petec

I would be more positive on both. On succession, I see no evidence so far that Prem's intention is anything other than what he says it is, namely, to put his votes in the hands of a family member who understands and preserves the culture - much as Buffett is doing by making Howard Berkshire's Chairman. Yes, there is risk here, but only inasmuch as there is in any controlled company. On personality/character: clearly this has led to mistakes, but it is also pretty much the reason for the existence and long term success of the firm. On balance it is a positive.

This is a very good post. My view is that the risk of real downside in the investing side is much reduced by the promise not to short, and so the outlook from here for the whole entity at this starting price sits somewhere between OK and superb. That's a decent range for me.

Thanks, Petec! After reading your notes and what I’ve found about Helios on the internet this seems like an ideal pivot for the African strategy. Helios seems like it’s about as high quality of a partnership as you could hope to find in Africa. I liked the color on the currency and fx risk management. I’m looking forward to the circular. Agreed. I tentatively doff my cap to Prem on this one. His flaws have been well-aired, but one of his strengths is to pull best in class people into his orbit and I think he has done it again.

Notes from the call. My summary: - Helios are impressive. - HFP will be a very different animal to FAH, with fee streams, more/better deals, and a dividend. - Those wanting real details will be disappointed and need to wait for the circular. Call notes: - Deal creates Helios Fairfax Partners, which aims to be the pre-eminent investment vehicle for Africa, combining private equity capital and permanent capital. - Founders met Prem c. 1 year ago and deal developed over 6-9 months. Helios had been looking for permanent capital for years to seed new funds and support strategic/control acquisitions. Met Fairfax and immediately saw cultural similarity - shared vision and common investment principles. - In effect FAH is buying Helios for 45.9% of the combined company. Fairfax gives up its fee. HFP pays a fee to Helios, but then Helios pays 100% of investment fees net of expenses to HFP, plus 25% of carry on Helios' 3 old funds, which have a lot of room to appreciate, plus 50% of carry on Helios IV and any new funds. More details to come in circular late sept/early Oct. Deal closes end Oct. - OMERS accepted ongoing trading restrictions in order to do independent due diligence and approved the deal. - Opportunity in Africa is "very significant indeed". "The word excitement doesn't capture how we feel about this" deal. Public listing increases visibility and ability to hire and comp the best people. - Helios team will manage legacy PE funds and will co-manage the FAH balance sheet assets with Mike and his team. - Helios ○ Have a 15 year track record having raised 3 PE funds and with a small private credit business (think this is advisory) which they want to grow. They are now the largest Africa-focussed private investment firm with $3.5bn in AUM from sovereign wealth funds, pension funds, family offices etc. ○ The two founders of Helios, Tope Lawani and Babatunde Soyoye, are Nigerians (unique for an African PE fund to have African founders, amazingly) with outstanding academic track records and met at TPG Capital. This is their life's work. ○ Investment partners have average 20y private experience. Team predominantly African - big advantage. ○ B-Corp with active CSR programme. ○ Buy or build market leaders in key economic sectors. Active. ○ Have invested in 30 companies since inception across startup, growth, carve-out etc. 24 investments today. ○ Generalists with particular expertise in financial services/technology (own several payments platforms), telecom and telecom infrastructure ("literally founded" the first telecom towers business in Africa, which they sold, and their second one, Helios Towers, is listed in London), consumer non-discretionary (food & beverage), energy (power, particularly distributed solar, and midstream gas/LNG regas because they are big believers in gas as a transitional fuel), and real estate (focussed on rental accommodation for student and recent graduate housing where the other options are expensive and deplorable, and logistics). ○ Several examples of companies created from scratch or via mergers. ○ Broad range of exits covering sales, listings, and other methods. ○ Unique edge is knowledge of and commitment to Africa, and a proven capability to manage complexity. Partner of choice in Africa - institutional but also entrepreneurial and pioneering. - Q&A ○ Is there an information asymmetry between Helios LP investors and FAH minorities? No - the latter don't have a view of Helios economics. Circular will give a comprehensive view and there will be ample time between the circular being published and the shareholder vote. ○ Fees and dividends? HFP will have a stream of income which will be "very significant" over time. "We will certainly be looking at a dividend policy" which will be explained in the circular. ○ Helios invests in Francophone Africa. Yes. Team is bilingual in the English/French sense so able to execute in Francophone Africa. One advantage of this is that the CFA currency is pegged to the Euro in a sustainable way, so they have to worry about fx less - elsewhere they spend a "huge" amount of time on fx risk, and try to find companies with natural hedges because they sell in hard currency or have pricing power). ○ ATMA - presumably FFH thinks it is undervalued, as FAH has always maintained. How is that fair? Prem and Mike answered this, not Helios. FFH did not want to do this - Helios felt the exposure was too high and required it as part of the deal. Also, the transfer price is at a significant premium to market value and you have to accept there will be challenges as a result of the ongoing economic impact of Covid, particularly on financial institutions. ○ African GDP? Over 15 years you see patterns. One is that economic cycles are short and shallow. That makes investing in cyclicals that require the economy to be buoyant is challenging. Prefer to focus on long term, non-cyclical, secular opportunities driven by things like demographics, urbanisation, technology, innovation. Another is that some countries have reformed - Cote D'Ivoire, Morocco, Egypt, increasingly Ethiopia; while others - Angola, Nigeria, South Africa - have not. Focus on picking spots with both good macro and good exit environments.

