StubbleJumper

But why play all these mindgames with the market when instead they can just simply announce and execute a massive buyback? At other companies, the purpose of buybacks is to benefit selling shareholders management who gave themselves an obscene stock option allotment. At Berkshire, the purpose of the buyback is to benefit remaining shareholders. There, I fixed it for you. SJ

There was an article in today's Globe which was even more disturbing. https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/ It would seem that the alternate bid might be superior because the proponents are suggesting that they are prepared to both bid higher in a cash-up-front perspective PLUS they have suggested that they would include contingent value rights to Torstar shareholders. Despite that, it seems like Prem has locked up our Torstar shares for the lower valued bid. I think that Prem might have a bit of explaining to do during the next quarterly teleconference if he is truly accepting an inferior bid from a former FFH executive. It's looking more and more like BearProwler called this one correctly... SJ

;D Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH. Couple of (serious!) points: 1) What makes you believe Torstar did not test the market before agreeing this deal? 2) If there was a better deal to be had, why would Fairfax not have taken it? 3) Anyone can still make a bid. The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m. If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee. Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right? Probably not going to happen... Looks like there might be a slightly richer bid for Torstar: https://www.cbc.ca/news/business/torstar-tsx-bid-1.5643172 SJ Yet another richer bid for Torstar: https://www.theglobeandmail.com/business/article-nordstar-ups-torstar-offer-in-what-could-end-bidding-war/ The market seems to agree with BearProwler! SJ

;D Dear lord can you imagine the reaction on this board if Fairfax took Torstar private?! Prem can't admit mistakes! Declining industries! Good money after bad! Liquidity! Leverage! AAAAAAAAAARRRRRRGGGGGHHHHH. Couple of (serious!) points: 1) What makes you believe Torstar did not test the market before agreeing this deal? 2) If there was a better deal to be had, why would Fairfax not have taken it? 3) Anyone can still make a bid. The break-fee seems to be only $2+1.5m on a deal that is currently valued at $52m. If somebody figures that this is a bargain and comes in and offers, say, $75m later this week Torstar BoD wouldn't have much choice but to recommend that the offer be accepted and simply pay the break-fee. Any offer above $55.5m ($52+3.5) would be a no-brainer for shareholders, right? Probably not going to happen... Looks like there might be a slightly richer bid for Torstar: https://www.cbc.ca/news/business/torstar-tsx-bid-1.5643172 SJ

Depends on what's a "reasonable time frame". The time frame I see most often in the media is 12-18 months. It's hard not to be doubtful of that claim. From what I at this point we have the knowledge and capability to pretty much make any (most?) vaccine in 12-18 months. So I'm not so worried about the time frame. What I'm worried when it comes to the vaccine is: 1. Will it be any good? 2. Will the moron internet people actually get vaccinated? If you were under age 40 and in good health, would you pursue a covid vaccination? I wouldn't. The mortality rate and morbidity does not justify the time and the risk of side-effects for people of that age. If you are over 50 or 55, it starts to become a real risk and the vaccine might offer some real value. I hope we will see a vaccine developed, but I am not particularly optimistic about the adoption rate or the efficacy of the vaccine. SJ Do you think it is possible that you're thinking would be swayed if the government was able to put forth an effective message that, as with masks, getting vaccinated is an act that is beneficial to the health and safety of the more vulnerable members of your community and Country? An appeal to altruism? It might work for some people, but based on the behaviour of young people over the past 4 months, I wouldn't count on that messaging being a complete success. SJ

Depends on what's a "reasonable time frame". The time frame I see most often in the media is 12-18 months. It's hard not to be doubtful of that claim. From what I at this point we have the knowledge and capability to pretty much make any (most?) vaccine in 12-18 months. So I'm not so worried about the time frame. What I'm worried when it comes to the vaccine is: 1. Will it be any good? 2. Will the moron internet people actually get vaccinated? If you were under age 40 and in good health, would you pursue a covid vaccination? I wouldn't. The mortality rate and morbidity does not justify the time and the risk of side-effects for people of that age. If you are over 50 or 55, it starts to become a real risk and the vaccine might offer some real value. I hope we will see a vaccine developed, but I am not particularly optimistic about the adoption rate or the efficacy of the vaccine. SJ Having a vaccine with a known and well established immune response will beat getting the virus in the wild any time. I don’t know how this is even in question. In any case, count me in as getting vaccinated even if it is only 50% effective. I also get vaccinated for flue every year which wouldn’t kill me either, but having the flu isn’t fun and having COVID much less so. My wife has seen patients aged 30 year up in ICU‘s in rather sorry conditions. Right now, an acquaintance of her from CA in her forties is in the hospital and hasn’t exactly the greatest time there. If I can help it, I‘d rather avoid such a ordeal. I will probably get the vaccine too, if it appears that it reduces my risk by even half. I am not in the highest risk age group, but this virus is one where you'd far rather be 30 than 50. SJ

