StubbleJumper

The most successful puts are those that are written using the benefit of a time machine! Sign me up... SJ

It's covered in the Issuer Bid Circular which can be downloaded off of SEDAR. The Paid-up Capital is US$11.55/sh and the buyout should exceed US$12.50, so you should expect a deemed dividend ranging somewhere between US$0.95 and US$3.45/sh. SJ *EDIT* BTW, this might also be an opportunity to pick up a bit of beer money for any Canadian taxfiler who has a bit of free space in a RRSP or TFSA and who doesn't already own some Fairfax India. The tender will probably settle close to the higher end of the price range, and it has an odd-lot privilege, meaning you can buy up to 99 shares and be guaranteed to not be pro-rated.

I wouldn't place too much weight on that particular transaction. IMO, given the past relationship of OMERS and FFH, that was likely more of a debt transaction than a sale of equity. The equity position effectively serves as collateral and the money will be "repaid" in a couple of years, likely with the typical 9% coupon. But, the murky nature of FFH's relationship with OMERS aside, FFH definitely looks cheap. SJ

I'd say that you need to mentally divide up the excess cash between cash held at the holdco and cash held at the subs. FFH is always looking for places to invest the subs' capital and can't really dividend any excess cash from the subs to the holdco without constraining the subs' underwriting capacity. But, you are correct that In the event that the holdco ever holds excess cash, the stated intent was to buy out the minority interests, buyback shares, and hopefully chip away at the holdco debt. If I had to guess, I would assume that this most recent acquisition was actually funded from the subs (ie, 25% gets bought by ORH, 25% by NB, 20% by C&F, etc without ever touching a penny of holdco cash). SJ

I wonder whether Fairfax is more interested in Mosaic's assets or its people. SJ

No, I don't think that many of us expected there would be a bat-shit crazy IPO market that would lap up nearly any old crap if it was tech-related. That has been manna from heaven for many companies, including FFH which has IPOed a couple of the turds lingering on its balance sheet. The successful VerticalScope IPO does remind us, however, that Torstar management and the major Torstar shareholders appeared to have taken an objectively inferior buyout offer from Nordstar rather than taking what appeared to be a higher offer from another outfit. That higher buyout offer included contingent value rights. Well, part of that "contingency" includes the possibility of windfall profits from a crazy IPO market. Failing to anticipate the crazy IPO market is not really an error, but not insisting that Torstar shareholders accept the best buy-out offer is definitely an unforced error. And, the size of that unforced error just got larger with this IPO. Agreed that there are definitely many good things working in FFH's favour at the moment. SJ

The really disappointing thing about this is that FFH and the other major Torstar shareholders refused an offer which included contingent value rights, and instead accepted an arguably inferior offer from NordStar (there was much discussion about that on this forum last year). At this point, it appears as if those contingent value rights might have been of significant value to FFH shareholders. SJ

So, in rough terms, this is accretive to FFH by about $6.5m/year, pre-tax? For the prefs it's an incremental 1.5% x $300m= $4.5m/year. And for the warrants, we expect Atco's stock price to increase by an average of about $2/year for the foreseeable future, so that's ~$2 x 1m= $2m/year. And in return, FFH has moved down the creditor pecking order? Okay, that's not too bad for one day of work. SJ

Yes, after further discussion, I believe you are correct that income earned on equity accounted investments is attributed to the carrying value and dividends paid are deducted from the carrying value. I actually did take a couple of courses in advanced financial accounting 25 years ago, so it's a bit embarrassing to have not retained that. SJ

It wouldn't simply be recognized as dividend income? So, debit cash, credit dividend income, no effect on Resolute holding value. You are thinking they would debit cash, credit the Resolute asset and it wouldn't pass through the income statement? I confess that my accounting courses are now many years in the past so maybe I'm not thinking about this correctly. SJ

I'm not sure that I would say that interest and dividend income is "growing." Unfortunately, FFH will continue to roll over a considerable portion of its treasury bonds into lower interest rates during 2021 and the interest element looks to be shrinking. Interest and divvies were lower by US$50m in Q1 compared to the same quarter last year. If you are brave enough to run-rate that for an entire year, that's a hole of ~US$200m. At least a special dividend of US$25m or US$30m from Resolute and something similar from Stelco will help fill that hole a bit. Thankfully, underwriting looks promising and investment gains might be very large during 2021. SJ

