Fibrek tender offer arbitrage

Today Fibrek’s share price dropped 11% to CA$0.96 after a court decision related to the battle over the control of the company. This is interesting because Resolute has made a tender offer for CA$1.00/share and Mercer is trying to buy the company for CA$1.40/share. Resolute has already bought 46.8% of the outstanding shares, and has extended the tender deadline to April 23 for remaining shareholders. So this seems to be an opportunity to make an easy 4.1% in a short time period with minimal risk.

I’m going to keep the write-up fast and quick because the idea is time sensitive, but there is quite a soap story behind the tender offer. The offer was made in November 2011 and besides the buying party and some other big shareholders that entered lock-up agreements with Resolute there has been little enthusiasm from minority shareholders for the CA$1.00 deal because they think (probably rightly so) that it’s a lowball offer, and that the parties agreeing to the deal have misaligned incentives because they also have a stake in the company buying Fibrek.

A second party – Mercer – emerged after the initial bid was made, and has made the offer to buy the company at CA$1.40 per share, but because of the lock-up agreements that Resolute has with other big shareholders this bid is probably not going to be accepted (so minority shareholders here have every right to be unhappy!) and the court decision referenced above was also a negative for the higher bid. The company issued warrants in a private placement with Mercer to break the voting power of the Resolute group, but this move was not allowed by the court.

Buying some shares at CA$0.96 and tendering them at CA$1.00 seems to be the easiest and least risky way to make some money, but there are also some other moves possible. I’m not really familiar with how the process exactly works in Canada, so take everything (as usual) with a grain of salt, but to take the company private they need to acquire 90% of the shares to be able to take compulsory action against remaining shareholders. Since Resolute has so far only acquired 46.8%, shareholders that do not accept the current bid could get a higher bid in the future. But it is certainly also riskier: maybe Resolute will be happy with just a 50%+ controlling position.

I’m going to take the easy to understand, low-risk option, and hope that it’s not going to take too long before I get the cash after tendering the shares.

Disclosure

Author is long FBK.TO

8 thoughts on “Fibrek tender offer arbitrage

    1. Hielko

      yes, they have just 71.5M in cash available for the offer, and they have already used 33.5M for the 47% stake that they already bought. But don’t think it’s a big risk, the company has a lot of trouble getting minority shareholders to approve the CA$1.00 offer (that’s why they have bought just 47% so far) so don’t think they get enough shares to run out of cash.

      Reply
    1. Hielko

      From the tender offer docs:

      If a Fibrek shareholder desires to deposit Fibrek Shares pursuant to the Offer and (i) the certificates evidencing such Fibrek Shares are not immediately available, (ii) such shareholder cannot deliver the certificates and all other required documents to the Depositary before the Expiry Time, or (iii) such shareholder cannot comply with the procedures for book-entry transfer on a timely basis, such Fibrek Shares may nevertheless be validly deposited under the Offer in compliance with the procedures for guaranteed delivery using the accompanying Notice of Guaranteed Delivery. See Section 3 of the Offer to Purchase, “Manner of Acceptance”.

      So think you should be fine if you buy today or even monday.

      Reply
  1. AIGswap

    If you tender, you are guaranteeing yourself a loss. Abitibi’s bid is not worth $1.00. The cash portion is $1.00 but the share portion is worth $0.82. You will get prorated 55%. Therefore, you only get $0.55 of cash, and the remainder in stock. You are buying at $0.96, only to lose $0.04 by tendering, because you will get cash + stock valued at $0.92. Don’t tender and lose money. Abitibi will raise its bid.

    Reply
    1. LUC

      Fibrek to sell Hydro-Quebec 33.23 MW of green energy

      2012-05-04 16:33 ET – News Release
      Mr. Pierre Gabriel Cote reports
      FIBREK SIGNS HISTORIC CONTRACT WITH HYDRO-QUEBEC DISTRIBUTION
      Fibrek Inc. has concluded an agreement for the sale of green energy produced at its co-generation facilities located at the Saint-Felicien mill, in connection with Hydro-Quebec Distribution’s power purchase program for electricity derived from forest biomass co-generation (PAE 2011-01), which was launched on Dec. 20, 2011.
      The 33.23 megwatts of green energy currently produced by Fibrek will be sold to Hydro-Quebec Distribution beginning on May 5, 2012, at a price of $106 per megawatt per hour, indexed to the consumer price index (CPI) for a 25-year period. The contract will generate approximately $16-million a year in EBITDA.
      “This production will further increase the previously announced 9.56 megawatts that Fibrek will be supplying to the government corporation starting in December, 2012. By the end of this year, the Saint-Felicien mill will be producing 42.79 megwatts in green energy for Hydro-Quebec Distribution,” said Pierre Gabriel Cote.
      ___________________________________________________
      Further to AIGswap comment:
      If you tender, you are guaranteeing yourself a loss. Abitibi’s bid is not worth $1.00. The cash portion is $1.00 but the share portion is worth $0.82. You will get prorated 55%. Therefore, you only get $0.55 of cash, and the remainder in stock. You are buying at $0.96, only to lose $0.04 by tendering, because you will get cash + stock valued at $0.92. Don’t tender and lose money. Abitibi will raise its bid.
      ___________________________________________________
      Fibrek shares should be trading at least at a $1.00, nevertheless Abitibi’s downward stock price since the offer was announced on November 15, 2011. The piece of good news reported today as above-described should have lifted Fibrek’s share price.

      Reply
      1. Hielko

        I’m not sure if that last statement is true. While the deal might have increased the intrinsic value of Fibrek, is that worth anything if you are not going to get a fair price for your holdings?

        Reply

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