AbitibiBowater head offices are seen in Montreal.Ryan Remiorz
A hostile bid for Fibrek Inc. has sparked a nasty takeover battle in the beleaguered pulp and paper industry, and those involved suggest that it might get even messier.
Fibrek (which was SFK Pulp Fund during the income trust days) has rejected the bid from Resolute Forest Products (which was AbitibiBowater before its bankruptcy protection days), saying that its financial advisor, TD Securities, has deemed the bid inadequate. Fibrek has also adopted a poison pill.
The company's CEO, Pierre Gabriel Côté, is vowing to work through the holidays to solicit other bids and fend off Resolute's offer. He's mad that the bid took him by surprise, given that Resolute is not only the former parent company of Fibrek but continues to be Fibrek's largest wood chip supplier (wood chips account for more than half of all Fibrek's costs). In addition, Fairfax Financial Holdings Ltd., which is the biggest shareholder of both Fibrek and Resolute, had already agreed to tender to Resolute's bid before Mr. Côté even knew about it.
"The hostile announcement – insider bid announcement – took us by pure surprise," he says. "I got a voicemail on my phone [from Resolute CEO Richard Garneau]that ten minutes after that we would receive a press release indicating that this would be launched on Fibrek by Abitibi." When Mr. Garneau was unable to reach his counterpart on the phone, he followed up with an email.
It didn't make sense to spring the bid on the company that way, given that the two firms have such ties, Mr. Côté argues.
Fibrek's core asset, the Saint-Félicien Mill, was built, owned and operated by Abitibi. Abitibi spun it off as an income trust fund (SFK Pulp) in an initial public offering in 2002. Eight years later, SFK made the transition to a corporation and became Fibrek. Around the same time, Abitibi was emerging from bankruptcy protection (and would go on to change its name to Resolute).
After it emerged from protection last year, Resolute hired BMO Capital Markets to explore potential ideas for takeovers and other transactions, including with Fibrek. At a meeting in February, BMO pitched a committee of Resolute's board on the potential merits of a Fibrek transaction, according to the takeover circular.
In May, Mr.Garneau met in Montreal with Fairfax CEO Prem Watsa. One of BMO's ideas had been that Resolute buy a large stake in Fibrek, by securing a deal with the three largest shareholders – Fairfax, Pabrai Investment Funds and Oakmont Capital Inc., which collectively hold almost half of Fibrek. But to get around the rules that would require Resolute to make an offer for the whole company, Resolute's offer would have to be no greater than 115 per cent of the market price of Fibrek's shares. Mr. Watsa balked.
So Resolute went back to the drawing board, and its executives recommended to the board this fall that it make a move for all of Fibrek. Mr. Garneau met with Mr. Watsa again in November, and by late last month Fairfax, Pabrai and Oakmont had signed lock up agreements, accounting for 46 per cent of Fibrek's shares, and the bid for $1 per share was launched.
"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."
The analysts who follow Fibrek have mixed opinions. Scotia Capital analyst Benoit Laprade recommended that his clients tender to the offer. Equity Research Associates says the bid appears to materially undervalue the company, but added that Mr. Garneau has recently signaled that government mandated changes to harvest levels in Quebec are reducing fibre availability in the province. The implication appeared to be that a cut in Quebec's harvest would prompt Resolute to sustain itself first, at the expense of the customers it supplies fibre to, such as Fibrek.
"If the supply agreement is indeed broken, Fibrek would be forced to source fibre from others in the surrounding area, thus increasing their costs," Equity Research said in a note to clients. "To us, the current bid puts Fibrek between a rock and a hard place – accept a lowball offer or end up getting squeezed on a fibre supply agreement. There are clear implications if the company fights the unsolicited takeover."
But fight it will. Analysts don't think a white knight can be found. Mr. Côté, who says the "insider" bid undervalues Fibrek, suggests they're wrong.
While he stresses that Fibrek is "not for sale," he adds that "when somebody puts the company in play, we have to defend ourselves.
"We are really having concrete discussions with folks."