stock hand over fist as well.  I think that's legal as long as they dont low ball the offer going forward.  I bet that ABH holds the majority of shares now, or within a coupke of weeks if you count FFH and Pabrai's holdings as well.

 

Management is out.  Its too late to do anything.  No one else is going to want this.  Abitibi is the supplier of wood chips to FBk at the PQ mills.  That will present excellemt synergies for ABH.

 

The fact that no other pulp companies had any change in stock price indicates to me that there is minimal interest out there at the moment.  Lots of companies could afford to beat this offer including

Merc, cfx, tembec...no one is interested. 

 

I no longer have any shares.  I sold the very last yesterday and bought some JPM with the proceeds. 

 

Whevener I am tempted by turnarounds at commodity based companies I am going to red flag it after this experience.  I am introducing into my checklist process the necessity to be paying a dividend now, not at some future date, for commodity based enterprises. 

 

I jave had a similar experience with PD which has decided to increase their fleet rather than pay out to shareholders.  I have similarly dumped it completely, and am apparently not the only one - the stock is moribund.

[triedtestedand]

I wonder what Investissement Quebec's (IQ) view on the matter is:

    - they hold the $78M term loan (one of their bigger investments)

    - given their mandate of investing in Quebec firms, presumably they're not a totally disinterested party? 

    - they hold investments (equity and debt) in a number of other familiar names (see link #1 below), so approachable?

    - not sure their relationship w ABH, other than recently hiring someone from there (see link #2 below), so no conflicts of interest?

 

Link #1:    http://www.investquebec.com/en/index.aspx?page=2885

Link #2:    http://foresttalk.com/index.php/2011/10/11/abitibibowater-appoints-silvana-travaglini-as-vice-president-and-chief-accounting-officer/

 

Here's one train of thought relating to this angle ...

 

What if FBK:

    a) could get IQ to invest $70M in new (convertible preferred?) shares @ $1/share (raising share count to 200M)

    b) drew $30M on the floating credit line (increasing the $70M in accessible cash to $100M)

    c) instituted immediate repurchase offer of 70M shares (or 35% of shares outstanding) at $1.428/share

          (using up the $100M, and reducing share count back to 130M)

    d) got agreement that IQ participate in repurchase, but only at 50% of their notional allotment (i.e. 17.5% of 70M shares, or 12.25M shares)

    e) instituted regular dividend of $.02/quarter going forward

    f) instituted normal course issuer bid going forward, with option for IQ that any common share repurchases be matched with commensurate repurchases of the IQ convertible prefs at the same proportional rate (and valuation ... presuming the valuation is attractive)

 

In this scenario:

    - Investissement Quebec would:

            1. become largest individual shareholder (but not controlling) with 57.75M shares, representing 44.42% of shares outstanding

            2. book immediate realized gain of $5.2M on the 12.25M shares repurchased by FBK

            3. book another $24.7M in unrealized gain (presuming $1.428 is set as new floor)

            4. secure dividend of ~$4.6M/year on their remaining investment

            5. secure pro-rata repurchase of preferred shareholdings in same proportion as any of the common shareholdings are repurchased

    - ALL other shareholders would:

            1. get a minimum 44.42% immediate liquidation opportunity of total shareholdings

                ... BUT at a 42.8% premium to current bid, so would have 63% cash-in-hand of what ABH is currently offering

            2. start getting dividend of $.08/share/year

            3. get increased liquidity on remaining investment as result of normal course issuer bid

 

What does this cost to FBK's balance sheet?  Not that much really ...

  a) underwriting and legal fees

  b) ~$30M against their credit line (which represents only 6-9 months of recent debt repayment efforts, so wouldn't set them back much)

  c) ~$10.4M/year in dividends

 

What does this really cost IQ?  A net ~$52.5M outlay for 57.75M pref shares, with a $4.6M/yr dividend (i.e. ACB of ~$.91/share, and 8.8% yield) ... which sounds like a reasonably low risk proposition ... BUT with significant influence on the board to shake things (e.g. divest RBK mills if/as/when get better valuation for them), and with ability to force ABH's hand at the same time. 

 

Am I totally delusional on a friday night?  If it forces ABH's hand, then great ... and even if ABH balked and did not cough up, IQ gets a good investment, FBK's financial position doesn't get compromised, and Prem/Pabrai and all us other shareholders would still get a fairly significant partial liquidity event, at a much more palatable valuation, and with a commitment to a dividend stream going forward.  And if we didn't like the story, we could always still sell on the open market!

 

 

 

 

[triedtestedand]

PS ->  I might also add the following components to the deal:

 

a) IQ subs portion of deal to management and employees/unions (reduces IQ exposure, and gets mgmt/employees/unions to have skin in the game)

b) a break-up fee payable to IQ (and it's partners) if deal does not materialize (e.g. ABH pitches better offer)

c) Management's current options are priced at $1.35/share, so might seek for them to exercise all vested options as part of the deal as well?

[SharperDingaan]

As long as ABH can buy the coy for less than its approximate MV, the offer will proceed, & we think there is +/- 220M on the table. The negotiation is about how much of that +/- 220M will go to FBK vs ABH shareholders.