How did I not buy Stelco at $4? I looked, saw the value, and bought something else. Clown. Could have made back some of what I lost when Prem bought it for me at $21!

+1

Do you know why BB have failed to gain traction in security?

ATCO, BAM.

Looks weird to me. There’s no obvious bump in volumes, and I think they’d have announced. My guess is this is to do with the change in the convert terms, although I’m not sure how.

Thats excatly the point. Its a messy deal and could use with far more transparency like a shareholders call or a disclosure explaining why it had to be done. Its not like FAH is running out of time with 100 mil in cash and zero debt. If your point is about transparency, then fine. I thought it was about shafting minorities.

Occam's razor says it was the fee. Why else would he do it? If the IPO was actually imminent, why not just put OMERS in the IPO with a big allocation. Discount them the I-banker fee or something. The only way I can see the deal structure making sense is that it was specifically designed to get OMERS to agree to a higher price than they otherwise would have been willing to pay to get the fees to print. The timing fits that, it was right at the last minute for this years fee calculation. The deal has no downside for OMERS, if the airport ends up being less valuable (for some unknowable reason like a pandemic, for instance) they just get more shares to make them whole. No downside for FFH, they got their fee already. All the downside is at FIH, who could end up giving up a huge chunk of their best asset at a low price, right after paying fees for selling it at a high price. Seems pretty win-lose for minorities to me. I guess the other possible motivation is that Prem just wants to do a favor for his friends at OMERS. Sort of like the Torstar deal, maybe he's doing a favor for a friend with shareholder's money. That seems less likely to me, but even if its true I don't think its any better. Can you think of another motivation for doing the deal? I can't imagine anyone would seriously suggest it was a good deal structure for FIH shareholders... The simplest explanation from my perspective is that Fairfax thought it would IPO at the named price and therefore the downside protection offered to OMERS wouldn’t pay out. Bear in mind the fee was booked but not paid. It’s possible to unwind it until it’s paid and that’s what would have happened if the IPO has been a bust. So I don’t think your scenario of FFH getting the fee *and* shareholders giving more of BIAL to OMERS was likely, but correct me if my understanding was wrong.

