petec

What was said? Rough version: Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch. Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies. Sounds like Sanjeev. Kidding!!! Ha ha!!

I think it is nearer $530. Based on what's happened to Blackberry and Digit. Mind you bond yields might have dented that so $500 is probably a wiser assumption!

Doesn’t matter when it closes. The point is (I think) they’ve locked in that price for a future buyback of 1.4m shares. Edit: what I mean is that when it closes doesn’t affect the profitability of the eventual buyback. If the TRS contract allows the parties to close out quarterly for example, FFH may be limited to a short term window where they can accrue gains on the reference asset (1.4m shares) less the cost paid (LIBOR + spread) for the period. On the other hand, if the counter party can't close out until a specific termination date set in the future, say 1 year from initiation, then FFH has more time to capture upside on the reference asset which is exciting knowing all the tailwinds occurring at the moment (Farm Edg, BB etc, CR's etc ). Paying LIBOR + spread vs. getting upside on 1.4M shares from $443cdn for a few more quarters is a pretty attractive risk/reward with all these tailwinds in mind. I'm by no means a SWAP expert - but that's how I'm understanding this at the moment. Correct me if I'm missing something. If it’s just a financial bet then you’re right. I don’t think it’s a financial bet. I think it’s a buyback. I think once they have the cash to pay 1.4m * USD344, they close out the TRS and buy 1.4m shares, using gains on the TRS to pay for any amount by which the share price exceeds USD344. Thought about that way, it doesn’t matter whether the transaction happens tomorrow or in a decade. I could easily be wrong! Actually, the way it works is that Fairfax pays a fee...usually Libor plus a negotiated rate. As Fairfax trades higher, the counterparty pays the difference between the strike price and market price. At the end of the swap time period, Fairfax gets the counterparty payments minus the Libor plus negotiated rate. It's not a buyback, but they benefit from it as if they bought those shares, paid a fee and reaped the gains. If Fairfax stock falls, then Fairfax pays the difference between the strike price and market price into the swap. Cheers! Yes I realise this. I think the debate we are having is over whether the benefit is: 1) locking in a profit on the appreciation of their own shares, in which case the longer the TRS lasts the better, and 2) locking in a price at which to buy back shares, in which case it doesn't matter how long the TRS lasts so long as it lasts long enough for them to collect $344*1.4m = $480m of cash to complete the buyback.

Petec, I don't think you have the math quite right. There is going to be a consolidation of shares immediately prior to the IPO (see page 101 of the preliminary prospectus) While we don't yet know the exact ratio we can back into it from the PowerPoint presentation on Sedar. Using the midpoint of the offer range, the company suggests that the IPO shareholders will own 16% and Fairfax will own 65%. Based on $100 million being raised at $13.50 per share implies that the IPO shareholders will own 7.41 million shares. If the IPO shareholders own 16% this implies a total share count outstanding after the IPO of approximately 46.31 million shares outstanding (i.e. after the effects of the share consolidation immediately prior to the IPO). With 65% ownership post IPO, this suggests that Fairfax will own about 30.1 million shares. At $13.50 per share, it also implies that the market valuation will be about $625 million in total. Ay ay ay how did I/we miss that? I think your maths works out at about a 5:1 consolidation ratio, and if you search for "consolidation" in the prospectus the first hit gives an assumed ratio of 7:1. That changes the picture totally: at a 7:1 ratio Fairfax's cost is $2.4*7=$16.8, which is at the high end of the IPO range. It is quite likely Fairfax will not book a gain. There won't be a loss either, because the debs convert at the lower of ($2.40 * the consolidation ratio) and the IPO price, and the Osmington transaction has this feature too. It also means there are fewer warrants than we thought. Frankly strikes me as a mindlessly complex way to do an IPO. But the bottom line is that FFH won't be booking a profit. The main benefit is that FDGE will get $100m of funding that didn't come from Fairfax.

Doesn’t matter when it closes. The point is (I think) they’ve locked in that price for a future buyback of 1.4m shares. Edit: what I mean is that when it closes doesn’t affect the profitability of the eventual buyback. If the TRS contract allows the parties to close out quarterly for example, FFH may be limited to a short term window where they can accrue gains on the reference asset (1.4m shares) less the cost paid (LIBOR + spread) for the period. On the other hand, if the counter party can't close out until a specific termination date set in the future, say 1 year from initiation, then FFH has more time to capture upside on the reference asset which is exciting knowing all the tailwinds occurring at the moment (Farm Edg, BB etc, CR's etc ). Paying LIBOR + spread vs. getting upside on 1.4M shares from $443cdn for a few more quarters is a pretty attractive risk/reward with all these tailwinds in mind. I'm by no means a SWAP expert - but that's how I'm understanding this at the moment. Correct me if I'm missing something. If it’s just a financial bet then you’re right. I don’t think it’s a financial bet. I think it’s a buyback. I think once they have the cash to pay 1.4m * USD344, they close out the TRS and buy 1.4m shares, using gains on the TRS to pay for any amount by which the share price exceeds USD344. Thought about that way, it doesn’t matter whether the transaction happens tomorrow or in a decade. I could easily be wrong!

