warrior

Please be patient. There is a team working on it. All top notch people. They will prepare a report and revert back as soon as possible. While they are working on it, is there anything else you need? Kraven thank you for reassurance, indeed it provides piece of mind. LOL had to step out from the office for cup of SBUX could not stop laughing. Thanks, it made my day

Stahleyp, Indeed, this is crazy, and not only 45% but also “shorts” have to compensate for dividends, assuming company pays them.

I understand Prem’s intention for protection ,however, in my view Prem has been fighting the FED and that is not easy… The situation at this present moment, It is like residing with inadequate (bad) spouse difficult to leave with and impossible to quit.

Buffet _Groupe thank you ! I would support the question about Microsoft. ” If you weren't good friends with Bill Gates, would you invest in MSFT at these prices?” Or if he could buy Microsoft would he buy instead of buying IBM? regards!

at AGM they were all enthusiastic about improving combined ratio from all of its business units. (Indeed, they have room for an improvement). With the FFH in capital preservation and defensive mode, likely resulting in low investment returns, it makes sense that more emphasis is placed on improved underwriting to generate ROE and book value growth.

Hi FFHWATHCER, I do not own MB , but, due to FFH investment i have been monitoring MB Mega did well in all their restructuring plan and seems that they want to build another facility to support future growth. So, I would reasonably expect future reduction in the rate of cash flow generation. This was a main concern in the past when they raised debt via issuance of debenture, stocks and warrants -on dilutive basis. the proceeds of which ($120 million), when converted, to be put in a trust to be used to pay off the debentures The strike price on the warrants is $9.94 per share. Company has 12.2 million warrants outstanding, In fact, recent financial performance and stock price ,encouraged MB to convert warrants. So they do not have to worry about liquidity and its ability to fund the business. PLEASE SEE REPORT FORM BMO ON THIS DEAL Key Points Mega Brands announced today that it has entered into an agreement with several large holders who have committed to exercising outstanding warrants; in turn. MB will use those proceeds to pay down existing debentures at par, on a pro rated basis. The action is neutral to diluted EPS, but accretive to free cash flow, and, we think, a positive event that better positions the company financially. We also think it signifies a good deal of confidence in the business by large holders and confidence on the company’s part to generate future free cash flow. Fairfax Holdings, Trimark Investments, and Victor Bertrand, Sr., have agreed to exercise 107,296,000 warrants, which convert to 5,364,800 shares and provide the firm with $53.3 million in cash (20 warrants plus $9.96 in cash entitles holders to one share of common stock). Combined with $2 million in proceeds from previously exercised warrants, and a regularly scheduled March 30 debenture pay down of $7.1 million, the total reduction in debt amounts to $62.4 million, bring outstanding debt down to $52.2 million from $115 million. This action will result in the elimination of $6.2 million in annual interest expense, and we estimate that free cash flow should increase by $4.3 million in 2013 and $5.2 million in 2014. The action will result in a one-time, non-cash write-down of about $2 million of deferred financing charges. This portion of deferred financing expense was previously being amortized through the income statement on a quarterly basis. This action will be neutral to diluted EPS, excluding the deferred financing charge, as the diluted EPS calculation had assumed full conversion of warrants and subsequent paydown of BMO Capital Markets Mega Brands Page 3 March 26, 2013 debentures, and, thus, already added back all interest associated with the debentures. And, by definition, this action is also neutral to EBITDA. Though no near-term increase in EPS or EBITDA, we believe this deal shows a good deal of confidence in MB’s business by three of its largest shareholders. Fairfax, Trimark, and Victor Bertrand, Sr., collectively own 45% of outstanding shares and 36% of outstanding debentures. The $53.3 million contributed by these three holders upon exercise of warrants will, in turn, pay down 46% of outstanding debenture, at par, on a pro rated basis. These debentures currently trade at $1.07 and carry a 10% rate of interest. Effectively, these holders are willing to give up almost half of their 10% in interest over the next two years for shares they would have received anyway by exercise conversion in 2015. We believe the improvement in balance sheet and added financial flexibility is beneficial to the company and thus the thinking may be that the long-term benefit to the business could outweigh the forgone near-term interest income for these holders. In addition, the company is providing remaining warrant holders with a cashless exercise option. Holders may exercise their warrants, but in lieu of paying $9.96 per every 20 warrants to receive one common share, these holders may take the option of exercising their warrants, pay no cash, but get a smaller number of shares in return. For example, under the existing structure, the exercise of 20 warrants plus $9.96 in cash results in the award of one common share. With the cashless option, exercise of 20 warrants, assuming a current share price of $14.30, awards holders with 0.3035 shares in return. In either case, at a share price of $14.30, the economic value to a warrant holder is still $4.34 per every 20 warrants. The trade off is that the cashless exercise option reduces the holder’s proportion of ownership by about 70%, but offers the opportunity to exercise and convert without putting up any cash (which would have been 70% of the current share price). In this case, risking that all warrant holders choose to exercise “cashlessly,” we think MB is basically telling the market it would be willing to forego $65 million in future proceeds. We think this is a strong signal that, with $6.2 million in annual interest expense savings, the company can generate the necessary cash through operations or access available credit to pay off the remaining $52 million in 10% debentures when they come due in March, 2015. cheers!

