Resolute Forest Products Commences Takeover bid of Fibrek

[Nnejad]

Well, I wrote the first version of this on my phone and lost it trying to grab the link for another site. So apologies if this sounds more curt.

 

You keep saying Fairfax forced the firm into taking the lower bid. In reality, an irrevocable agreement means they were forced to take the bid. And you can't say the lock-up premium was beneficial and then complain about the lock-up portion of it.

 

Another example:

http://www.fairfax.ca/news/press-releases/press-release-details/2015/Fairfax-to-Acquire-Brit-PLC/default.aspx

 

Note, Fairfax is on the other side of this situation. Are Apollo/CVC doing something wrong by irrevocably agreeing to tender their shares to Fairfax? What If I came out tomorrow with a 400 pence bid for Brit conditional upon me obtaining 50% of the shares? Is "what one thought of [my] bid really irrelevant; the fact is it existed, it was live, and it was the higher of the two bids"?

 

Finally, a few bullets:

- There are very few instances where it makes sense to sell your 25% stake cheaply to a company where you only own 18%.

- The timeline of events makes it clear that Resolute conjured up the deal.

- Fairfax was also the last of the shareholders to agree to the lock-up.

 

Anyways, you're already assuming guilt and moving on to discussions of punishments/damages, and to me it just seems a bit ridiculous.

[lessthaniv]

There is no denying the lock-up premium was beneficial, but when it was over - there was a 2nd HIGHER bid on the table, FFH was on both sides of the table, & they forced the firm into taking the related party LOWER bid. What one thought of the Mercer bid is really irrelevant; the fact is it existed, it was live, and it was the higher of the two bids

 

SD,

 

This comment is silly. You're assigning blame to the incorrect party.

 

A lockup agreement was well within the rights of Fairfax, Oakmont & Dala Street. If you're looking to point fingers ... then look at the inept execution of the management team at Fibrek whom failed on several fronts:

 

1) Operations at Fibrek and,

2) Failing to have in place any shareholder rights plan which would have prevented the hard lock-ups from being entered into.

 

The competing higher bid that you reference was a white night bid by Mercer that was based and dependent upon improper defensive tactics (warrants).

 

And, in the end the Bureau’s decision to invalidate those defensive tactics that it concluded interfered with contractual arrangements Resolute had put in place at the outset of its bid, allowed Resolute to succeed. 

 

The higher bid you keep referencing was deemed to be illegal and properly squashed by the courts.

 

 

 

 

[Guest Quebec]

I am not good at arguing but it is my opinion ffh was a conflicted insider. Mercer approached them with an 1.20$ offer and they said no, it's worth 1.50$. Then they turn around and hardlockup at 1.00$ with RFP where they are the largest shareholder . Why ? This Groia letter does a good job at explaining the wrongs of Fairfax, Steelhead and Resolute:

 

http://www.osc.gov.on.ca/documents/en/Proceedings-OTH/app_20120326_fibrek.pdf

[Hielko]

I am not good at arguing but it is my opinion ffh was a conflicted insider. Mercer approached them with an 1.20$ offer and they said no, it's worth 1.50$. Then they turn around and hardlockup at 1.00$ with RFP where they are the largest shareholder . Why ? This Groia letter does a good job at explaining the wrongs of Fairfax, Steelhead and Resolute:

 

http://www.osc.gov.on.ca/documents/en/Proceedings-OTH/app_20120326_fibrek.pdf

I think that letter does an excellent job of explaining what ffh and others did wrong, and it should be illegal what they did.

[cwericb]

I must be missing something here.

 

How was Fairfax forced into a $1.00 bid? Mercer floated an offer of $1.20 in November 2011.

 

Fairfax countered saying the company was worth $1.50.

 

My understanding is that It was AFTER rejecting the $1.20 bid and declaring that the shares were worth $1.50 that  Fairfax entered into the lockup at just $1.00. Then Mercer raised their offer to $1.30 and in April of 2012 raised the bid to $1.40.

 

Despite all the excuses being made, Fibrek shareholders lost 40% of what they should have been paid.

 

In what way does this qualify as a Fair and Friendly Acquisition? And just because something may or may not have been illegal does not necessarily mean that it was ethical, fair or friendly.

[TwoCitiesCapital]

I must be missing something here.

