T-bone1

Looks like its a done deal at $38 per share . . . "Fairfax intends to finance the acquisition with a combination of holding company cash and subsidiary dividends, but will also raise $200 million through an equity issue prior to the closing. Following the completion of the acquisition, Fairfax expects to continue to maintain approximately $1.0 billion in cash and marketable securities at the holding company level."

congratulations to any boardmembers that may have speculated on this! I was certainly in the camp that they would continue to buy in the open market . . . but as of this morning its hard not to think this was staring us in the face. FFH is gonna be a powerhouse when the insurance market turns.

I do think gas prices will be $7+ after 2010 and that the costs of extraction per MCF of gas for Sandridge will drop when the plant comes online, so yes I am long shares and think it will work out for FFH. Prem owns shares personally as well. SD also has 80% of their gas production for 2010 hedged at $7.70 per MCF, so the uncertain commodity outlook for this year doesn't concern me. Your point about the new headquarters is a concern. And the same criticisms have always been leveled at CHK . . . these guys are definately visionaries that have built a lot of shareholder value, but they also tend to treat the company like their own piggy bank. Bottom line: I think this is a great way to invest in natural gas (or inflation if you prefer), but not a great bottom-up investment if you don't have a view on the commodity. The convertible note FFH bought lets them ride out the next few years collecting interest but the mandatory convertability definately suggest that Prem & Co at least believe in the inflation thesis (and since Prem bought shares himself I think they believe in the company too)

With regard to SD, they have a few advantages I see: 1) they have a CO2 factory coming online this year in partnership with OXY (who will use the CO2 for tertiary oil extraction at a nearby field they own). SD's best wells/wellsites in the WTO all have very high CO2 content (60%+!) . . . this is why they have never been drilled despite the fact that they can be easily drilled with "old" vertical rigs and none of the fancy new techniques needed in the shales. As soon as this CO2 factory/extractor comes online they will be drilling much better wells and when natural gas goes back up they will not suffer the cost inflation the rest of the industry will because they don't need the more modern technology. 2) the oil feild they just bought is a good inflation hedge. This are also encompasses an emerging oil play called the three forks which apparently has very high rates of return at current prices (200-300% IRRs) 3) they have a lot of land that hasn't been explored which gives them upside potential if you think they know what they are doing (the CEO was co-founder of CHK and helped build that company from nothing for - what its worth - not everyone thinks highly of CHK).

I don't believe it is available on the web. here is the article though: SFK Pulp is increasing US prices on recycled bleached kraft, or market deinked (MDIP) pulp, contacts told RISI. Also, the firm and Northern Pulp Nova Scotia were among the many producers that told customers they'd raise northern bleached softwood kraft (NBSK) pulp prices, effective January 1, 2010. Quebec-based SFK Pulp, the world's largest MDIP producer, told US customers it was increasing prices on the grade by $20-30/tonne, effective Jan. 1. The firm, whose January price increase is the only known hike in MDIP, has increased prices every month since October, contacts said. Other producers in the small capacity MDIP sector may be moving to raise prices on a customer-by-customer basis. NBSK hike list grows in US, Europe. Also, SFK Pulp and Northern Pulp Nova Scotia separately joined a long list of NBSK producers that slated $20-30/tonne price increases for Jan. 1. The firms told customers about their price hikes just before the Christmas holiday. SFK Pulp and Northern Pulp Nova Scotia both told North American customers they were raising NBSK prices to $850/tonne, up $20/tonne. The companies also told customers in Europe their NBSK prices would be $830/tonne, up $30/tonne. Those prices in the USA and Europe were the common levels set by various majors including Canfor Pulp, Domtar, and West Fraser as well as Botnia and Sodra, among others.

options on the VIX are european style, so you can only exercise them on the expiration date. You cannot buy the VIX, only VIX futures, so basically you can only arbitrage the puts with the future expiring on the same date. It looks like the January VIX future is trading at 20.25

Looks like SFK raised their RBK (or MDIP) price $20-30 per tonne January 1st. I guess the Black Liquor rolloff is having an effect. They raised NBSK again too

