The Fibrek Case in a nutshell -Arguments
This post is meant to summarize the facts in order to provide readers with a very clear picture of the events surrounding the hostile takeover bid for Fibrek by Resolute/Fairfax. Resolute offered $1.00 per share and a competing offer from Mercer Int'l came in at $1.30 . Note, it will become very obvious as to why it is a Resolute / Fairfax takeover.
If you would like to read the in-depth details of the events, read the letter of complaint filed by Groia and Company. Perhaps the staff at the OSC might consider reading it as well. https://www.osc.gov.on.ca/documents/en/Proceedings-OTH/app_20120326_fibrek.pdf
The hearing at the Bureau will take place on Monday April 2, 2012 at 9:30 AM. The Fairfax offer expires at 5 PM on April 2, 2012. Lawyer for Resolutes/Fairfax/Pabrai/Oakmont/Stealhead will argue the need for a quick decision. This is complete nonsense as the offer can be extended and modified under certain conditions. In addition, the cease trade of the warrant deal is now being appealed to the Supreme Court of Canada. It would be highly prejudicial to rule on this decision in haste. The outcome of this case will have significant impact on capital markets and the decision must not be rushed.
In broad terms,
1. Fairfax is the controlling shareholder of both Resolute and Fibrek. As a controlling shareholder of Fibrek they were privy to undisclosed information (takeovers/mergers plans) with regards Fibrek as noted in the Fibrek circular.
2. Resolutes largest buyer of its wood chips happens to be Fibrek. Lets consider Fibrek to be a strategic asset to both Resolute and Fairfax. Fibrek discloses their plans to merge or takeover an undisclosed company to Fairfax. This merger/takeover / joint venture would provide Fibrek shareholder with excellent new growth opportunities which the company believes will benefit all shareholders. In addition, Fibrek had not fully disclosed all the details of the power purchase agreements that will significantly benefit Fibrek shareholders. I am wrong, they disclosed this information to Fairfax. Apparently it will result in $16-$20 million of cashflow.
3. Fairfax is kept abreast of developments (now an insider) as is the case with most controlling shareholders, particularly if they have significant financial resources, such as Fairfax. Fairfax has a much bigger stake in Resolute/Abitibi and therefore will be concerned as to what effect any moves by Fibrek will have on Resolute. It is clear that Fibrek is a strategic investment to both Fairfax and Resolute based on their existing relationship and non public disclosures. While Fibrek moves ahead with its merger plans, they inform Fairfax of their intent to act. Fairfax cuts off all communications and within days, Resolute launches a hostile takeover of Fibrek at $1 per share. Is this pure coincidense?
4. What if any information did Fairfax share with Resolute? Did Fairfax break confidentially agreements with Fibrek? Is Fairfax now a conflicted controlling shareholder and are they now acting in concert with Resolute? What if any information was shared?
5. Resolute immediatley launches a hostile takeover bid and enters into a hard lock-up agreement with Fairfax. As it turns out, they must also have Pabrai (friend of Fairfax) and Oakmont agree as well. At this point, they are now all acting in concert to insure the Resolute offer succeeds. One would assume that these are bright people but they all agreed to enter into a hard lock-up knowing that if a superior offer materializes, they would be bound to the $1.00 offer by Resolute. It is important to note that Resolute having recently come out of bankruptcy does not have the financial wherewithal to make a large acquisition without working with other parties, specifically, Fairfax, Pabrai, Oakmont and Stealhead. It is clear they all believe Fibrek is a strategic asset that they can acquire below fair value (Fairfax says it is worth $1.50) only if they all agree to work together (in concert) by entering into a hard lock-up. If there was any doubt as to how detrimental hard lock-ups are to capital markets, read on.
6. It is important to realize, no one in their right mind would enter into a hard lock-up agreement that would prevent them from entertaining a higher offer. They would have to be compensated or provided with an upside benefit. I am sure they will argue the Resolute buyout of Fibrek will benefit Resolute but they will not be able to argue how it will benefit Fibek minority shareholders. One must now assume, all parties to the lock-up ar elarge shareholders of Resolute. Another starnge coincident. But they are not acting in concert.