 

How was Fairfax forced into a $1.00 bid? Mercer floated an offer of $1.20 in November 2011.

 

Fairfax countered saying the company was worth $1.50.

 

My understanding is that It was AFTER rejecting the $1.20 bid and declaring that the shares were worth $1.50 that  Fairfax entered into the lockup at just $1.00. Then Mercer raised their offer to $1.30 and in April of 2012 raised the bid to $1.40.

 

Despite all the excuses being made, Fibrek shareholders lost 40% of what they should have been paid.

 

In what way does this qualify as a Fair and Friendly Acquisition? And just because something may or may not have been illegal does not necessarily mean that it was ethical, fair or friendly.

 

I'll just say my 2 cents even though I have very little idea what happened here. First a recap: An outside company approached Fairfax to sell with an offer of $1.20. Fairfax rejected an countered for $1.50. The company refused. Then another company that Fairfax owned a large portion of made a bid for $1.00 and Fairfax agreed to tender their shares. This is where the story should stop - it doesn't matter that Mercer came back with a higher bid because Fairfax had already agreed to tender their shares, right?

 

So the question should be why did Fairfax tender to the lower bid? Well, they had two alternatives: 1) sell the company for less than it's worth at $1.20 or 2) sell the company to another company they own a large portion of for $1.00 and still maintain large exposure to potential upside as the new company accrues the benefits of acquisition approaching IV. There might of even been some consideration that the assets would be worth more in the hands of the new management team.

 

 

So Farifax could have sold it for an undervalued amount or could sell it to another entity it maintain large ownership in and still maintain upside exposure while getting some cash out of the deal. They chose what made sense for them. Just because that's different than what made sense for you doesn't make it unethical. You could argue that they should have abstained from voting either way and I might generally agree - but I have a hard time understanding why what they did was wrong. They just had different incentives and every right to vote in favor of those incentives as opposed to voting in favor of yours.

 

 

 

[Guest Quebec]

Yes they went for their self interest, but what is wrong in my opinion is doing it at the expense of minority shareholders, using their special position to squeeze us.

 

Here is my perception of what occured to me, as a minority shareholder of FBK. As a cover my ass statement, I will say that this is just my feeling/opinion. I'm hoping that the investigation will put closure to my frustration (and help me shut up!)

Read the news small fry: We gang are buying your shares for 1.00! You may think they are worth 1.50 but it does not matter because We commence take-over! No need for valuation and its not a take-it or leave-it offer because we big fish with inside info, aligned interests and large stakes have put in place lockups and agreements that will prevail. Together we are so very close to 50% from the start. This ensure that no competitive bidder can rise up to get you fair value. Your vote won't matter. We commence. Resistance is futile.

I wish to say that I am grateful that management of Fibrek in the like of Pierre Gabriel Coté and Hubert Lacroix have risen up and fought back, trying to get us a better deal.

[lessthaniv]

I am not good at arguing but it is my opinion ffh was a conflicted insider. Mercer approached them with an 1.20$ offer and they said no, it's worth 1.50$. Then they turn around and hardlockup at 1.00$ with RFP where they are the largest shareholder . Why ? This Groia letter does a good job at explaining the wrongs of Fairfax, Steelhead and Resolute:

 

http://www.osc.gov.on.ca/documents/en/Proceedings-OTH/app_20120326_fibrek.pdf

I think that letter does an excellent job of explaining what ffh and others did wrong, and it should be illegal what they did.

 

That letter was written by representatives acting for Mercer. No bias there.

 

And, the ongoing comparisons of the nominal deal values are really misleading. These were not comparable all cash deals.  They involved both cash/stock. Therefore, the intrinsic value of the paper you're receiving is an exceptionally important component to overall valuation of the deal.

 

In an all cash deal:

 

$1.40/share is better than $1/share. Here, its reasonable to directly compare.

 

In a cash/stock deal:

 

Not necessarily. It depends on the intrinsic value of the stock you're receiving. Your comfort with the new business model. Your comfort with the new management teams. Expected synergies. Tax implications. Friction costs ...... etc

 

The whole argument of $1.40 is better that $1 is rendered moot when this is considered.

[lessthaniv]

Yes they went for their self interest, but what is wrong in my opinion is doing it at the expense of minority shareholders, using their special position to squeeze us.