I am a big fan of Aubrey Mcclendon and a shareholder in CHK . . . That being said, this transaction was completely inexcusable and attrocious. I didn't sell my shares when this happened and it didn't change my estimate of the value of the company, but come on guys! This is a natural gas company, not a rare map dealer. Due to his financial difficulties, Aubrey had to sell of his wine collection too, should the company have bought that just because they regularly serve wine at the christmas party? Should they buy his rare cars to display in the lobby of company HQ? I am saying this as a big fan of the company, but I don't think companies should have expensive art to begin with. The fact that this is was a blatant insider deal and a bailout of the CEO is obvious. The CEO of Valero was in financial trouble at the same time, what would you think if CHK opportunistically purchased that guy's art collection? This occurred in the same year that CHK lost a ton of market cap and paid Aubrey $100 Million dollars. I don't have that much of a problem with the $100 million payout . .. I do think value was created that year even if the stock went down, and at least that payout was honest and they took the P.R. hit for it. If Aubrey really needed another $12Million they should have paid him $112 Million. A company should not buy crap from their CEO, no matter what it appraises for, especially if its not part of their core business (and no, these maps have nothing to do with looking for natural gas). I would imagine Aubrey will buy these maps back from the company for $20 million or something when he gets back on his feet, to "do the right thing" and prove they were worth that, but its beside the point. If he needed a $12 Million dollar loan secured by his rare map collection he should have gone to the bank. /end of rant. long CHK P.S. I know its not the same people, but I cannot believe how hard this board was on FFH for - in my opinion - a very fair deal in the ORH buyout, and how easy people seem to be going on CHK for very blatant insider dealing and arguably eggregious executive pay (I say arguably because I think he has created a lot of value and the $100 Mil is over 5 years, but he was the highest paid CEO in the country in a year that the stock lost ~2/3 of its value)

I spoke to the company and found out the following (my numbers are probably a little off as I'm doing this from memory): 1) The 25 Million shares of SD that Fairfax now owns includes the 18 Milllion and change that the convert will mandatorily convert to in 5 years. There is some provision to adjustments to this 18.x number, but I don't know what that is and I think they are using the same number SD assumed in their press release for now. 2) The company did buy more shares in December, roughly 5 Million assuming they owned 2 Million before the convert. Not sure if they bought as part of the equity offering, but I assume thats where the shares come from 3) Prem did indeed but 147k shares for his personal account. This is the first time they have ever disclosed a personal purchase by Prem, although they would only do so if FFH owned 5-10% of the company and they are required to do so (so assume Prem doesn't own any ICO, SFK, Brick, etc.) A few other thoughts: Tom Ward sold 2 Million shares as part of the december offering, but he is still leveraged (has his shares pledged for bank loans) so I don't think this is a negative. FFH isn't stupid and was buying at the same time. If FFH thinks that we will see deflation in the short term and inflation in the long term - at least this is my interpretation of their public statements - then the convertible they bought is an amazing investment. For the next 5 years they get a safe bond, and then they have a huge equity kicker in a commodity business, potentially worth multiples of their initial investment in an inflationary environment. The $10 Calls for January 2012 on SD are offered at $4.00! I think its safe to assume that a $10.67 (roughly the conversion price) in 2015 (5 years from now) is worth at least $5.00 (more likely around $7-8 if I had to guess). That means if they got 18 Million calls worth $5 apiece right now on a $200 Million convertible, they basically got an instant rebate of $90 Milllion dollars. This calculation is much more meaningful for an instrument like Buffett's GE and GS convertible preferreds, but should give some idea of the huge value of this conversion feature.

They bought a $200MM 11.5% debenture a year ago and got the warrants for free. They are now getting $186MM for the warrants (the new $150 debenture isn't going to them, its going to someone else so that company can pay off the warrants). The warrants are being cash settled. So for $200MM they got a debenture in the same amount worth more than par today, and a 93% pretax profit in one year on top of that!

Anyone ever read Den of Thieves about Mike Milken and Drexel? That case was built by a series of small dominoes and pressure from various directions. Between the FFH lawsuit, this lawsuit, the Galleon Case, I think there is blood in the water. Now it is just a matter of uncovering smaller crimes in discovery and offering immunity to those who committed them. Mr. Cohen isn't looking so Teflon all of a sudden

Domtar and Canfor are raising NBSK prices $20-30 per tonne January first

Dec. 15, 2009 - Mercer International told customers worldwide today that it will increase northern bleached softwood kraft (NBSK) pulp prices, effective January 1 until further notice, market participants told RISI. Mercer plans a $30/tonne price increase in its key markets. In North America, that would bring its January price to $860/tonne. It also plans a $830/tonne level in Europe, and $730/tonne in China. Its $30/tonne price increase is also effective in other Asian markets.

