Fairfax Injects $350 million Into Struggling AbitibiBowater

The main contrarian forestry industry stock I'm following is AbitibiBowater (ABH). If you are looking at the forestry industry, you can either go for forestry companies that produce wood products or paper products. I decided to avoid the wood companies due to the housing uncertainty. ABH is a leading paper company which I haven't posted much about lately because I'm waiting to see if the company can stabilize its operations. Abitibi and Bowater merged a few months ago to create the largest paper forestry company.

On top of horrible fundamentals (weakening paper demand, increased costs due to C$ increase, overcapacity in the industry), ABH has high leverage. Lately there have been some concern about ABH's ability to re-finance its debt. There was one big positive move recently, which occurred when Fairfax, run by Prem Watsa, a value investor, decided to pump $350m into the company:


According to the terms outlined in the news release, Fairfax is buying the five-year debentures with an 8 per cent interest rate, which can be paid in the form of additional debentures at a 10 per cent rate. The $350-million (U.S.) in debt is convertible into AbitibiBowater common shares at $10 a share and has a subsidiary guarantee.

If the debentures were fully converted, Fairfax would hold 35 million new shares of AbitibiBowater, which currently has roughly 51.9 million shares outstanding.


The market cheered the news but, as has been the case with struggling companies lately, it involves a lot of share dilution. Overall, I think this is good news for the company since it removes some of the financing problems and provides a stable long-term-oriented investor.

If one waltzes into distress investing, it pays to keep in mind that dilution is a huge risk. Unlike a "normal" share price decline, dilution can involve massive stakes being sold off (up to 40% of the company given away; in the case of Ambac, it was 66%) and it crystallizes the loss. That is, when a share price declines, it an always rise back because of the possibility of irrational market pessimism; but if shares are diluted, you are basically giving away ownership of the company and you won't ever get it back.

Comments

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>