Resolute Forest Products Commences Takeover bid of Fibrek

[SharperDingaan]

The IV argument is right, but to make it work you need 100% of the sellers ownership in the hands of one party, & prior owners have to have sold to you at lower prices - so that the premium price applied to the last share is not received by all shareholders. The practical solution is to put up a cash offer for all of the shares up to about the IV, then collect the synergy on the combined entity.

 

Swapping cash for stock made sense if FBK traded at materially less of a discount to IV than ABH did, AND you had confidence that the ABH discount would narrow following the merger. At the time most thought this reasonable, but the sticking point was ABH's refusal to pay up. Board solicitation of a competing bid was to make ABH pay up.

 

The argument still holds today, but with possibly a wider ABH discount & a delay in the narrowing of that discount. If you need to issue a lot more stock to pay for the deal, & are likely to make senior management changes, you have to discount your stock.

 

Today many would not accept ABH stock. So they either do a placement with a friendly party for cash, or they do a placement with the street for a fee. Given the recent treatment, both parties will be mercenary.

 

There's no conflict with FFH. Fiducary duty requires them to maximize the sale value of their FBK stake, & they will accrue the synergies on their ABH stake if the merger is successfull.

 

SD

 

 

 

 

 

 

[lessthaniv]

IV

 

I would more easily subscribe to the rationale IFF FFH were opting for ABH shares, but doesn't the tender circular state that FFH would opt for the cash? That would mitigate thesis that they are giving up on one end to get on the other (recognizing they would still gain as existing ABH shareholders).

 

I'm a long time FFH admirer, so it just seems something is different here.  However it plays out, I'm sure there are a few good bar stool stories that will come out of this.

 

TTT,

 

Fairfax has agreed under its Lock-up Agreement to elect to receive its consideration in the form of either the Cash Only Option or the Cash and Share Option, but not in the form of the Shares Only Option, in effect limiting the number of shares of Resolute Common Stock that Fairfax may receive under the Offer to 955,043.

 

Resolute's offer limits the amount of new stock issued to approximately 3.7M shares.

 

So, when FFH agreed to this condition it was in effect leaving more stock for the remaining shareholders to split. Dare I say it ... they did something nice for their partners! You'll note that the others parties involved did not agree to the same limiting condition under their lock up agreements.

 

Here is an excerpt from the Globe and Mail article dated Dec 20th:

 

http://m.theglobeandmail.com/globe-investor/investment-ideas/streetwise/hostile-takeover-bid-puts-fibrek-on-the-defensive/article2277573/?service=mobile

 

“When Resolute, the old Abitibi, approached us, we felt this was the right operation with the right scale to acquire Fibrek, and here’s the key – Fibrek shareholders will receive Resolute shares that will maximize shareholder value over the long term,” says Mr. Watsa. “Our view is Resolute shares over time, the next three or four years, will do much better than Fibrek shares.”

 

Fibrek’s shares have not performed well for a long time, he added. “Abitibi/Resolute is almost debt free, it’s a large company, and it’s come down by more than 50 per cent itself,” Mr. Watsa says. “So where would you put your money? Our thinking is we preferred to go with the large company whose stock is also undervalued and who is financially very strong and will recover. If Fibrek was to recover, Resolute will recover too. And it’s as simple as that.”

 

<IV

 

 

 

[alertmeipp]

I must be missing some with ABH.

[triedtestedand]

IV:

 

Thanks for the info r.e. Hudbay and Osler ... the links below spell out some interesting contextual details:

 

http://www.mccarthy.ca/article_detail.aspx?id=4759

http://www.osler.com/NewsResources/Default.aspx?id=1303

 

It looks like everything is a shade of grey ... with interpretation based on whether you're rooting for black or white.  We'll see what happens soon.

[rmitz]

IV:

 

Thanks for the info r.e. Hudbay and Osler ... the links below spell out some interesting contextual details:

 

http://www.mccarthy.ca/article_detail.aspx?id=4759

http://www.osler.com/NewsResources/Default.aspx?id=1303

 

It looks like everything is a shade of grey ... with interpretation based on whether you're rooting for black or white.  We'll see what happens soon.

 

In life, everything is a shade of grey.  Only people who ignore some of the facts see in black and white.

[alertmeipp]

maybe ABH will turn around to buy MERC.