Sanjeev, good call… congrats!!! Perhaps you should frame the Dollar...

financial results for the firm are more volatile than its competitors who do employ hedging strategies. Prem does not mind the volatility, as he a says about lumpy 15%, the question is why hedging 100% vs keeping cash. In fact ,he keeps cash+ 100% hedges ... ? Hence, I would agree with Twacowfca that FFH appears overhedged .hedging involves accurate market timing, numerous transactions which is costly , it also means forgoing dividends and offsetting gain on equity... as we can see at the present loses are massive. They extended the expiry on hedges as well , considering loses on hedges and the present situation it may be logical move . In fact, I did ask Prem about FFH hedging all portfolio. his answer was that ;a) Sir Templeton was hedging 100% in the last 5 years of his career- (I'm not sure about the result for Sir Templeton ,since he started to hedge) b) he is worry about downside risk such as 1 in 100 event in my view ,Prem does, however, has to worry about what will happen if his forecast for a lower stock price turns out to be incorrect .

It is expensive, taken to consideration that he does not have any redundancies such as marketing, risk monitoring department, analysts ect…. He is one man running the fund. So, the fee should be lower in Canada and US. On the other hand, his fee are reasonable if you compare with Canadian Mutual Fund Industry. If FFH decides to sell Chou associates fund, they would receive distribution in kind .the arrangement is that owners who owns 10% or more would not get cash upon the selling , but in –kind.

FFH invested into Chou associate fund. I bealive FFH owns close to 15 % of the fund . In my view ,due to conflict of interst Francis cannot “openly” work for FFH.

We do not own MB, however, we might initiate the holdings warrants / common in the future. The reason I keep my eye on MB that FFH invested into …We own FFH and it is interesting to know what Prem and Co. buying and selling and what is the rational. It seems that the strategy FFH used with MB is similar to Brick -which works very well for FFH and Francis Chou, in both cases turnaround plan, issue of debentures , warrants ,common to p/o debt. In fact, MB has been making big progress, the construction category performing very well, margin is expending, expenses had been reduced and well controlled. Approximate EBITDA estimate close to $55mil. I see huge gain in the store shelf. (Walmart, Target). They have new license with Mattel, in particular “Barbie construction toys for girls “, it is very competitive product , my daughter confirmed that the Barbie-Mega Brands is better than Lego-friends. The Second segment of MB is a Stationery /Art category - sales are up, margin is improving and I believe this is the first year since they bought them, MB has a positive cash flow from the segment. They paid close to 400mil $USD in 2005 to buy Rose art ( please note that today market cup of MB around $180milCAD ) .the Interesting fact is that they tried to sell the stationary in 2008 – when time was bad , but the price was low, so they kept it . Idea of selling the segment today…? well, would certainly unlock the value. the interesting part that the balance sheet is better than it looks. approx 12.2mil warrants outstanding are in the money ( the exercise price close to 10$) when converted will be used to pay off debentures. I spoke with management- and they confirmed that. On a negative side, business is a mediocre, in highly completive industry, to compete company needs to come up with new products and licenses. they do not have a strong brand recognition like Craoyla in stationary and Lego in construction category thus there is always a chance for an improvement… Cheers!