 

It is in FBK's interest, & power, to declare a special dividend as soon as possible -  & make it as of record the day BEFORE the bid was made. Excludes all bid related selling, & ensures that original institutional shareholders get the cash - decapitating possible opposition.

 

As the total dividend will still be less than the +/- 220M on the table, it will remain in the ABH interests to proceed. Most would also expect that the offer can still go through - & on the same terms - as FBK shareholders get the $1.00/share + the dividend. About the best that anyone can really hope for. And .... the improvement will be without ABH having to put ANY additional cash/equity.

 

Keep in mind that the FBK debt covenants give them a sizeable exclusion (FBK managements Q3-2011 reason as to why they could claim a 12% D/E ratio). An additional 75M is the LEAST they could borrow, & this is BEFORE stripping all available cash out of the existing working capital.

 

Notable is that the dividend is in the lock-up groups interest, as they will be recipients of the cash. Not reassuring the banks, or blessing the transaction, will hurt them as cash is better than ABH stock. Everyone walks away happy. 

 

Agreed; management may know to run mills, but s**k at creating value!

It is beyond pathetic, that most of the opposition seem to have to come from a message board.

 

SD 

 

[alertmeipp]

honestly, I am worried that management actually do something stupid (like max out the loan and do a special dividend) to prevent this buyout. It's not tax efficient for us and if ABH pulls out, we end up with a leveraged company again going into a down cycle and u can rest assured we will stuck with this for long.

 

If they can sell RBK for ~150millions and then divi out the $ - I am all for it. But not just divi out without a major transformation, please. I am okay with buydown and restating some sort of quarterly dividend.

 

Just let the shareholders vote. If it gets rejected, we will have a better place. If not, I will take the loss and move on.

[triedtestedand]

SD:

 

I'm coming to see your (more simple) line of thinking ...

 

-> tap into available credit lines, maximize working capital, seek extra credit line

-> pay existing shareholders via special dividend (if up to $1, then Prem/Pabrai should have no argument)

 

After that is done, then yes, FBK is then left with weaker balance sheet ... BUT existing shareholders are compensated (now) for the risk ... and if ABH continues to proceed, they don't need to come up with more cash or shares to maintain offer ... and further, if they did proceed, the increased debt burden is still ring-fenced in FBK as a sub.  Calls their bluff nicely.

 

How much are you into FBK for?  I'm in for plenty, so happy to yell loudly with you to management and the board if desired. ;-)

 

 

[SharperDingaan]

In terms of share count: > low 6 digit. In terms of $: Zero, as we are working with house money - having recovered our investment a few times over allready through the years.

 

Ideally we would like to see a 10-20% increase in the offer price (high enough for face saving purposes, but not enough to trigger the FBK management options), & a material cash dividend (ABH/FBK synergies carrying the interest cost)

 

When it's done, we would like to be able to exchange for &/or buy up to about double the ABH position that we would otherwise have got. We like foresty, but we need to move up the quality curve.

 

SD 

[Guest Quebec]

Hello fellow board members. I've been a long time lurker but just registered now to write up my disgust with the proposed Resolute buy out of fbk. It's much too low and would be laughed at if not for the cooperative support of the two major holders which are obviously biased, trying to "steal" it as it would much improve their substantial investment in abh, rather than get full and fair value from their fbk investment. They stand to gain much more from a doubled ABH than from a quadrupled FBK. Their absolute dollars invested in abh just dwarf those in fbk.

 

It makes me mad. I feel cheated. My conviction is that fbk has been doing all the prep work to unleash steady improving results with little risk/leverage under the radar.  It was my thought that fbk was not getting an low ball offer like the one just proposed because it was so sure to be dead on arrival, refused upfont by major holders. It did not cross my mind that they could manoeuver like that to do the deed themselves!

 

My confidence in fbk grew such that it's become my single largest investment ever and most of my net worth. I own 250k shares and my cost basis is around 1.2 (hoping it's not too stupid to say so). I was sleeping soundly even at the recent lows and looking forward to add because i was so sure to realize no less than book value within 2 or 3 years.

 

I much prefer the focus of FBK than the mix at ABH and would rather go it alone. I'm thrilled by the possibility of a special dividend to thwarth the offer or to call their bluff and have them pay fair. If they walk away, I would not mind to hold especially with a regular dividend later on. On the other hand, I might take the offer if it was improved enough. While my hopes were more, it may be tempting to accept all share at a rate of  0,1 abh share for every Fbk share (about 1.55 in shares (or cash))

 

Given a choice, I'd rather have Cascades shares, because the product mix is better and the stock is as much undervalued as abh (me thinks). Maybe M. Kobrynsky who left the board could help with this at CAS. Or ideally CFX shares! Hopefully management will really do their work to scout strategic alternatives but they may not be really incented to do so and just fake it... Beside ABH: Tembec, Cascades, Domtar, Cfx, Merc, or even FTP could be suitors. The Investment Quebec proposal put forward by a member here is also interesting.

 

Best of luck to all

 

Québec

[Liberty]

Welcome to the board, Québec! I'm not a FBK shareholder, but I can understand your frustration -- I would hate it if one of the companies that I hold was acquired way below what I thought it was worth.

 

I'm close to Ottawa. In what region are your located?

[Guest Quebec]

Liberty: Eastern Townships in La Belle Province!