[lessthaniv]

IV:

 

Thanks for the info r.e. Hudbay and Osler ... the links below spell out some interesting contextual details:

 

http://www.mccarthy.ca/article_detail.aspx?id=4759

http://www.osler.com/NewsResources/Default.aspx?id=1303

 

It looks like everything is a shade of grey ... with interpretation based on whether you're rooting for black or white.  We'll see what happens soon.

 

This is the statement that bothers me the most:

 

the fact that the transaction did not preclude a superior offer by a third party, and required Paramount to tender or vote any Profound shares acquired on the conversion of the special warrants in favour of a superior offer;

 

As I stated earlier, I think ABH will argue this deal does have the potential to preclude a superior offer.

 

We'll see though.... It's certainly been an interesting one to follow.

 

 

[lessthaniv]

Something to consider:

 

FFH/Pabrai/Oaktree may have agreed to a lock-up, & a lowball tender, to put FBK into play. The intent was to exit either via ABH share issuance (& resale to the secondary market), or a direct sale to the winning bidder. Clean, elegant, & the fairest way to deal with a problem holding. No additional involvement from FFH other than lend their credibility via the lockup.

 

Then ABH decides to play the thug, & CONTINUES to play the thug right up to the present. Most senior management recognizes that the job comes with risk, & OK - you might have been overly aggressive in the intial delivery to spur the desired reaction. (A)But attempting to have the courts throw out a subsequent superior & COMPETING bid just because you don't like it ? What are your lockup shareholders supposed to do - when you've just tried to legally rob them by attempting to remove the competing offer that they were trying to obtain ?

 

ABH is a bankrupt & hoping to use 50M of its reformed stock as currency. Now nobody wants the stock (unless deeply discounted) & (B)they need maybe an additional 130M to pay for the PV of the PPA. If you held your bowl out to me for an additional 180M, just after trying to rob me, I'd also be supremely p*ssed. I'm working with the Marx brothers, to protect my existing investment I don't have a choice but to fund them, I'm going to very close to the complications of 50% ownership, & I have to act to protect my business reputation. Some might even think that I'm being greenmailed.

   

Most would want this resolved, & quickly, behind closed doors. Simplist is to put up the fair bid, end the event, then use the votes to make the changes neccessary.

 

SD

 

 

(A) In the history of public market deals,  have you ever seen a bidding entity happily increase their bid to IV in order to make shareholders under a hard lock happy? SD, this makes no sense to me. The whole point of getting FFH to commit to a hard lock is so they can't chase after a higher bid. That is what allowed ABH to perhaps get away with a weak bid and transfer the excess intrinsic value to ABH and away from the minority shareholders of FBK.

 

Furthermore, if FFH was in fact displeased with Garneau's cowboy antics as you suggest then why is FFH seeking to stop the issuance of the warrants through the exchange?

 

Additionally, three shareholders, including Fairfax Financial Holdings Ltd., which have entered into lock-up agreements with Abitibi and Steelhead Partners LLC, which is, like Fairfax, a significant shareholder of Abitibi, has also, through counsel, sought to stop the issuance of the warrants before the Toronto Stock Exchange.

 

Your comments leading us to believe that FFH would prefer the $1.30/sh Mercer offer do not align with FFH's actions.

 

(B) It seems to me that this is applying private equity theory to a public market deal. In the public markets, I would not expect the bidders to pay up for a contract that doesn't yet exist. I note that neither ABH nor MERC have offered prices that include that future potential revenue stream to any meaningful degree. The best hope for the FBK minority is to try and get a PPA in place, yesterday. With a new contract on the table the value of FBK then goes up. But what are the chances that it happens before the deals close? I would be willing to bet that whoever wins the bidding war will pay the lowest price they are able to pay inorder to win the deal. And until such time as a PPA is in place ... I won't expect that future cash flow to be fully valued.

 

 

 

 

[Cardboard]

This comment from Cote tells me that Fibrek is wide open to accept a superior offer from ABH: "If Abitibi wants the warrants to go away, all they have to do is make a superior offer to the Mercer offer." So the door is not closed and it sounds to me like MERC would be happy to simply walk away with a cool $8.5 million. And it is hard for me to see MERC entering a bidding war with the kind of results they just published and the fact that they are looking to sell the RBK business at an uncertain price. Also, forget about the PPA. Even if it occurs, I doubt that the two bidders will put much value on that considering recent pulp industry results. There is already too much risk for them on the table and FBK has telegraphed that recent results are not good. MERC $1.30 bid must consider the PPA in some ways.