7. Resolute contends that their offer was a premium to the then trading price of Fibrek which was in the $.76 range. It may be advisable to check the trading of shares 90 days prior to the offer from Resolute. (CAN SOMEONE PLEASE CHECK THE TRADING OF FIBREK SHARES 90 DAYS PRIOR TO THE OFFER TO DETERMINE IF ANY OF THE JOINT ACTORS WERE SELLING SHARES). It is hard to imagine anyone being that blatant but as you will read, Stealhead was not very bright when they acquired shares of Fibrek after the offer.
8. As highlighted in the information circular and the letter of complaint by Mercer, they (Mercer) did approach Fairfax with an offer to buy their shares at $1.20 and it was rejected.Just curious Prem, what was your view at the time. Fairfax indicated they were worth $1.50. I am not kidding, that is what is written in Mercer letter of complaint. Fairfax indicated they were under valued at $1.20 but are fair value at $1.50
9. Fairfax after agreeing the company is worth $1.50 turns around and agrees to tender their shares to Resolute for $1.00. Surprised? Don't be, it gets better. Fairfax is clearly in a jam now. They are conflicted beyond all doubt. They are prepared to force the minority shareholders of Fibrek under the bus to further their interest in Resolute. By acting in concert and agreeing to enter into a hard lock-up, Fairfax has clearly demonstrated they are willing to harm the Fibrek minority shareholders by entering into a hard lock-up which was designed to prevent competiting offers or at the very least discourage them. This single act, is what caused Fibrek to come up with a defensive measure and entice Mercer into an offer at $1.30. It involved issueing 32 million warrants at the Resolute offer price of $1.00. Resolute and surprisingly Fairfax deemd that to be abusive and successfully convinced the Bureau to cease trade the warrant offering. That is right, it is ok for the controlling shareholder Fairfax to sell its shares at $1.00 to Resolute. But it is abusive if the company sells shares to a Mercer at $1. By cease trading the warrants, it now prevenst the minority shareholders from accepting a higher offer of $1.30 from Mercer. Explain that logic Fairfax?
10. Lets be clear on this. If Fairfax did not have a controlling interest in Resolute, if they had not sunk $150M into Resolute, I am not sure they would not be behaving so badly. They are clearly trying to enhance the value of their Resolute holding, yet they ar ewilling to abuse the minority shareholders of Fibrek and prevent them from tendering to a superior offer. Let be clear, Resolute is a struggling newsprint manufacturer with very little prospects for growth.
11. Fairfax is clearly now conflicted as they are willing to sacrifice the minority shareholders of Fibrek to benefit the shareholders of Resolute / Abitibi. Fairfax, Oakmont, Pabrai, Stealhead are all acting in concert to prevent the Fibrek minority shareholders from accepting a superior offer by Mercer. If the Bureau does not intervene, Fibrek shareholders will be prevented from tendering to a superior offer because the controlling shareholders have decided a lower offer is in their best interests This is in complete disregard to the Fibrek minority shareholders.
12. Based on the evidence to be presented, it is clear Resolute has been coordinating all parties to the hard lock-up. How does Stealhead fit into this picture is most intrigueing. However unlikley, a full-scale investigation with all parties under oath would be very helpful at this point.
13. The OSC and the Bureau must realize that it is in the public interest to make sure controlling shareholders do not disadvantage minority shareholders. In the case of the Resolute / Fibrek takeover, the controlling shareholder is conflicted, and they have been acting in concert with Fairfax, his buddy at Pabrai, Oakmont and Stealhead to effect a takeover below the $1.30 Mercer offer, inspite of Mercer allegation that Farfax turned down $1.20 but would accept fair value of $1.50. Say it aint so , Prem. Say it aint so. I would like you to attend the hearing and provide details. Your reputation is at stake here and your silence speaks volumes.