 

Quebec, most respectfully, this statement shows a significant lack of understanding about Canadian Securities Law. There are in fact provisions for compulsory squeeze outs in Canadian Securities Law. The rules state clearly that under certain conditions minority shareholders can and will be forced to tender their shares .... As a minority shareholder in a company,  it is incumbent upon you to know the rules of the game. If you don't and get caught, you've only yourself to blame.

 

Fairfax didn't write the securities legislation nor did Fairfax squeeze you out. They voted their shares in favour of the ABH deal as did most others. Because a majority of the shareholders preferred the ABH deal, ABH was able to squeeze out the remaining minority shareholders.

 

Therefore there is no valid reason why Fairfax should have to apologize to you for your own misunderstandings.

 

(not trying to fan the embers here ... just providing an honest assessment of what I see)

 

Ironically, if you go back and re-read the entire thread you'll see that this very topic was discussed on many occasions.

 

 

 

 

 

 

[Hielko]

There is a difference between what is legal and what is ethical. It is very well possible that what ffh and the other did was legal in Canada. I don't think it should be legal though, and luckily it wouldn't be legal in most developed countries.

[cwericb]

So this investigation should put these questions at rest - from a legal aspect.

 

However, there will still be many former Fibrek shareholders who will feel that Fairfax’s “fair and friendly acquisition” moto is a bit of exaggeration at best and a little self serving or hypocritical at the worst. Perhaps a better motto would be “all’s fair in love and war”.

 

They bulldozed through a deal at the expense of Fibrek’s shareholders that was solely in their self interest and cut off any bidding war that might have developed before it had a chance and then you just have to wonder about the participation of Steelhead.

 

The moral here is to be very careful in buying into any company in which Fairfax has an interest because Fairfax can be just as ruthless in the pursuit of their own interests as any other large company.

 

“There is a difference between what is legal and what is ethical” Some here would prefer to ignore that aspect.

[SharperDingaan]

The place for this discussion is the ATF, and not this board. The ATF has the expertise, the experience, and as Fibrek was a Quebec company – the power to look at whatever they choose, to validate the facts.  If they thought nothing was there, this probe would not still be alive 9 months later. The ATF exists, in large part, to resolve matters exactly like this – and we are happy to go with their decision.

 

The argument that It was not us, it is the Fibrek board that is to blame - is not valid. Resolute bought the assets AND the liabilities of Fibrek. If the Fibrek board was indeed to blame, that was part of the liability Resolute purchased. All the ATF need do is review the board material, and the minutes to the various related board meetings.

 

Minority squeeze outs are only permitted once minority ownership is below 10%. At the time of the vote, Mercer and all those opposed to the Resolute bid held more than 10%.

 

Most do not dispute that FFH did go well out of its way to help minority shareholders, and that did earn them a lot of good will. Sadly, it would seem that once they signed the lock-up agreement and disclosed it, they did not distance themselves sufficiently from the rest of the process - and it is that, that is costing them dearly.

 

This board flare-up is hard evidence that the reputational damage needs to be addressed. Obviously it is a sensitive issue for many, and better resolved behind the closed doors of the ATF.

 

We would remind all concerned that this WAS a Quebec company, Quebec sons and daughters got run over, the ATF is a Quebec regulator, and that Quebec law is French based; meaning you are presumed guilty until proven innocent. These are proud folks, and they have every right to feel highly pissed. A little contrition could go a long way.

 

We wish all parties a successful outcome, but gentlemen – take it behind closed doors, and get it fixed.

 

 

SD

 

[Guest Quebec]

Thanks lessthaniv for your feedback. I am indeed not well versed in securities law and was using the word "squeeze" loosely, to mean not really having other choice than to fit in.

 

Its true that we already discussed just about every facet and the only real news is that there is an investigation on this Fibrek deal.

[lessthaniv]

There is a difference between what is legal and what is ethical. It is very well possible that what ffh and the other did was legal in Canada. I don't think it should be legal though, and luckily it wouldn't be legal in most developed countries.

 

Actually, squeeze out rules are common throughout the developed world. Canada, US, UK, Germany ...

The rules vary somewhat but the spirit of the laws are the same.