You have posted positive views on herd immunity in this thread. With this in mind, it's a real head-scratcher (looking for a rational explanation) as to why somebody (from an individual or collective point of view) would, if given a choice, pick the natural way over the vaccine. ? It's already hard to craft a message for the growing crowd with convictions. How to win when even rational people start to wonder? Well, first RB says that I made a dumb statement, and now you are questioning whether I am rational! Not sure what numbers you guys have been looking at, but if I were under age 40 I'd be looking at it the same way that I looked at the flu vaccine (oops, I used the flu word, which sometimes triggers people). What is your benefit from the vaccine (ie, what risk are you managing with it) and what is your risk from the vaccine itself. Now, RB has posited that I made a dumb statement because most vaccines have no side effects, but the fact of the matter is that even with the flu vaccine there is a very small number of bad outcomes...and with a rushed vaccine, the risk might be heightened. That risk would be fine if there were an obvious benefit, but to some age groups, there is not necessarily an obvious benefit. So, what do you say to "rational," numerate person under age 40? The IFR for the under 40 group is, what, less than 0.1%, and most of those are likely people with existing co-morbidities? The hospitalization rate for the under 40 group is, what, 2 or 3 per 100,000? I would say that a rational, numerate person who is under 40 and healthy would not be wrong to take a pass on any vaccine that offers less than full immunity and that has been rushed to market. You can appeal to people's sense of solidarity and goodwill to their fellow man all you want, but in the end, people will make a decision based on their own individual risk and benefit. SJ

Depends on what's a "reasonable time frame". The time frame I see most often in the media is 12-18 months. It's hard not to be doubtful of that claim. From what I at this point we have the knowledge and capability to pretty much make any (most?) vaccine in 12-18 months. So I'm not so worried about the time frame. What I'm worried when it comes to the vaccine is: 1. Will it be any good? 2. Will the moron internet people actually get vaccinated? If you were under age 40 and in good health, would you pursue a covid vaccination? I wouldn't. The mortality rate and morbidity does not justify the time and the risk of side-effects for people of that age. If you are over 50 or 55, it starts to become a real risk and the vaccine might offer some real value. I hope we will see a vaccine developed, but I am not particularly optimistic about the adoption rate or the efficacy of the vaccine. SJ

That's barely a dent! Is $10 billion about six months of cash accumulation? SJ

Pretty much. Unfortunately, the R governors of FL and TX who Daddy "Hydroxychloroquine 'n Bleach" Trump whispers into the ears of will have a much higher threshold before they consider lockdowns. They may even try to avoid them. It will not be pretty. Just watch as all the Cuomo bashing goes quiet over the next weeks... Why would the Cuomo bashing go quiet? If things turn badly in Texas, Arizona and elsewhere over the next few weeks, should that make people re-evaluate the quality of decision making in NY State during March/April? Explain how the two are linked. SJ

I will believe it when I see it. But, all in all, It's perfectly fine for FFH to find some other place to invest $500m, if they actually do get to November without rolling it. SJ

In fairness to this forum's members, TwoCities and others called it cheap 6 or 7 weeks ago. SJ

So, you are suggesting that if Prem might have had ~US$150m laying around if he had racked up ~10-12 years of divvies, paid the dividend taxes and then didn't go crazy on spending in his personal life? That's definitely plausible. SJ

Good sign! So now he has ~9% of the economic interest? I wonder if he borrowed against the multiple voting shares to make this happen? I would not have thought that he would have ~$150m just laying around.... SJ ***edit, it's worth noting that Prem didn't exactly hit bottom in that he paid ~US$300/sh, and bottom was a good 12 or 15 percent lower than that.

