ICUMD

The dutch auction is a piece of unexpected news. I was awaiting announcements regarding the formation of Anchorage and mark to market of their private holdings such as the airport and seven seas shipping. So, for me, that begs the question, is Fairfax being opportunistic (at the expense of shareholders) in buying back before the Anchorage IPO, or are they genuinely trying to generate value for impatient shareholders?

Certainly hope there is no buyout of Fairfax India at these depressed prices. Brookfield has recently done the same on their Brookfield properties, offering only about 2/3 of book value. I would much prefer to see Fairfax continue to build their revenue stream and continue to mark to market their assets. I believe this whole Covid fiasco is responsible for the discount to BV that we are currently seeing.

Good points Viking. People often make the mistake of judging a company by the share price, myself included. 4x return on Privi is excellent. What will be more interesting is what they use the funds for. While Fairfax India's price has lagged, I don't see management clearly dropping the ball on any of their decisions.

My understanding is that Anchorage is an entity that will be listed on the Indian stock exchange. It will essentially be a route to indirectly list private holdings like BIAL. OMERS I believe has simply become a pre IPO investor in the entity. As there seems to be an appetite for good infrastructure assets, Fairfax is hoping to unlock value in BIAL through a public listing. Funds raised through a share sale if Anchorage will allow purchase if additional infra assets. Now that I understand the motives, I believe it's a very smart move. Management fees will likely become part of the equation at some point.

Picking up on Petecs last line is key. If FIH sells Anchorage shares, money goes to FIH and is a disposition of the airport (and other assets Anchorage holds). OTOH, if Anchorage sells Anchorage shares, it's a dilutive equity raise which allows Anchorage to purchase additional assets. The flow of fees and OMERS not wanting to hold the other FIH assets is purely speculative at this point. However, following a tried and proven model like BAM certainly makes sense. Interested to see if FIH purchases the 13% BIAL stake for sale by AAI and National Shipping.

Thanks Petec for the explanation. This makes a lot of sense to me. And is certainly much more reassuring to my concerns. Even if this thing can trade at book value, I'll be happy. I think the value of the airport has been short changed with the current setup. Hopefully Anchorage will help realize some of this value.

The more I think about this, the more I realize it's a complicated structure that's a bit difficult to understand. Essentially through Anchorage, Fairfax is selling off the airport via public listing. Presumably, they are monetizing parts of it at current Mark to market prices, but will necessarily need to keep some equity for future cash flows and growth. (Otherwise what's the point of having bought it in the first place). As the airport generates a regulated rates of return, those cash flows will likely go to Anchorage shareholders. Some management fees would go back to Fairfax India for their work on development/management. Really, for this arrangement to make sense, Fairfax India needs to deploy the capital they raise via the Anchorage ipo in a way better than the airport investment is in and of itself. Maybe it's a way to diversify their investments? If the airport was fully valued this would make sense, but I'm not sure this is the case presently. I'm open to corrections in my interpretation. Thoughts?

Thanks for the replies. If I understand correctly, with Anchorage, they are attempting to set up a structure similar to Brookfield Asset Management with its various subsidiaries. I also see how they may be able to 'mark to market' some of their assets like the airport by selling stakes to equity firms like Omers. In others they will remain a shareholder. I think BIAL has experienced a transient impairment in its value with ridership down to 30% of usual volumes. I agree that book value is closer to $18 and could be as high as $20 - 22. Regardless, this is a 10 - 20 yr play.

Thanks for posting this. As a shareholder of Fairfax. India, does anyone know the relationship to Anchorage holdings? Why is Prem forming yet another holding company and does this negativity affect Fairfax India shareholders?

Trading more than 50% discount to BV. What's not so clear is the profitability - certainly the airport (along with the other entities) is taking a clear financial hit. As the operator of the airport on a lease, it may take 2 yrs for profitability to return. Now as I understand it, Fairfax India has a regulated rate of return of 16%. What I'm not sure of is how they plan to increase the user development fee to recoup the lost income. They also have significant loans for the development of T2 which I understand is proceeding as planned. On a positive, the flight volumes seem to be returning.

The airport, being a regulated industry that's too important to fail, that all pandemics subside, it follows that any impairment is temporary. People will fly again. Bangalore population is growing. Covid numbers will abate in 6 mo to 1 yr. Volumes will reach pre covid levels in 2 yrs. The impairment will be shed when a large buyer sees the underlying value bidding up the share price.