 

Hielko, (just to play devils advocate);

 

What if a company had 1M shares outstanding and a takeover occurred. 999,999 shares voted in favour of the deal and 1 shareholder decided he didn't like the terms.

 

What is the ethical outcome?

[Hielko]

I have no problem with squeeze-out rules, as long as there are also regulations to protect minority shareholders from abusive tactics. The other extreme of the example that you posit is that once someone owns 50.01% of a company they can help themselves to a 100% economic interest without paying any consideration to minority shareholders. That would not be ethical, just as allowing one shareholder to remain in your example since that would impose an unreasonable burden on the company. That's why you have stuff like majority of the minority provisions, mandatory bids after breaking certain ownership thresholds (way below 50%!)

 

But I don't think this specific transaction was fair and ethical, and I'm pretty sure that it would be illegal in a large part of the developed world.

[Provincial]

Fellow Board members: I used to write here occasionally with the "Quebec" handle but I have deleted my account. I wrote some posts on the Fibrek thread which I truly regret publishing. They were my personal toughts paraphrased on the moment, not thoroughly researched facts. I got carried away, did not look at it properly from both sides, used biased information, and realized too late that I was being stupid and could be hurting great reputations for no good reasons. I sincerely apologize.

 

In fact, my mind is changing on this Fibrek deal, as I get educated and if I review the transaction one step at a time. I hardly slept last night because thinking about this over and over. As <iv said, part of the consideration was RFP stock, and if you believe RFP was worth more than its stock price back then, it made perfect sense to favor that offer, even buying above 1.00. (If you value RFP say at 30 then you get that 1.50 for your Fibrek) Eventually I got to like RFP myself, bought more, and came out fine with this big, liquid stock. This is much inline with what Fairfax suggested could happen by tendering into the RFP offer.

 

Because I can make such mistakes writing, from now on I return to being a silent reader only.

[Hielko]

If Steelhead would have thought that RFP was worth 30 they should have bought RFP shares instead of manipulating Fibrek.

[benhacker]

Blast from the past... about 7 Fibrek threads, so I'm putting this here.

 

https://www.sec.gov/Archives/edgar/data/1393066/000119312519256452/d813207d8k.htm

 

Appraisal Rights process done in Canada for Fibrek investors... and the court agrees the acquisition prices was way below fair value:

 

ITEM 8.01

OTHER EVENTS.

 

Effective July 31, 2012, we completed the final step of the transaction pursuant to which we acquired the remaining outstanding shares of Fibrek Inc. (or “Fibrek”), following the approval of Fibrek’s shareholders on July 23, 2012, and the issuance of a final order of the Quebec Superior Court in Canada (the “Superior Court”) approving the arrangement on July 27, 2012. Certain former shareholders of Fibrek exercised rights of dissent in respect of the transaction, asking for a judicial determination of the fair value of their shares under the Canada Business Corporations Act. For additional information, see Note 14 “Commitments and Contingencies” in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

On September 26, 2019, the Superior Court rendered a decision fixing the fair value of the shares of the dissenting shareholders at Cdn $1.99 per share, or Cdn $30.6 million in aggregate, plus interest and an additional indemnity, for a total currently estimated at approximately Cdn $43.9 million ($33 million, based on the exchange rate in effect on September 26, 2019) payable in cash. Of this total amount, Cdn $19.3 million ($15 million, based on the exchange rate in effect on September 26, 2019) is payable immediately. The payment of the remaining portion of the consideration and its timing will be dependent on the Company’s decision to appeal, as well as the outcome of such appeal, if any. The Company is reviewing the judgment and evaluating its options. As previously reported, we have accrued Cdn $14 million ($11 million, based on the exchange rate in effect on September 26, 2019) for the payment of the dissenting shareholders’ claims.

 

Pretty stunning, but most on this board felt it was a lowball at the time, and Fairfax/ABH (RFP)'s actions were super shady... and Fibrek board was ... something bad. :)

 

First appraisal rights situation I had followed loosely, so I wanted to follow up.

[Cigarbutt]

Blast from the past... about 7 Fibrek threads, so I'm putting this here.

 

https://www.sec.gov/Archives/edgar/data/1393066/000119312519256452/d813207d8k.htm

 

Appraisal Rights process done in Canada for Fibrek investors... and the court agrees the acquisition prices was way below fair value:

 

ITEM 8.01

OTHER EVENTS.