@hobbit - what would you have had Prem do? Pay 250, thereby shafting FFH minorities? A transaction at or around market is entirely reasonable in the circumstances (which include an overall merger of FAH which Prem presumably thinks will work out well for FAH minorities). @bizaro - the BIAL deal certainly looks weird, but are we sure it was done for the fee? Prior to covid, the IPO was meant to be done in 2020, and the fee isn’t actually payable until the end of 2020. So the only benefit is being able to book the fee a year early, and since it’s not really big enough to move the FFH needle I don’t really see why they’d have bothered. I wonder if we are missing something.

Yep, the BB shareholders are up in arms. I guess their underlying assumption was that either BB doesn't need the liquidity or that there is a long line-up of potential lenders who would be prepared to lend a half-billion at 3.75% with no conversion privilege. I am from the school of thought that FFH's last note flotation was at 4 5/8%, so if that's what FFH pays for debt, what should a riskier outfit like BB pay? Maybe 7%? Seriously, a 15 minute walk through their financials for the past 3 or 4 years is enough to make a guy want to puke. Maybe there is a long line-up of outfits wanting to lend money to companies that have drastically transformed their business and are cashflow negative? I don't see it, but I've been wrong plenty of times before... SJ Blackberry shareholders are still up in arms about this: https://www.newswire.ca/news-releases/concerned-shareholder-objects-to-blackberry-s-related-party-transactions-with-fairfax-851354230.html SJ Your prior actions tend to form your reputation... "Fairfax and Mr. Watsa have a history, when presented with a conflict of interest, of working against the interests of minority shareholders and for the benefit of Fairfax. In September 2019, the Québec Superior Court rendered a judgment in which it found that Mr. Watsa and Fairfax, as insiders of Fibrek Inc., acted in a "blatant conflict of interest situation" for the benefit of Fairfax by enabling the acquisition of Fibrek at the "lowest cost possible," to the detriment of Fibrek's minority shareholders who were bought out at an unfairly low price. The Court also found that despite the trust and confidence Fibrek placed in Mr. Watsa and Fairfax, Mr. Watsa purposely refrained from disclosing Fairfax's true intentions to Fibrek management." Your prior actions tend to form your reputation! More examples please, because if you are going to point to 2 transactions out of some 300-400 conducted over 30 years...please! The only reason Blackberry is even around is because of Prem putting John Chen in charge. Cheers! Its not just 2-3 transactions..look at what they are doing with Atlas Mara. In May2020 ATMA controlled by fairfax reported tangible book value around 2.50 and now they are selling it to themselves for 40 cents . with zero explanation. They gave a ratchet clause while jacking up value of bangalore airport. With no explanation. There is a reason market does not trust them anymore . FIH, FAH trading at 50% of reported BV and FFH probably off 20-25% too. Given that ATMA is trading at 32c, are you suggesting they underpaid or overpaid? Bearing in mind there are minorities on both sides of the transaction? ATMA is controlled by FairfaxAfrica , ATMA reports a tangible book value of $2.50, Wilkerson who is incharge both at ATMA and Fairfax africa defends the book value in annual reports, AGM 2020 call and at ATMA earnings. At the same time there is a transaction going on where they are happy to sell ATMA for 40 cents to FFH. FFH gets the asset at 0.25 * TBV which helps them make up for losses in Fairfax Africa investment. Farifax Africa shareholders get screwed. or Helios, their new investment guide in africa, really wants ATMA off the books and they are happy to sell it to FFH even at 0.25*TBV since they see no value in the equity. FFH screw their own shareholders by buying a worthless asset for 40M. or Tangible Book Value of ATMA was always overstated and was being falsely being defended by Wilkerson and co. Either of these scenarios does not make Fairfax paragon of transparency or ethical behaviour Or, Fairfax see value, Helios don’t, so they transfer at/above market, thereby doing ok by both sets of minorities. There are better examples of Fairfax being less than perfect.