It kind of depends on what you believe BB is actually worth. If you believe that all of BB's future cashflows discounted back to today are only worth US$4 billion or US$5 billion, then today's market cap of US$9 billion is a screaming sell. Without a doubt it would be a beneficial thing for existing BB shareholders if management sold another 100 million or 150 million shares to a bunch of inexperienced kiddies at 2x fair value, but even in that case it would be far better for FFH to sell its shares at 2x fair value than to hold them and benefit from the minor value improvement from BB having picked some kiddies' pockets. If the BB share price holds above US$15 after the blackout period, there's no excuse if FFH doesn't sell, unless FFH actually comes out and states that they truly believe the POS is actually worth US$9B. SJ

I differentiate the common and debs only because I do not fully understand the mechanics of conversion and subsequent disposal. I know that FFH can issue a sell-order for the 47m common shares and they'd start flowing out the door within seconds of the sell-order, with a T+2 settlement. With adequate volume, perhaps 47m shares could be dumped over 2 or 3 trading sessions, and that would be the end of it. What I don't fully understand is the process of converting the debs and liquidating the resulting shares. Would it be possible to short 55m shares and then leisurely convert the debs and close the short position a week or so later using the shares provided by BB? Or would it be possible to exercise the conversion, obtain those 55m shares approximately immediately and sell them on the market? Once the conversion option is triggered, how many days does it take to actually receive those shares from BB (is it immediate? is it two days? a week? a month?). I have never read any prospectus or other filing from BB about those debs, so I confess to not really understanding the potential constraints (maybe they are convertible only under a full moon on Tuesdays when the temperature in Waterloo, ON exceeds 14 degrees celsius) and mechanics of conversion.... SJ

To be fair, I had never in my wildest dreams anticipated that the quiet period would be a problem for FFH to exit its BB position. I had not seriously contemplated the possibility that there would be a (possibly) transitory spike in BB's share price and that FFH would be prohibited from selling during that short period that gold falls from the sky. My concern was that the price could slowly rise to an acceptable level or that FFH would eventually capitulate and dump the shares for whatever they could get. In that type of scenario traditional volumes are a problem as it could take several days for FFH to move their 47m shares and the early-warning disclosure requirement for directors could signal the market to bid the stock price lower before the entire position could be liquidated (ie, the market usually doesn't like it when insiders liquidate a long-held position because we assume that there is some level of asymmetric information). Anyway, let's just hope that the price spike lasts for a full month this time and that FFH takes the opportunity to at least dump its position in the common shares. I don't expect the debs to be converted and sold, but I certainly wouldn't shed any tears if FFH completely washes its hands of BB by exercising the conversion and dumping the whole lot. It is possible that 2021 could provide the opportunity to dump both BB and Resolute. Keep your fingers crossed. SJ

Finally a bit of news about Toys R Us. They are too small to merit much discussion in the annual report, but it seems like they are adding clothing to their product offerings. I wish them luck with it, as I have never quite figured out which clothing retailers will thrive and which will crash and burn: https://www.theglobeandmail.com/business/article-toys-r-us-teams-up-with-canadian-fashion-mogul-joe-mimran-to-launch/

Above $15? I'd be deliriously happy if they were able to unload the equity position for US$12/sh, even if they elect to continue to hold the debentures. Cripes, I wouldn't even be upset if they realized an average of US$10/sh. Prem provided a valid excuse for not divesting that position during February, but it will be interesting to see what happens if the BB share price continues to rise as we work our way through the month of June. Will he act, or will it just be more excuses? SJ

Yes, I would say that we've been talking about Resolute a fair bit, and the discussion of the lumber market dynamics has been unprecedented on this site. The conversation seems to have boiled down to two competing views. One view is that this is just a temporary lumber price spike and FFH should divest RFP at the top-ish of the lumber cycle (ie, find a sucker to buy the whole company while the stock is high), while the other view is that this will be a longer-term price increase and FFH should hold its shares to milk the cash cow. I guess we could spill a bit more ink about which of those views is correct, but I'm not sure that would be helpful. Sanj, for FFH shareholders, it's worth celebrating that the RFP and BB positions have risen from the dead, but it's really not cause for patting Prem on the back when you consider the time-value-of-money. Some enterprising board member might wish to do some forensic research to construct a little spreadsheet that tracks RFP and BB share/note purchases, dividends and current market value which would enable the calculation of an IRR. But, I don't think we even need that sort of spreadsheet to tell us that we have not gotten a 8% or 10% return on either of those stocks for the period that FFH has been holding. Seaspan, on the other hand, is one where you might want to praise FFH management because I am guessing that the IRR calculation would be favourable. SJ

Maybe lightning will strike twice?