NYC was showing 21% with antibodies on April 23, so what would it be today? Would it be as high as 30% today (7 weeks later), or is that dreaming in Technicolour? Right off the top, that would cut the R0 by 30%.... SJ

Yes, the US appears to be advancing quickly along path to herd immunity (if such a thing actually exists). The US currently has 2 million officially diagnosed cases, and if the current pace of adding ~15k/day continues through the summer, there will be ~3 million official cases by August 31. Serology tests suggest that the number of people carrying antibodies is 10-for-1 or 15-for-1 compared to the number of official cases. If this is true on a large scale, there might be 30+ million with antibodies today, and possibly 45 million on August 31. If we think herd immunity kicks in when ~60% or ~200 million people have already had covid, 45 million is significant. The larger scale seroprevalence studies will be very interesting as the summer progresses. SJ

It wouldn't surprise me if Prem were interested in buying BB outright, but the market cap is $3B+ and then you'd probably need to offer some sort of premium, which might value the company at $3.5-4B. To execute a takeover, FFH would probably need to find about $2.5B to add to its existing equity and debenture position. It would probably be a significant challenge to float that much debt, and it would require that FFH also renegotiate its revolver. Even if FFH partnered with an outfit like OMERS, it would still need to find a large pile of capital. I can't see it happening, but never say never. SJ

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. Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!). Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year. Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year. Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10? SJ

Good point on the equity accounting. I don't generally spend much time thinking about mark-to-market gains, but that doesn't excuse my being brain-dead and asking about companies that are consolidated or equity accounted! So, it looks like maybe a couple hundred million from the major equity holdings, plus likely a considerable chunk from the total return swaps and possibly something considerable for the miscellaneous equities....so it's likely low-to-mid 9-digits. Quarterly financial reporting is going to look bizarre for a great many companies! Thanks for setting me straight, SJ

With the market going nuts this morning, I was thinking a bit about Xerxes' comment about FFH's Q2 mark. Taking a quick gander at some of the major holdings (Recipe, BB, K-W, Resolute, Eurobank, Stelco, etc), almost all of them are showing considerable improvement over March 31. There's still three weeks to go before June 30, and heaven knows what kind of gyrations we'll see between now and then, but has anyone taken the time to actually estimate the mark for Q2 to date? Is it a 10-digit number, or just in the high 9-digits? SJ

I don't think that's quite the right way to evaluate it. John Chen paid an appropriate interest rate and granted an appropriate call option at the time the notes were last negotiated. The interest rate of 3.75% strikes me as bat-shit crazy for renewal in November 2020, but it wasn't all that bat-shit crazy when the notes were negotiated. At that time, BB already had a large pile of cash, and FFH's money simply served to make that pile even larger. In fact, BB at the time was doing something similar to what FFH is doing today -- that is, BB borrowed FFH's money to effectively hold marketable investments (I don't know what BB's net cost was, but I don't think it was very high). FFH is doing the very same thing today in that it is holding commercial paper in the holdco using bank-money from the revolver (FFH claims to have a favourable spread). From a creditor's perspective, the problem with BB is that they burned an enormous portion of their cash on the Cylance acquisition last winter, which qualitatively changed the risk of the debentures. That shift in risk is not such a problem for 2020 as they still have adequate cash to repay the debs, but it does demand more favourable terms for a potential extension to 2023 or 2025. Similarly, the fact that the call option embedded in the converts looks as if it will be worthless upon expiration in November, does not mean that it was worthless when it was sold. In Sept 2016, when the debs were negotiated, BB traded between US$7-8/share and the conversion privilege was priced at US$10/sh for a 4 year term. That was a valuable option at the time. Clearly, if the same option were offered in November 2020, it would be almost worthless because the underlying share price is so much lower. But, a conversion price of $5/sh (or even $6) would be a valuable option. SJ

That's precisely it. It absolutely depends on when you start the clock. People who are anchored in a US$500 stock price from two years ago look at FFH and wonder when they will see US$75/sh of EPS which would give an earnings yield of 15%. But, the decision to buy at $500 (or fail to sell at $500) was already made, so the $500 number and the $75 number are completely irrelevant. The most relevant thing today is the current stock price and FFH's prospective earnings...and US$250 was pretty cheap. Even today at US$316, it would likely work out well over a 5 year horizon. I would like to also take the opportunity to make a couple of comments about the management of the past few months. I am first person to bitch and moan about poor management decisions, and I am possibly amongst Prem's loudest critics. But, so far in 2020, FFH management has pretty much done exactly what was needed: -they proactively pre-released the direction and general magnitude of Q1 earnings -they managed to float a debt issuance in a situation where credit markets were spooked and an equity issuance would have been highly dilutive -they fully drew the revolver to proactively prevent the banker from screwing FFH by finding a reason to pull it -they exploited widening credit spreads to bolster interest/dividend income -they have continued to grow their book at seemingly profitable prices -they have communicated their understanding of the pandemic impact on both underwriting and claims (they might ultimately be incorrect in their assessment, but at least they have been clear) -so far there has been no sign of pulling from the "too hard pile," which is exactly what you want to see when securities valuations broadly declined. Despite the many and varied mistakes that FFH management has made over the years (I have spilled much ink moaning about many of them), there is not really much that I can bitch about over the past 3 months. SJ