Yep, the BB shareholders are up in arms. I guess their underlying assumption was that either BB doesn't need the liquidity or that there is a long line-up of potential lenders who would be prepared to lend a half-billion at 3.75% with no conversion privilege. I am from the school of thought that FFH's last note flotation was at 4 5/8%, so if that's what FFH pays for debt, what should a riskier outfit like BB pay? Maybe 7%? Seriously, a 15 minute walk through their financials for the past 3 or 4 years is enough to make a guy want to puke. Maybe there is a long line-up of outfits wanting to lend money to companies that have drastically transformed their business and are cashflow negative? I don't see it, but I've been wrong plenty of times before... SJ Blackberry shareholders are still up in arms about this: https://www.newswire.ca/news-releases/concerned-shareholder-objects-to-blackberry-s-related-party-transactions-with-fairfax-851354230.html SJ Your prior actions tend to form your reputation... "Fairfax and Mr. Watsa have a history, when presented with a conflict of interest, of working against the interests of minority shareholders and for the benefit of Fairfax. In September 2019, the Québec Superior Court rendered a judgment in which it found that Mr. Watsa and Fairfax, as insiders of Fibrek Inc., acted in a "blatant conflict of interest situation" for the benefit of Fairfax by enabling the acquisition of Fibrek at the "lowest cost possible," to the detriment of Fibrek's minority shareholders who were bought out at an unfairly low price. The Court also found that despite the trust and confidence Fibrek placed in Mr. Watsa and Fairfax, Mr. Watsa purposely refrained from disclosing Fairfax's true intentions to Fibrek management." Your prior actions tend to form your reputation! More examples please, because if you are going to point to 2 transactions out of some 300-400 conducted over 30 years...please! The only reason Blackberry is even around is because of Prem putting John Chen in charge. Cheers! Its not just 2-3 transactions..look at what they are doing with Atlas Mara. In May2020 ATMA controlled by fairfax reported tangible book value around 2.50 and now they are selling it to themselves for 40 cents . with zero explanation. They gave a ratchet clause while jacking up value of bangalore airport. With no explanation. There is a reason market does not trust them anymore . FIH, FAH trading at 50% of reported BV and FFH probably off 20-25% too. Given that ATMA is trading at 32c, are you suggesting they underpaid or overpaid? Bearing in mind there are minorities on both sides of the transaction?

I think that’s a valid and necessary exercise, but it does miss the fact that the holdings might be undervalued. I think many are, and I can’t be bothered (or just can’t) to assemble that portfolio myself, so occasionally when I need some good news I calculate Fairfax’s book value on a look through basis for Eurobank and Atlas ;)

I’d also point out that Prem was clear (in writing, and in person) that the Singleton comparison was meant to be very long term. He never said that buybacks would be the priority at any specific point in time - merely that the age of issuing to do big deals was over, and that over time the count would fall. It would be nice if the company had more capital and could grow in a hard market while buying back shares. But if that was the case, it wouldn’t be at 0.6x book.

They don’t have the capital.

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income. If BB actually does turn the corner, that option could become quite valuable. The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023. I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms. SJ So did I, but doesn’t the change in rate just reflect the change in bond yields?

I’m not sure it was ever FAH’s crown jewel. They bought it distressed and fairly rapidly set about trying to dismantle it.

They are buying back. Or at least they were in April, which is the last data I saw.

It seems to me that if you wanted a war to tighten your grip on power, you might not pick a regional superpower with nuclear weapons and 1.3bn people as your enemy. Wouldn’t you pick someone weaker?

I believe it is.

Are you kidding me?! The CEO of the company puts $150M of his outside money into Fairfax and you think it's an act of desperation. A bunch of us said that it was dirt cheap back around late March, early April, and we backed the truck up. Now the CEO is telling you the same thing and you still can't wrap your head around it. I would stop worrying about Fairfax's price and go back and read Securities Analysis by Ben Graham. This is a valuation and analytical issue, not a psychological one! Cheers! +1 Most buys aren't publicised with a press release. But most buys aren't $150m.

Ive been wondering the same.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.