 

We also have a pretty good idea as to the maximum potential value of the offer or $1.45: "Despite the results of an independent formal valuation that puts the value of Fibrek shares between $1.25 and $1.45 per share, and in the face of a significantly superior offer at $1.30 per share from Mercer...". That range has been put forward in front of shareholders many times now. If the final bid is within that range, the Fibrek board will consider that they have done a tremendous job. They can increase that range if the PPA is received, but are bidders going to oblige?

 

How superior to $1.30 to consider it superior remains the question? However, currently we have two offers on the table: $0.99 and $1.27. They keep talking about $1 and $1.30, but about half of the value of the offers are shitty stocks. Sorry for the expression, but MERC and ABH are not cash and in pretty bad industries. Your only advantage to stick around is to save on taxes in a tax free exchange for the shares, but is that worth it? Are ABH and MERC the best opportunities that you see currently in the stock market or is this tax advantage enough to make them the best?

 

The stock is at $1.32 currently and I would imagine that if ABH comes out with a bid that truly delivers $1.35 that they will win the auction. Even $1.40 if you will. That leaves very little money left to grab and there is a risk that the stock falls back to $1.25 or a slight discount to the $1.27 offer if ABH pulls out. MERC may even go lower in that scenario since there will be a foreseen overhang of shares from Fairfax, Pabrai and Oakmont.

 

IMO, the quick and easy money in that situation has been made. I think that there is more risk now and that it is likely better to put my money in undervalued opportunities that will deliver a much higher rate of return, although over the longer term.

 

Cardboard

[triedtestedand]

The SEDAR filing for the warrants (and the support agreement) is available at:

 

http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00029948

 

Some of the details (or at least that's how I read them) include:

  - warrants automatically convert to shares if <50.1% of shares are tendered to MERC

        - NB: The 50.1% threshold would factor in the MERC warrants being converted (so a lower bar than calculation on undiluted #)

  - MERC can convert anytime after any of FBK lock-up shareholders tender to ABH

  - FBK can redeem (at par) within 2 days of conversion, at it's discretion

  - FBK can redeem in event of a bona fide Superior Bid that kills the support agreement

  - MERC can require FBK to redeem if >50.1% of shares tendered to MERC

  - If Superior Bid materializes, warrants convert, and Termination Fee is paid, then MERC is required to vote the converted shares if favour of the Superior Bid

  - If Superior Bid materializes, warrants convert, and Termination Fee is paid, then MERC required to pay FBK either:

                a) Termination Fee,  if profit from warrants is >= the termination fee

                b) profit from warrants, if profit from warrants is <= the termination fee

        - NB:  Based on 32.32M warrants, the Termination fee of $8.5M represents a profit of $.263 per warrant

 

You could draw up a pretty sophisticated Venn diagram to map this all out.  Looks like they've covered a fair # of bases with this ... what are they missing and/or what is contentious from an FBK-only shareholder perspective?

 

One observation ... the # of warrants being issued represents <25% of existing FBK shareholdings (a magic # for TSX according to one of the law articles referenced ... see  http://www.mccarthy.ca/article_detail.aspx?id=4696)

 

 

[triedtestedand]

PS for all ... notice any similarities to current situation in the linked video?

 

 

 

 

[finetrader]

I have sold all my shares at 1.33$. Will wait for more development to see if I want in again.

[Parsad]

IV

 

I would more easily subscribe to the rationale IFF FFH were opting for ABH shares, but doesn't the tender circular state that FFH would opt for the cash? That would mitigate thesis that they are giving up on one end to get on the other (recognizing they would still gain as existing ABH shareholders).

 

I'm a long time FFH admirer, so it just seems something is different here.  However it plays out, I'm sure there are a few good bar stool stories that will come out of this.

 

They're not opting for the cash, but restricted to receiving alot of it in cash because securities laws prevent an affiliated company from receiving too much stock of an affiliated company.  Cheers!

[SharperDingaan]

There are actually 3 options on the table.

Sell to ABH @ .97, MERC @ 1.27, or do nothing.