Doesn’t matter when it closes. The point is (I think) they’ve locked in that price for a future buyback of 1.4m shares. Edit: what I mean is that when it closes doesn’t affect the profitability of the eventual buyback.

Yup. 93% CR excl covid. Super stuff.

They needed to borrow some money without pushing up their ratios, so instead of borrowing they sold some of Brit to OMERS, likely with that 9% promise, and then they'll buy it back in a couple of years. Every time they do a deal with OMERS, I feel like I need to take a shower after. SJ Quite.

Because they didn’t have the cash to buy the stock. Instead they locked in the price for when they have cash later. Yeah maybe but they’re not short after Riverstone. Which perhaps explains the 15% sale of Brit to OMERS (source of cash for buyback)

Because they didn’t have the cash to buy the stock. Instead they locked in the price for when they have cash later.

Something for everyone here. BVPS 478 *before* BlackBerry and Farmer’s Edge. And the buyback is superb. Not sure why they’re selling 15% of Brit.

Love it. Can I sell you my stock for $750 at the end of ‘22? ;)

Sure but it trades at a discount to book today. So in very rough maths, and assuming BV is c.$500 today, they need to: - earn a 10% ROE to get pre-dividend BV to $800 - pay $50 in dividends over 5 years. - trade at 1x.

+1 Do you have a link to the Southeastern podcast?

Interested to know how people view this!

Re luck, I think the underlying point I’m trying to make is this. Buying a business below intrinsic value and selling it at, or even a little above, intrinsic value is not luck. It’s skill, and it’s repeatable. Buying a business because you overestimated its IV, and then getting bailed out by a bubble, is not skill, it’s luck, and you can’t rely on it being repeated. So while it’s fine to say luck is part of the game, I don’t care, because I’m trying to assess Fairfax’s *future* prospects.

I think the lockup provisions preclude this but I need to reread.

So, taking at look at your Feb 1 spreadsheet, there has been a bit of jockeying of the largest positions over the past 10 days? So from largest to smallest it currently roughly: 1) ATCO ~ US$1.4 billion 2) BB ~ US$1.3 billion 3) Farmers Edge ~ CAD$1.4 billion (or something) 4) Eurobank ~ US$0.8 billion. 5) Fairfax India ~ US$0.6 billion On February 1 when you shared your spreadsheet, I don't think that I would have said that Farmer's Edge would come in at #3 on that list. SJ It's an astonishing possibility. Even if the IPO goes well I can't really believe it will hold these valuation levels until the sell restrictions pass but hey.

Interesting. 13 years ago I took the opposite view: that results would be lumpy in unpredictable ways and therefore trading would not work. I committed to holding the thing long term. Your way might be better :o

But people say that every time. He was bailed out by his friends. He was bailed out by being right on the housing crisis and buying collateralized bonds. He was right because he is being bailed out by a tech bubble. As I said, in June he threw $150M of personal money into his own stock and explained why...that it was cheap. I told you guys why it was cheap even before Prem said he bought stock. A couple of other long-time FFH owners also said the same. There was an enormous amount of capital sitting on the sidelines over the last 3 years. Combine that with massive amounts of stimulus flowing into hands that don't need the cash, but they invest it in the markets, you have capital that was originally flowing into growth stocks now moving into value stocks. The Reddit and millennial bulls drew cash from sideline investors as well...so that had to find a place. This is the normal transition of capital flowing from expensive stocks into cheaper stocks...with the more expensive bubble stocks eventually crashing up to 90% of their value down the road. It's not a bailout...it's patience! Cheers! I have owned this for 13 years now and added materially in 2020. You do not need to persuade me that it was cheap! I did not, however, think they might have a chance to monetise Blackberry at $20, or that Digit would be marked up quite so fast, or that Farmer's Edge might generate a $1-2bn profit within 6 months - and I certainly did not think that all three would happen at once. I have never felt that he got bailed out before, personally. But I do not believe he invested in Farmer's Edge or Blackberry because he saw an epic bubble coming in unprofitable stocks. He thought they were great businesses and, frankly, there is precious little evidence so far that he was right. Even if BB and FDGE turn out to be super-profitable over the next decade, getting the chance to monetise them now at silly prices is transformative to Prem's IRR. That is pure luck. And being able to do it when he desperately needs capital is beyond luck. So no, sorry, he's been bailed out on this one. And I am not complaining at all. It be saying the same thing that Elon Musk was bailed out by an inflated stock price or was simply lucky. While the bubble might be true, it doesn't negate the fact that markets and observers were still wrong on Tesla and Musk's vision. Did Steve Jobs get bailed out because he invented the iPhone? Without the iPhone, AAPL today would not exist in its present form. With investing and entrepreneurship, there is always a bit of luck...but the winners always position themselves to benefit from that luck. If Buffett had not bought Blue Chip Stamps, met Munger, or eliminated derivatives contracts at Gen Re, Berkshire might not be the same either. Cheers! Agreed there is always luck. But every example you have given (including Watsa with CDS's) is an example of an entrepreneur doing something extremely smart in a way that skewed the risk/reward in his favour. I actually think Watsa and Digit is another example of the same. But Watsa and Blackberry isn't, and I am not sure Watsa and FDGE is either. These strike me as examples of poor underwriting that seem to have got bailed out by a phuquing enormous bubble.