Welcome to the discussion. Share everything that you want to share, and ask any question that you want to ask. The most insightful threads are triggered by questions, comments and nuggets of information. FFH has been obviously cheap for the past month. The company has done an admirable job to ensure its holdco liquidity for the next 18 or so months, it has improved its underwriting, and it is in a more favourable investment environment for corporate bonds and equities. Meanwhile the stock price tanked to ~US$250. As TwoCities and others have pointed out, at that price it doesn't require much of an investment return to get a earnings-yield of 15% (ie, only US$37.50 EPS). Despite the warts, FFH for the past month has been a compelling opportunity for people who have room in their asset allocation for more... SJ

The cruise lines are an interesting counter-example. Both RCL and CCL have issued senior secured notes with double-digit coupons over the past few months. That's junk territory, and for good reason -- we have no idea how much cash they will burn before they come through to the other side of this pandemic. The senior secured debt holders might ultimately be end up having to petition them into bankruptcy if this drags out for years and years (which it might), but at least they have some prospect of recovering a healthy portion of their capital through a bankruptcy process because presumably they are secured against cruise ships that originally cost $1B could be sold for $200m in a liquidation process. The convertible debt issuance to which you made reference have a coupon of 5.75% and appear to be senior unsecured, with a $10/sh conversion -- on the day that those converts closed, the closing CCL share price was $12/sh, so they were in-the-money right from the start. So what about BB? Well, we are hoping that BB will turn the corner and rack up some meaningful cash from operations, but so far it's been unconvincing. BB currently has about $300m of its own cash and about $600m of cash from its deb holders. At the end of a 3 year or 5 year renewal term for the debs, it is not at all clear that they will have $600m to make a repayment. As long as they don't burn down their cash balance too deeply, it would likely be possible to petition them into bankruptcy, have a firesale for their intangible assets (what would be the proceeds from a fire sale of intangible assets that are booked at $2B? Would you get $200m?), and FFH could get its capital back. But, if BB makes even a modest $400m acquisition in the next couple of years, all bets are off about getting all of your money back. So, how do you price their debt? I really don't know. FFH's last debt offering was 10 year notes at 4.625%. All things being equal, would you prefer to lend money to FFH or to BB? Without a conversion privilege, what would you ask of BB if FFH is paying 4 5/8%? Would 7% be good enough? Maybe even higher (RCL and CCL were double-digit for senior secured)? It would need to be a hell of a lot higher than 3.75% if there is no conversion privilege. So, you can drop the coupon a bit if you include a conversion privilege, but what should be your conversion price? Well, $5/sh is a premium to the average share price over the past month, but it's a slight discount to the price of the past few days, so it's probably a valuable OTM option at that price. At a conversion price of $4/sh, it's a very valuable ITM option. So what combination of coupon, conversion privileges and duration would make sense today? I will confess that I don't really know -- all I do know is that there needs to be a considerable improvement in the debenture terms over the current 3.75% and $10/sh conversion. SJ

Expensive converts? The current coupon is 3.75% and the conversion price is $10/sh. That's not what I would describe as expensive for a company that is barely generating any positive cash from operations. Let's invert this: if FFH were to roll the debentures in November, what would be the terms that should be demanded, understanding that there is a considerable probability that BB could continue to burn through cash and might not have $600m in cash to repay a rolled deb by the time November 2023 hits (ie, return of capital is a risk on a going-forward basis). So what would be fair? For a 3-year extension, would 4.25% coupon and a $5/sh conversion be fair? For a 5-year extension, maybe 4.25% and a $4/sh conversion? Seriously, this is a company with $900m cash, they owe $600m on the debs, their cash from ops minus capex was negative last year and barely positive the prior year, and they operate in a fickle industry (software). Your capital is at considerable risk, so what do you demand for a return and for an upside? SJ