FFH shareholders will recall the saga of Torstar being taken private last year at a price that some thought was inadequate. In this forum BearProwler was apoplectic that the assets were being sold for less than cash on hand, and his view was later supported when alternate, higher takeover bids for Torstar were made and then rebuffed by TS management. With the IPO craze that has been occurring for the past year, it now appears that there is yet another asset on Torstar's books that may be monetized at a considerable valuation as VerticalScope is being IPO'd: https://www.theglobeandmail.com/business/article-new-torstar-owners-eyeing-windfall-return-as-majority-owned/ As time passes, it has become plainly obvious that BearProwler called this one correctly, and the TS buyout price was inadequate. SJ

Over the course of the past year or two, FFH shareholders have periodically been bemused by the large number of joint initiatives between FFH and OMERS. When we look at the disclosure and run the numbers, it often seems that OMERS obtains a debt-like guaranteed return of ~9% and FFH seems to get the crumbs. This article from the Globe is about how the largest union that engages OMERS to manage its members' pension is belly-aching about OMERS's poor investment returns. Too bad FFH shareholders haven't been the beneficiaries of "under market" returns by OMERS! https://www.theglobeandmail.com/business/article-cupe-report-calls-for-third-party-review-alleges-underperformance-by/

The Resolute shares were likely acquired several years ago (pre-merger) and have been held ever since. Now that you have posted the table of his major holdings, I wanted to observe that it's interesting that he added to his BB holdings. It takes a fair level of conviction to add to BB after years of poor execution by the company. SJ

Yes, we are paying them to maximize shareholder wealth. But part of that is running the actual business, not just investing. The insurance business requires that the reserves be available for policy holder indemnities. You can invest in any old risky assets if your premiums:surplus ratio is very low. But, once you get your underwriting gets into gear the premiums:surplus ratio rises, you need to manage the risk of the securities that make up your insurance reserves. Otherwise, wouldn't the optimal strategy always be to invest 100% in equities because over the medium and long-term, the return will blow the snot out of debt instruments? So, if you review Note 5 from the 2020 Q1 report, FFH had $28B of cash, short term investments and bonds. Of that, $12B was corporates. With the lessons learned during the ABCP freeze-up and the other joys of the financial crisis, how high would you want to see that go? As an insurer, you still need to write cheques to the policy holders, irrespective of what is happening in the world. SJ

No, I'd say the issue was credit risk. Prem puffed his chest out a bit and proclaimed that FFH obtained an attractive interest rate by lending to Disney, among others, but let's not join him in his narrative and pretend that it was risk-free. It's all fine and good to dedicate a certain portion of the portfolio to equities, corporate bonds and other risky assets. But the move last spring was a considerable corporate debt purchase that was added to FFH's existing corporate bond holdings, and then enhanced by a slug of commercial paper that they bought using proceeds form the revolver. When you take all three together, you suddenly have a fair exposure to debt instruments that carry greater credit risk. If you are maintaining a portfolio in which to hold your insurance reserves, you need a very, very large slug of (almost) risk-free sovereign debt and you need to carefully manage your exposure to risky assets (even AAA corporate debt carries risk). During the financial crisis, FFH was able to take advantage of a better opportunity when they loaded up on munies which were insured by Berkshire Hathaway. Municipal debt is already a reasonably low risk, and when you add a BRK guarantee, it is *almost* as good as sovereign debt (but not quite). You can get silly about your position-sizing on something like that, but you shouldn't do it with garden variety corporate debt. SJ

I thought the Q1 MD&A suggested that the holdco received significant cash payments. Might need to read it again...

This is all true, but Pedro has tabled a valid point. If FFH is receiving periodic cash payments at the moment because the underlying stock (FFH) for the TRS is increasing, they might need to make periodic payments if the underlying stock price decreases. As long as FFH doesn't spend the money that it has received as its stock price has risen, this is not a problem because it can simply return some portion of that cash to the counterparty if the stock price should drop a bit. But, if that cash is used for some other purpose (ie, debt repayment, acquisitions, corporate overhead, etc) and then FFH's stock price decreases, the holdco will need to find the cash from somewhere. That's a little different than the BB situation where FFH owns the shares outright. The stock price went up in February, and then went back down again in April and there were no cheques received or written. It was just a large paper gain, followed by a smaller paper loss. The TRS will certainly require consideration in FFH's continuous risk management process. The higher FFH shares go (ie, from 0.6x BV to 0.75x, now to 0.9x and hopefully to 1.1x), the greater the risk that they might eventually owe a cheque of some magnitude to the counterparty. They'll do well to keep that in mind when considering holdco liquidity levels and when considering their exit price. SJ