I'm not sure I understand the significance of the question. Is this purely a hypothetical, or a reference to the implied interest rate in a LEAP (when you could still buy them) or the cost of money to large banks? I would absolutely take this deal with at least double my net worth. Most of the tail risk could be hedged out with some sort of disaster insurance (low strike S&P puts or the like). I am not concerned about FFH's reserves, investments or that they will make a huge mistake. Even decent performance at FFH (say 5-10% BV growth) makes this a no-brainer in my opinion. I'd be curious why some people vote "no" . .. ?

While the Buffett/Gates idea of giving your kids "enough money that they can do whatever they want but not so much that they can do nothing" probably means an amount less than $2MM, I'm not sure that means that no one should give their children more than that. Any standard of this sort also complicates matters because you could pay less to the government by having more kids (if the tax code specifies an amount per child that is tax free). I agree with Ben Franklin (couldn't find a quote in a brief search) that inheritence stratifies a society and ruins a true republic after only a few generations. Dynastic wealth usually ends in a manner that would be an embarassment to the creater of such wealth - usually much more quickly than they would imagine - however there have been a number of heirs that have done great things with their large inheritences . . . much better things than could be done by the government. I agree with Sanjeev's original thought that there should be a punative tax on inheritence above a certain level - provided the proceeds of such would lower current income taxes. I don't trust the government to spend $1 Billion dollars any more than I trust some drunken heir or heiress to do so, so I don't think this should be a net gain to the government. However I would much rather the government take 75% when I'm dead and only 30% while I'm alive. There should be some threshold before the 75% kicks in, and maybe $50 Million is as good of a number as any. Of course people will try to avoid the 75% tax rate by giving their money to charity. A lot more Gates' foundations is better than a lot more government in my opinion, but do-nothing foundations aren't of much social good. In short, it is a tough problem, but I would rather be taxed less while I'm alive and more when I'm dead. /end of rant

While we all consider ourselves investors in FFH, many of us - myself included - own or have owned FFH through LEAPS instead of owning the stock. There has also been a lot of talk of short-term trading of the stock on this board. I have done this stuff as much as anyone, so I am certainly not criticizing anyone here . .. but I think its possible that this move by FFH has just as much to do with the actions of us on the board as the actions of the NYSE or short sellers. FFH wants long-term investors, and while many of us have admired and owned this company for years, trading in-and-out and using options doesn't really make us long-term investors in the company. Owning through margin is also frowned upon at least by Buffett - who is one of the intellectual father's of FFH. I would certainly prefer if they stayed on the big board and that there would still be LEAPS on this company going forward, but I don't forget that it is the work that Prem and everyone else at FFH have done that have made me money . . . my buying LEAPS certainly doesn't help them out at all. There has been a lot of talk on this board lately about FFH being shareholder unfriendly and I think it is both misguided and unfounded. This company has gotten where it is because of the leadership it has. I am glad there is a dual share structure to prevent more short-term-thinking shareholders from controlling the fate of FFH. I don't think a share split will help anyone in the long-term, not the shareholders or the company. It is to our benefit to have the other shareholders be long-term (I would say "also be long-term", but I have already disqualified myself) - this is why they could raise capital when they needed to a few years ago and could do it again on good terms this year. Someone complained that the other shareholders got a sweetheard deal with they injected equity a few years ago. They deserved to! They were helping Fairfax . .. I certainly have never helped FFH in any meaningful way, and certainly couldn't give them a couple hundred million if they needed it. I don't mean this as a rant or an attack on anyone (myself included), only as a request that everyone take a step back and get some prespective. This is probably the most shareholder friendly company I know of outside of Berkshire. It is also one of the best investments I know of, and most of us have already made a lot of money investing in this company (or derivatives of such). If Prem wants me to (and I don't presume to know why he and the board made this decision) be a true long-term shareholder, and even if he wants to prevent me from using margin (not that I think this will ultimately be a problem for many people or that it was a part of the motivation for this action at all) I am fine with that. I am lucky to be able to invest in FFH and have benefited by it, not the other way around. If the only way to invest in FFH going forward is to buy $360 subordinated voting shares in Canada, I am just fine with that. It worked out pretty well for those who bought BRK in the 80s. 15% annual appreciation is pretty darn good, and one day the multiple will reflect that.

with regard to options, I am told that the CBOE will only allow closing transactions (no new positions) - not sure if this takes effect today or once they delist. Existing options will reference FFH in Canada after the delisting and should not be affected.