14. It may seem illogical that any large shareholder would enter into a hard lock-up arrangement as it would clearly prevent them from obtaining a higher price for their shares. This would be a good time for Stephen Jarislowski to step into the fray and take Prem to task. The only reason anyone would do this is if there was something to gain by doing so. Please explain Prem. I think most would agree that Resolute / Fairfax/Stealhead/Pabrai/ Oakmont/ have a lot to gain, just what remains unknown for now.
15. It was disclosed that after the Resolute offer, Steelhead Partners was purchasing Fibrek shares in the marketplace at prices higher than the $1 Resolute offer. It was further disclosed that Stealhead would be tendering those shares to the Resolute offer. This is peculiar behavior but very understandable if you are acting in concert with Resolute to ensure the success of an inferior offer from Resoute. This behavior is in complete contravention of the securities act and without no doubt be considered detrimental and harmful to the minority shareholders of Fibrek.After the announcement of the Fibrek offer, Stealhead had been buying Fibrek shares in at prices above the $1.00 offer price. This would be considerd normal behavior if you were expecting a higher offer but it is highly suspiciuos if you then get a higher offer and tender to the lower offer. This is exactly what Stealhead has done. By acquiring over 5% of Fibreks shares and agreeing to tender to a lower offer, Stealhead now ensure Resolute of their 50.01% majority required.One cannot expect the SEC to investigate Stealheads purchases, but is it too much to ask the OSC or Bureau to rule on the matter. Make no mistake about it, Resolute lowered their minimum tender amount from 66 2/3 to 50.01% for this very reason. They would have us all believe that there is no way they were acting in concert. ithink it is now cleatr to all that there are many joint actors in concert. They clearly habve shown no respect for the integrity of capital markets and although they have assembles an army of lawyers to argue otherwise, the Bureau must look past all the rhetoric and deal with the facts.
16. They (Stealhead) were so close to pulling this off but they foolishly tendered and disclosed their 5% stake too early. Interestingly, subsequent tender offers did not include the Stealhead shares. Why? There are many questions that need to be answered. Why would Stealhead buy shares in the market and tender to a lower offer. It is not clear as to what or how they will benefit. What is clear, they have assured Resolutes inferior offer may prevail if the Bureau does not act. What made Stealhead buy the shares? What conversations took place between Resolute, Fairfax and Stealhead. Clearly, something must have happened to give cause for Stealhead to enter into the takeover. This one act was detrimental to the integrity of capital markets as it all but assuresthe Resolutes offer will win the day. Clearly, the Bureau was not privy to all the behind the scenes maneuvering by Resolute / Faifax/ Pabrai/ Oakmont and Stealhead. They need to take their time and investigate more.
Resolute is determined to win this takeover at all costs, and they will stop at nothing to ensure they win. They and their partners have locked up almost every high-powered law firm in Quebec in hopes of swaying the Bureau. The Bureau is now faced with the dilemma of having to uphold the securities act or caving under the political pressure / interference. The OSC has now placed the Bureau in charge of protecting the capital markets in Ontario. I now believe that the OSC has washed their hands of this preferring to pass the buck to Quebec's Bureau. Can someone please explain why we need multiple regulators when the OSC chooses to pass the buck. maybe we should just set up one regulator and call it the Bureau.
The resolution is simple.
The Bureau rules that Hard Lock-Ups are detrimental to capital markets as they prevent or discourage competing bids.
Furthermore, they rule that Fairfax/Pabrai/Oakmont and Stealhead are joint actors and are now subject to insider control bid rules. They are required to obtain or rely on a fairness opinion before proceeding with the takeover offer. Fairfax has already indicated they would not accept a $1.20 bid but would accept a $1.50 bid. This is inline with the CanncordGenuity opinion of $1.25-$1.45.
Resolute must incrase its bid to above $1.30 or the commission will rescind the warrant cease trade and allow the issuance of shares.
This is how capital markets are to function for the benefit of all shareholders not just controlling shareholders.