 

The board & the external valuation agree that FBK qualifies for the PPA. Most estimate the average PV of the PPA at $1/share +/-. The bid argument is dont pay, because you dont have it, the business is worth $1.27 at most. The sell argument is pay up for the PPA or we don't sell, we'll simply wait to get the deal signed & increase our value by the $1/share PV of the PPA to $2.27. A gain of 79% for maybe a 3-4 month delay.

 

There is nothing to prevent FBK itself selling its RBK mills to someone else. It is highly likely that they have received an offer for those mills, that would eliminate a very large chunk of their debt. Were there a RBK mill sale, the PPA would incease St F's value by well > 100%, & we would be having another discussion with ABH. Merge the chip plant with St F, or buy St F, or sell the chip plant to St F. No matter what - the PV of the PPA gets included.

 

SD

[SharperDingaan]

(A) In the history of public market deals,  have you ever seen a bidding entity happily increase their bid to IV in order to make shareholders under a hard lock happy? SD, this makes no sense to me. Money talks. Very loudly - & especially when those hard lock shareholders are also the ones funding you (either directly or through their indirect acquiescence). Only the Marx brothers would be deaf to the need to keep this group happy.

 

The whole point of getting FFH to commit to a hard lock is so they can't chase after a higher bid. That is what allowed ABH to perhaps get away with a weak bid and transfer the excess intrinsic value to ABH and away from the minority shareholders of FBK. The point of the hard lock is to demonstrate the displeasure of the major shareholders & lend credibility to the alternative - if value is not realized in very short order.

 

Furthermore, if FFH was in fact displeased with Garneau's cowboy antics as you suggest then why is FFH seeking to stop the issuance of the warrants through the exchange? A hard-lock requires the shareholder to publicly support the bid. Privately the shareholders may say something quite different, & in different ears.

 

 

(B) It seems to me that this is applying private equity theory to a public market deal. In the public markets, I would not expect the bidders to pay up for a contract that doesn't yet exist. I note that neither ABH nor MERC have offered prices that include that future potential revenue stream to any meaningful degree. The best hope for the FBK minority is to try and get a PPA in place, yesterday. With a new contract on the table the value of FBK then goes up. But what are the chances that it happens before the deals close? I would be willing to bet that whoever wins the bidding war will pay the lowest price they are able to pay inorder to win the deal. And until such time as a PPA is in place ... I won't expect that future cash flow to be fully valued. There is nothing to prevent the PPA from being treated as a working capital adjustment. As in all takeovers the buyer pays the agreed amount of the A/R, & gets a rebate off the price for that portion of the A/R that subsequently turns out to be uncollectable. ie: pay up for the PPA, & get your money back if the PQ doesn't sign the agreement. Consequently, it is highly likely that the winning bid will be the one that guarantees to pay the most for this A/R. ie: the least rebate from FBK if the PQ doesn't sign the deal.

 

We will get paid for the PPA. It is just the how that is unclear.

 

SD

[FFHWatcher]

If Resolute/Abitibi were to say, 'we have enough problems right now, we are going to walk away', wouldn't MERC get FBK for $1.30, assuming no other bidders present themselves?  If that ends up happening, than it could be argued that MERC ends up with FBK without paying for the PPA, unless of course you contend that Abitibi wasn't willing to paying anything for it and MERC was willing to paying $0.30/share for the chance of it becoming a reality.  Either way, I believe that the odds of this deal going through at $1.30 is many times more likely than the $1.00 deal going through.  Therefore, holding at $1. was a way lower risk venture vs. holding at $1.32.

[SharperDingaan]

MERC would have to include the PPA as a working capital A/R adjustment. FBK shareholders do not have to vote in favour of the $1.30, & they can afford to wait the expected short period for the signing to be completed.

 

The obvious solution for FBK & each bidder is to agree a PV of the PPA, & hold the funds in escrow until the PQ signs the deal. If there is no subsequent signing, the funds return to the bidder as a working capital adjustment.

 

On a risk scale of 1:10 (worst) holding at $1.00 was perhaps a 2. Holding at $1.30 is maybe a 4-5. More risky than it was, but still relatively low overall.

 

The saving grace is that the significant & material size of the PPA forces both bidders to recognize it.