Txlaw ,Good peace ,thanks... In 2005-2007 Mega gained market share on the expense of Lego. The bad purchase of Rose Art stopped the momentum for MB. In boys construction category Mega is the second after Lego, however Lego is huge, I believe it is about 90% of market share. Lego has brand recognition, economy of scale ect…in retail they are indeed # 1. FFH invested into MB via debentures, common and warrants ,at the present moment FFH has big peace of business and the board seat .( and I keep thinking that FFH should just buy them all. what do you think?) In seems to me that MB has been gaining back what they had lost. From my point of view, valuation is attractive.

http://money.cnn.com/video/news/2012/11/15/n-warren-buffett-hire-mitt-romney.cnnmoney/index.html?iid=HP_River

We keep large portion of partner’s money in BRK about 34%. We are very comfortable with downside risk. As long as we know that they buy at 1.1 BV , culture intact , and all awesome businesses , ect… we will hold it. I agree with tombgrd... Thanks to the board, I got too emotional with BAC, have to hold my hands and not to add more. perhaps a little vacation will help.

David Winters on Consuelo Mack www.wealthtrack.com/

Gio, +1 thank you !

Yes ,I agree MER is high, for Canadians even higher. In Canada ,one able to invest only via Renaissance Global Markets. In US you can invest directly.

Thanks for sharing, I met with Dave at our dinner this year, he got lost at Royal York Hotel, Prem invited him to his private dinner, which was happened to be at the same time and place as ours. we had nice conversation… he promised that he would come to our charity dinner in 2013.

Economist article tried to oversimplify, "Anyone who finds it easy is stupid." -- Charlie Munger

Frank Arabia, Prem has invested in MB- stocks and debentures, I think it was at the same time when they invested into Brick ( as we all know brick investment worked very well for them). Both companies were turnaround stories. In 2007 MB had bought Rose ART in US, and all, what could go wrong went wrong… CEO was at our shareholders dinner this year, and as I remember he was enthusiastic about prospect. In fact, MB had made some progress in its turnaround plan, and recent observations at retail are encouraging. The construction category continues to perform well, and recent licensing deals with Barbie and HOT Wheels should add some firepower. Valuation is cheap, assuming the conversation of warrants and paying out debts . Management confirmed that they will p/o debt from the conversation of warrants. Warrants are expired in 2015. Bertrand family own and run the operation. the management will have to work hard on all the turnaround process and be able to compete . for now ,I consider this enterprise as a mediocre, management failed on many occasions to deliver… I would agree that it is a cigar butt . Why Prem invested? I do not know. the fact is that he rescued MB , if he did not do it . I’m not sure if MB would exist today. In my view, he should have taken MB private. Francis Chou has invested as well , he loves cigar butts ("as long one right 6 times out of 10" ). Cheers.

According to Globe and Mail "Between Sept. 12 and Sept. 14, board chair Victor J. Bertrand bought 400,000 shares in the public market at an average price of $9.14. Institutional investor Fairfax Financial Holdings Ltd. also bought 323,337 shares on Sept. 14"

I’m not sure about Money market funds, I would go with flexible term deposit . it is fully open and the r/r about 1.5%- in Canada. Ben Graham recommended to take on leverage/ margin, only, when market at exceptionally low level. Today – it is not the case . Cheers!

David Winters talks about Master card and Nestle http://www.wintergreenfund.com/reports/sar/

Giofranchi , Thank you for info. Also we may agree or disagree with Prem’s on hedging, however, as he said, he remains bullish over the long term and wanted to retain the equities of the portfolio( an alternative to liquidating all or some) . In fact, hedging involves accurate market timing, numerous transactions, it also means forgoing dividends and offsetting gain on equity -IF market advances

Hello Dear Members, One of the paradoxes of buying protective puts is that , in hindsight the strategy is never ideal. Nobody ever knows the best strategy until after the fact. In my view, this approach is costly and requires market timing. I have a question to fellow members: what is the cost for FFH having all Hedging strategies? Thanks