petec

I also love these deals. But having skimread your pdf, I have questions. You seem to suggest that Vacatia's existing business is included in the deal. Where are you seeing that? From the (very limited) detail given in the press releases, Vacatia will run Blizzard, but I don't think Vacatia is being merged into Blizzard. As I read it, in effect Fairfax is buying the assets with high yield debt, Vacatia will run them, and Fairfax and Vacatia share the upside 50/50 via equal participation in the equity (which is virtually worthless on day 1). If so it's an incredible incentive for Vacatia, who make out like bandits if they create value, but don't have to put up any capital. It's also a good structure for Fairfax, who get lots of interest income secured on real assets, and equity upside driven by yet another world class operating partner. That said, not all of these deals have worked out beautifully. The KW equity investment is underwater, the Westaim deal went nowhere, etc.

I think this is exactly right and it has been going on for years. If anyone thinks total compensation is excessive at Fairfax I think they need to make a clear argument for that based on market rates for the relevant employees. But in the absence of that we should give full credit for A comp structure (buying shares at market and giving them to employees) that aligns employees to shareholders better than most others, especially if there are long lockups or vesting periods, which I am pretty sure there are. Extremely smart capital allocation, building a war chest of treasury stock at cheap prices to fund years of employee comp.

I have to disagree. Are salaries and bonuses "beneficial to outside shareholders"? Of course - the company would collapse without them. So surely paying some of that compensation in the form of shares that have been bought in the market is even better, since it aligns employees perfectly with shareholders? (NB options don't do this since there is no downside risk.) I hope there is a decent lockup. I do know Fairfax's stock compensation schemes have very long vesting periods.

I'm not sure Buffett has an issue with partnering - look at Berkadia. But he does have a LOT more capital to deploy and that lends itself to owning 100% of large deals rather than 18% of a startup miner, if you see what I mean.

Damn! I had it in mind to go on this and missed it. Thanks for the info.

Interesting to speculate though. 1) FFH takes a direct stake. 2) FFH lends a fat chunk to FIH to complete the deal. 3) CSB is actually the acquiror, funded via an equity issue and a loan from FFH. 4) OMERS gets roped in on an 8% preferred deal. Any other ideas?

Right. Because Greece is as liquid as Canada. GREK has net assets of $150m Also: it might well be tricky to do a secondary in RBC if you owned 33%. No stock wants that kind of overhang.

It's actually really good to see that they can liquidate chunks of this holding reasonably close to the market price. I have always felt there was a risk around that.

Highly unlikely that they would outright lie about the reason. Should be easy enough to check whether the regulator did rescind permission. I'd rather they flowed dividends to Fairfax to redeploy. Long term I think that's more tax efficient - I don't think FFH pays tax on dividends received (?) but presume it does on constant sales of shares to stay below the threshold. Not sure though.

No idea. I have a gut feeling that I ought to own this but I am glad I don't!

My interpretation is more that the Ukraine conflict unexpectedly made a lot of Russian gas available cheaply and they're enjoying that. What they're decoupling from is growth. I'd focus more on that in terms of oil demand.

Fair points, especially if we are hoping for say 2x not 4x.

Directionally fair, but the returns hurdle is key, and the IRR on an imminent IPO is huge.

Thank you!

Oh I’m sure there will be a decent sized mark, and growth thereafter. But I don’t think Siemens are stupid. If IPO is a 2025 affair, they’ve no need to leave *that much* on the table.

Thanks. Where’s the disclosure on this structure? I absolutely agree 5x is more believable.

Well, for an stake to be worth $100 per share in gains potential, the gain has to be about $2.2bn. Both companies would need to IPO at $10bn or higher to produce such a gain, and that's before tax. Maths below - mostly from memory so apologies if I have made a stupid mistake. Fairfax owns 20% of Ki. Even assuming it is carried at zero, to generate a $2.2bn gain it needs to IPO at a valuation over $10bn. That's over 10x GWP on the platform and strikes me as an optimistic number unless we have a very strong thesis that Ki has a deep competitive moat. FFH owns 29% of BIAL (42% of FIH which owns 69% of BIAL after the recent addition). FIH carried 59% of BIAL at $1.6bn in q3 and the recent 10% addition cost $255m, so the threshold for gains on FIH's 69% is $1.85bn. That implies $2.7bn for all of BIAL and $770m for FFH's 29% (excluding any impact on performance fees). To produce a $2.2bn gain to FFH BIAL has to IPO at $770m + $2.2bn = $3bn for 29%, or just over $10bn overall, or 4x the valuation that Siemens have just realised. As I said - seems high to me. But if you have evidence that I am wrong, I'll be delighted.

Absolutely and I did not mean to be critical. Just find it interesting. To me, 4 years ago, Fairfax was priced for nothing to go right, and I liked that because there were many ways for things to go right (even if I wasn't sure when). Today I find it harder (but it is still my largest position). This seems rather high to me. What are the underlying assumptions? (Sorry if it has been discussed upthread - I may have missed stuff over the last few weeks.)

Just incredible when you think back.

My thinking also. I do wish they'd move to quarterly though.

I don't really understand this logic now vs 4 years ago when FFH was a nested egg of value. Today buybacks are worth far less and several of the right tail options have happened. What's the right tail at Eurobank, for example? Are our stakes in Ki (or even BIAL) really big enough to make a difference? 4 years ago FFH was fairly easy to identify as a massive value opportunity. Today it looks more like a very attractive compounder to me.

I have a simpler answer: Ensign! Mainly because I am a sucker for free cash yield, but I also like the inside ownership (>50% is in the hands of management and Fairfax) and economics well below the incentive price for new supply.

I think the fact they're paying dividends tells you they're not capital constrained - the people involved are too rational and long term to make any other decision, but I could be wrong. I agree they're super smart, but I do think they got caught with their pants down somewhat when rates rose and I wonder why they didn't fix more of their liabilities, especially given that their contracts are not inflation-linked which I have always thought was a huge weakness of their model/the industry. I see it as a kind of levered option, but I like your point that FFH overall benefits more if rates rise than fall - I hadn't really considered this aspect of their Atlas investment.

It's a while since I looked closely at Atlas, but I used to own it and followed it closely, and the sense I had was that they always optimised for IRR and meeting customer needs rather than type of ownership. So it may well be that they just got a good IRR from this deal. I was always slightly sceptical about this because IRR is only relevant if you can immediately redeploy the capital.

I also have this. I ran a Latam fund for a decade so have some comfort with the region, ant they explained the opportunity well in their 2023 investor day (might have been 2022 actually).