Despite the bitching  ::)

 

SD     

 

 

[finetrader]

http://www.stockhouse.com/News/CanadianReleasesDetail.aspx?n=8432920

 

Well, maybe it is time to sell those mills after all

 

[Guest Dazel]

http://finance.yahoo.com/q?s=Fbk.to&ql=1

 

We are happy to out of this....too many reports like this! It has been a big lesson to us! A dog is a dog even though you might think you can sell the assets for what they are worth...you need an operator who specializes in selling off the assets. Or else it is one excuse after the other...even though we made a little money here...it was a painful experience...and one that was not necessary given that Canfor pulp was available at an inexpensive price at the same time...

A valuable lesson for us.

Good luck all!

 

Dazel.

[SharperDingaan]

Very well played gentlemen ....

 

Because we have a bidders hedge covering both our Q4 & Q1 results, we are not affected by the downtime & write-downs that were required to set the business up for Q2 going forward. The bids remain at $1.00 & $1.30, & we continue to have a material incremental PPA in progress that is mutually exclusive of how both the NBSK & RBK markets perform. 

 

Notice:

The global NBSK market is currently showing signs that prices have reached the bottom of the cycle. For the first time in seven months, February presented no price reductions and China spot prices were increased by US$20 per tonne. An announcement was also made by a leading producer of NBSK for an additional US$20 per tonne on China spot prices for the month of March. Furthermore, paper machines which had taken market-related downtime during the holidays are now being restarted. The Company anticipates a gradual recovery in both demand and prices during the second quarter of 2012.

St F has taken its downtime & is going to be selling NBSK into a rising market starting Q2. EBITDA goes back up to normalized levels & starts rising from BOTH price AND volume increases. Just in time for its buyer to start coining it

 

Notice:

During the fourth quarter of 2011, RBK pulp markets continued to be negatively impacted by high wastepaper prices and low hardwood kraft pulp prices.  Fibrek announced on February 10, 2012 that it will be taking market-related downtime for approximately five weeks, beginning February 20, 2012, at the Fairmont Mill to manage inventory levels. Looking forward, the Company believes the return to a balanced level of harwood inventories should have a positive impact on the RBK pulp demand.

Feb 20 is the natural sale date for these mills as the buyer has 5 wks to do their thing at Fairmont while the inventory is running down, & FBK takes the hit on the labour disruption. Despite bad conditions the other mill would also seem to be largely unaffected (assume its the take/pay contracts, & new product). ie: by mid-march a buyer could expect BOTH these mills to again be generating EBITDA at normalized rates, that should grow over the balance of the year.

 

SD 

[FFHWatcher]

Why would MERC have to do a working capital adjustment for PPA?  I have seen private acquisitions do adjustments but not pubco acquisitions.  $1.30 is a $1.30 unless there is something I missed in the agreement.  Is there specific wording that you are referring too in the MERC offer?

[SharperDingaan]

FFH Watcher: Working Capital adjustments are common to ALL take-overs, not just private ones, as the same basic valuation issues have to come to practical resolution. The adjustments just don't get the press because they're normally very small relative to the purchase price (often a rounding difference in EPS terms), & they are the outcome of negotiated collection (sufficient effort in the collection effort, etc.)

 

Look at the sale of the 407ETR by the Province of Ontario to a private consortium of toll-road investors. Sale proceeds were $3B+. The working capital adjustment was $10M, & paid roughly 6 months later through a seperate money bill passed in the Ontario Legislature.

 

SD

   

 

[triedtestedand]

IV:

 

You called it ...

 

  http://finance.yahoo.com/news/Resolute-Announces-That-cnw-1940164226.html?x=0

 

The question now ... what lies ahead? 

 

If ABH sticks to requiring 66.67% for tender to proceed, the 48.5% who haven't tendered (i.e. everyone except the lock-ups and Steelhead) will need to be resolute (pardon the pun) in not selling, and let ABH's bid die (and presumably the lock-ups with them) in order for MERC's to have opportunity to succeed.  With a kitchen sink quarter like FBK just had, I'd say a few just might throw in the towel now ... with perhaps Steelhead lurking on the open market to pick up more votes?  Having a signed PPA would obviously help FBK.

 

 

 

[SharperDingaan]

Three options:

 

- Rework the Merc deal to make it qualify

- Apply to have the ABH deal diqualified

- Get the PPA signed ASAP

[alertmeipp]

Still don't adjust offer price up. What are they thinking?