 

Effective July 31, 2012, we completed the final step of the transaction pursuant to which we acquired the remaining outstanding shares of Fibrek Inc. (or “Fibrek”), following the approval of Fibrek’s shareholders on July 23, 2012, and the issuance of a final order of the Quebec Superior Court in Canada (the “Superior Court”) approving the arrangement on July 27, 2012. Certain former shareholders of Fibrek exercised rights of dissent in respect of the transaction, asking for a judicial determination of the fair value of their shares under the Canada Business Corporations Act. For additional information, see Note 14 “Commitments and Contingencies” in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.

 

On September 26, 2019, the Superior Court rendered a decision fixing the fair value of the shares of the dissenting shareholders at Cdn $1.99 per share, or Cdn $30.6 million in aggregate, plus interest and an additional indemnity, for a total currently estimated at approximately Cdn $43.9 million ($33 million, based on the exchange rate in effect on September 26, 2019) payable in cash. Of this total amount, Cdn $19.3 million ($15 million, based on the exchange rate in effect on September 26, 2019) is payable immediately. The payment of the remaining portion of the consideration and its timing will be dependent on the Company’s decision to appeal, as well as the outcome of such appeal, if any. The Company is reviewing the judgment and evaluating its options. As previously reported, we have accrued Cdn $14 million ($11 million, based on the exchange rate in effect on September 26, 2019) for the payment of the dissenting shareholders’ claims.

 

Pretty stunning, but most on this board felt it was a lowball at the time, and Fairfax/ABH (RFP)'s actions were super shady... and Fibrek board was ... something bad. :)

 

First appraisal rights situation I had followed loosely, so I wanted to follow up.

For those who had or still have an interest in the topic, here's the complete judgment:

https://www.canlii.org/en/qc/qccs/doc/2019/2019qccs4003/2019qccs4003.html?searchUrlHash=AAAAAQALZmlicmVrIDIwMTkAAAAAAQ&resultIndex=2

[cwericb]

While some rejected my views at the time and tried to defend Fairfax, I, and a lot of other former Fibrek shareholders felt that Prem Watsa and Fairfax violated the company’s self imposed mandate of “Fair and friendly acquisitions” and committed an unethical and illegal takeover that profited Fairfax at the expense of Fibrek shareholders.

 

For those few who attempted to defend Fairfax, this judgement finally settles the matter. Many of us had little choice but to dump the stock at less than $1.00 while the courts have found that the actual value was at least double that amount.

 

I may still a Fairfax shareholder but I am under no illusions about how Fairfax operates.

[Gregmal]

So Fairfax tries to be as clever and cutthroat as say, a Brookfield; they just suck at it, among other things...

[cwericb]

True.

 

The difference is that, according to Prem Watsa, the name Fairfax stands for “FAIR and FRIENDLY ACQUISITIONS”. The takeover of Fibrek was none of those.

 

Furthermore, it was proved in court that the acquisition was far from fair and that the takeover price should have been $1.99 per share , not $1.00. That is a pretty good spread and more than a little hypocritical on Fairfax’s part. As a longtime shareholder of both Brookfield/Brookfield Properties and Fairfax I don’t ever remember Brookfield suggesting that their takeovers would be fair and friendly as they tried to screw you. 

 

That is the difference.

[Gregmal]

Not for nothing, but I learned pretty quickly that one is significantly better off assuming that EVERY person they encounter in the financial industry is a total piece of shit. Ive now been in that biz(tangentially) for a while, and to this day, out of everyone Ive ever met, can count on one hand the number of people who would put people before dollars. It is what it is.

[Orchard]

keep in mind that Fibrek shareholders are advocating the same thing....dollars first.

[cwericb]

"Not for nothing, but I learned pretty quickly that one is significantly better off assuming that EVERY person they encounter in the financial industry is a total piece of shit. Ive now been in that biz(tangentially) for a while, and to this day, out of everyone Ive ever met, can count on one hand the number of people who would put people before dollars. It is what it is."

 

YUP.  However, my point was that there were people on the board defending Prem by saying that he wouldn't do anything shady. I argued that he most definitely did and this incident proved that Prem was being hypocritical with his "fair and friendly" BS. The court case proved that beyond question. So your point above is well taken.