Airport revenue, to my understanding, is based on aero and non aero revenue. The aero component is regulated via UDF modulation during the control period to provide 16% return on depreciated investment. Non aero revenue is not regulated and will take a large hit. I don't know the proportion of each, but it is likely the value of the airport is currently impaired. Oth, population continues to increase and there is talk of building a second airport. For the patient investor, I think this will turn out ok. Covid will likely reach a baseline in 12-24 months. The airport is not going anywhere. NAV I think is $12-14. 50 % discount right now.

Correct me if I'm wrong, but since they get a regulated 16% return on aero operations, they will never suffer loss on core operations.

Selling off a portion of BIAL is really the only way to 'mark to market' the private companies of FIH. Alternatively, they can IPO as they did with CSB. I think it's up to the investor to decide if the valuation is reasonable and their business partners are synergistic. I think BIAL will prove to be a solid investment over the next 10 yrs. Particularly as they develop not only the airport, but sources of non aero revenue through developing the surrounding property. They are developing an aero city. The fees they get paid are for hopefully sound superior management, and investors will hopefully reap rewards as BV increases and market value follows. Certainly, I don't think it's possible to invest the the type of companies in FIH's portfolio without Prems resourcefulness, and hence the fees. If you don't think the composite companies are special, I wouldn't invest.

I don't let politics enter my decision to invest or not. Larger trends always prevail. Growing wealth and population leading to more travel, banking and investment services. Modi or no modi. I do think he has liberalized foreign entry to India's businesses, aadhaar will be crucial to business and transactions. These he has brought to the table and are here to stay. Rupee will always depreciate. India's businesses will always grow.

Thanks for the article. Sounds like the perfect explanation. All I'd say, is that is an amazing opportunity for Fairfax India - to provide more liquidity to IIFL in exchange for more equity. IIFL is not going anywhere but up in the long run given its growth rates.

Yes - have been following it closely. Hold a large holding in Fairfax India. I'm not clear on the reasons for IIFL's collapse in share price. Wonder if its due to the volatility of the Indian markets or perhaps a compression of PE values. EM markets don't look particularly strong at the moment. Wonder if there will be a contagion to NA markets.

I'll be there.

Does anyone here have a purchase target price? I'm willing to jump in at the $550 range.

One point however is that BIAL holds a considerable amount of debt on its books. Furthermore, it is expanding the airport with a new runway and terminal, at a cost I believe of ~600 million USD. They have made good strides to reduce this debt over the past year and I think they will continue to do so under Fairfax's prudent management and rapid revenue growth. As they pay down this debt, they should be able to increase BV and induce a rise in Fairfax India's share price.

BIAL may be on the books for 600 million with a 1.2 billion valuation. But it is reasonable to think that the airport is worth far more than that - I doubt you can build a state of the art airport serving 20 million passengers per yr for that price. It is also growing at > 25% yoy. Book value is understated, in my books..... I think it is worth at least 100% more - ~ 2 - 3 billion, pre expansion costs.

I have to plead a bit of ignorance as I haven't read as of yet any of Taleb's books. Though I appreciate the clarification between Antifragile and Resilience now. Personally, as a bit of a philospher I have always tried to distill complex concepts to simpler ones which are easy to understand and apply. In investing, as in life, a multipronged strategy (like in MMA) works best. The two greatest competitive assets one can have in investing is 1. Cash and 2. Time. With these you have options, (however, one can trump the other should there be devaluation). They would I suppose, be the core components of an 'Anti-Fragile' strategy. However, I believe risk is essential - and calculated high risk bets are necessary in life to achieve exceptional outcomes, though these need not compromise base security.

Anti Fragile - sounds a lot like a term coined to sell books. It it not a synonym for 'Resilience'? I think most value investors always strive at 'resilience'. I would argue I've been doing that from the time before Taleb even wrote his book!

I think the performance fees are reasonable considering the expertise Watsa and the Fairfax parent are offering. This business would not exist if it weren't for the quality of management and access to capital that the parent Fairfax, has access to. They are able to lever large funds such as OMERS and and proven that they can make solid investments that would otherwise be unaccessable to the small investor. I guess you have to decide if the 'fees' are worth it for yourself.

I am quite excited about the prospects of Fairfax India. I think India is risky as an aggregate due to high debt levels and corruption remains problematic. However, with the right management - in this case Watsa's, a proven track record and with the right connections, it is possible to find undervalued high growth companies that will do well in the long run. Fairfax India, essentially a private equity company, is investing in businesses with greater than 20% yr over yr growth. I believe that its investments in the Bangalore airport and in IIFL are powerhouses that will lever the rapidly growing Indian middle class. I also think it remains an attractive investment in the $15.50 /share range.