I agree, if you look at this investment versus a long term inflation protected security (including the risk of the government underreporting CPI increases) it looks pretty good to me

Prem spoke in Toronto today. Nothing new or earth shattering, but a few highlights: Fairfax expects to compound book value at 15% yearly Fairfax's head office will always be small and the structure of the company is a competitive advantage Japanese past economic problems are worth looking at Investors should focus on the unexpected Acquisitions will have to meet FFH's targets for return Being a public company helps with funding 75% of FFH is owned by ten holders (not sure who all these are . . . SEAM has 17%, Mackenzie has 8%, the rest are below 5% . . .) Prem welcomes competition among financial companies and is okay with banks competing with insurers fewer investment opportunities now than a year ago Canadian commercial real estate may be an area to invest in I know I'm beating a dead horse here, but I would posit two premises: A) After the first half of this decade FFH is going to underpromise and overdeliver B) FFH has once again publicly stated that they will compound book value at 15% per year Draw your own conclusion, you all already know mine.

I think Bargainman was kidding - although he is correct on the inspiration for my handle. In any case, while I am sure no clarification is needed, I am no Warren Buffett and am certainly not THE Warren Buffett.

As Eric pointed out, the insurance side (and associated fixed income investments) should contribute over 5% per year to book value. THIS, in no uncertain terms, is the value of the insurance business. Sure it will be lumpy, but no one here seems to be suggesting it won't happen. If you invested in a good mutual fund like FAIRX, and I told you that I would gross up your after-tax returns by 5% each year - with the caveat that I might do it in arrears - every year for ten years, what would you pay me for this? If you had the choice between owning FAIRX at NAV or owning FAIRX + 5% per annum, what would you pay for the second option. Adding 5% per annum to after-tax returns gives you a result in ten years that is roughly 50% higher than what it otherwise would have been. If you think we could have a hard market and a 95% combined ratio, then the insurance business could add 10% per year. When you consider that float could also grow in a harder market and the power of compounding, the numbers get large quickly. Since few people here seem to think the insurance business (which is the business they are in) is worth anything, I suggest you look at it another way. If you think that FFH can compound book value at 15% per annum for the next ten years, then they are basically trading at a P/E of 6.5 and growing at 15% per year. Obviously all the different ways FFH makes money doesn't flow into reported earnings, but the after-tax gain in book value each year is what they have earned. If anyone else knows of a big, safe, conservative company with great management and a bright future trading at 6.5 times earnings and growing at 15% per year please let me know. I would like to buy as much as possible of a company like that.

I am still always surprised when people talk about FFH's insurance business as being either worthless (as implied by 1X tangible book valuation) or as a detraction to overall value . . . It makes me think the valuation still has a ways to run.

Klarman talked about the opportunities in distressed fixed income products, particularly morgage backed securities that most people can't or won't own at this point. If only there was a company with a bunch of cash, investing expertise, and some cheap leverage to exploit this situation . . .

I for one would be shocked, shocked I tell you, to find out there are improprieties at SAC. From Reuters: "Ali Far and Choo Beng Lee, the former hedge fund traders turned government informants in the Galleon insider trading case, have admitted to engaging in illegal insider trading for many years, according to their cooperation agreements. In the case of Lee, the agreements suggest that he engaged in illegal insider trading while working at Steven Cohen’s SAC Capital, the Connecticut-based hedge fund. In the case of Lee, the alleged wrongful conduct dates back as far as 1994. In both cases, this would suggest the men engaged in insider trading while working at other hedge funds before setting up their own fund, Spherix Capital, in 2007."

returnonmycapital, I don't know where you get an intrinsic value of $140 per share. I think an argument can be made for 1.5 to 2 times book for a number of reasons, but $140 sounds way too high. I also don't understand why anyone is upset or complaining about this buyout. I can understand that some people might have preferred an all stock transaction to make it tax efficient, but other than that; If you think ORH was too cheap at 1.1 times book, you can buy Fairfax for less than book today. Consider yourself lucky.