BTW for amusement: I think there are about 230m shares outstanding after the IPO. 80m now, plus 130m from conversion of the Fairfax and Osmington debs, plus 20 for warrants. FDGE had a revenue run rate of $55m at YE20. At $10, it's being valued on 42x revenues. I haven't the heart to do the calculation at $17.

But people say that every time. He was bailed out by his friends. He was bailed out by being right on the housing crisis and buying collateralized bonds. He was right because he is being bailed out by a tech bubble. As I said, in June he threw $150M of personal money into his own stock and explained why...that it was cheap. I told you guys why it was cheap even before Prem said he bought stock. A couple of other long-time FFH owners also said the same. There was an enormous amount of capital sitting on the sidelines over the last 3 years. Combine that with massive amounts of stimulus flowing into hands that don't need the cash, but they invest it in the markets, you have capital that was originally flowing into growth stocks now moving into value stocks. The Reddit and millennial bulls drew cash from sideline investors as well...so that had to find a place. This is the normal transition of capital flowing from expensive stocks into cheaper stocks...with the more expensive bubble stocks eventually crashing up to 90% of their value down the road. It's not a bailout...it's patience! Cheers! I have owned this for 13 years now and added materially in 2020. You do not need to persuade me that it was cheap! I did not, however, think they might have a chance to monetise Blackberry at $20, or that Digit would be marked up quite so fast, or that Farmer's Edge might generate a $1-2bn profit within 6 months - and I certainly did not think that all three would happen at once. I have never felt that he got bailed out before, personally. But I do not believe he invested in Farmer's Edge or Blackberry because he saw an epic bubble coming in unprofitable stocks. He thought they were great businesses and, frankly, there is precious little evidence so far that he was right. Even if BB and FDGE turn out to be super-profitable over the next decade, getting the chance to monetise them now at silly prices is transformative to Prem's IRR. That is pure luck. And being able to do it when he desperately needs capital is beyond luck. So no, sorry, he's been bailed out on this one. And I am not complaining at all.

I get the same numbers with one minor exception. All values below assume the $10-17 IPO range holds; the numbers of shares change if the IPO prices below $2.40: - $272.8m of debentures which convert at $2.40 into 113.7m shares worth $1.137 at $10 to 1.933bn at $17. - 18.2m warrants for nothing which are worth $182-309m. - Agreement to pay Osmington $24m for 10m shares worth $100-170m. Total value of Fairfax position: $1.42 at $10 to $2.41bn at $17. Total cost: $225.2m principal amount of debentures plus $24m to Osmington. Round it up to $250m for the nominal cost of converting the warrants. I think you're including the accrued interest on the debs as a cost, when I think I would include them as a profit. Pretax profit: $1.17-2.16bn. Fairfax is going to look quite well capitalised if they can pull this off!

The undervaluation isn't bizarre. But the number of things that seem to be aligning at one time is impressive. And the fact that Prem is being bailed out by a tech bubble he railed against (I refer to the valuations of Digit, Blackberry, and Farmer's Edge) is downright amusing.

To add to this, crucially, the gross margin turned positive in 9M20 and the commentary around cost of revenue seems to be that it improves as the installed base grows (a lot of it is due to onboarding customers not servicing them) and as density increases (ie they need a lot of customers in the same place, ideally).