Fairfax Proposes To Buy Odyssey at $60 Per Share!

[valuecfa]

Holders of the series A or B preferred shares are not entitled to vote on any sale of all or substantially all of the assets of OdysseyRe, and I am not aware of any change in Delaware law that would require a vote by the preferred shareholders.  Therefore, it doesn't trigger early redemption rights to my knowledge, and the company has been current on dividend payments, and there has been no announced change to the rights of the preferred shareholders. In addition, certain transactions that would vary the rights of holders of the series A preferred shares cannot be made without the approval in writing of the holders of 66-2/3% of the series A preferred shares then outstanding or the sanction of a resolution passed by a majority of the votes cast at a separate meeting of the holders of the series A preferred shares.

 

 

 

[Cardboard]

I think that Ericopoly has got a valid point relative to the value of HWIC embedded into ORH's numbers. The ability to realize large capital gains over time on their portfolio should not be part of the equation.

 

On the other hand, operating income after tax should be of great use to value the company properly. This amount of income should be recurring and other potential bidders out there (who won't be allowed) should be able to repeat such performance even if they were the ones managing the investments. It is also a value constantly used by analysts and ratings agencies. At ORH, this is now north of $5. The premium paid here has to be light at 12 times or less.

 

I believe that the great majority here have come to the conclusion that $60 is too low. It is true that Prem has to look for FFH shareholders, but I would argue also for ORH shareholders. Many of the long term ORH shareholders have helped him salvage Fairfax when times were dark by providing a solid bid when ORH shares were offered. They had to endure bad reserving for quite a while, catastrophes and shorts attacking them due to Fairfax. How they are treated now will dictate their future relationship with Prem. It surely will influence my decision to invest in Fairfax in the future or on my idea of the proper valuation for the firm (premium to book or other).

 

Some have talked about ORH public shareholders being a minority therefore, should have expected, upon buying these shares, a low bid in the event of a take-over by the parent. For perspective, the IPO in 2001 was made at 1.32 times book. The growth in book value since then don't even match the growth in share price! I shall also remind those that as Fairfax shareholders that they are also in a minority position with Prem controlling most voting. If ORH is acquired on the cheap, would you not expect that you would get similar treatment if FFH was taken private by Prem and close friends? Is that a partner that you would want to have?

 

As I mentioned previously, $80 to $160 million more is not a huge sum compared to what is already being committed and to the long term benefits that a solid relationship with existing ORH shareholders will provide. Again for perspective, just over $140 million was spent on Fairfax dividend earlier this year. It is a group that had $800 million of their capital deployed in ORH as of Friday afternoon. Nice friends to continue having if you ask me.

 

Cardboard

[oldye]

If 1.16 is too little, why aren't you simply switching into Fairfax which is trading at a similar multiple?

[ERICOPOLY]

Here is one for Prem:

 

Why not buy it for the same multiple the shares were issued at?  Hey, that would be fair.

 

Unless you think you gouged them, eh??  Or, perhaps time are different and market valuation is lower (other companies to switch the cash proceeds into are trading at lower valuations too).

 

[Partner24]

Keep in mind that:

 

- we will issue some FFH shares (an undervaluated currency) to finance the deal;

- ORH shareholders had more than 15% CAGR since 2001, wich is far from being bad, especially if you put that performance of the market context;

- ORH short term shareholders had their small bonanza in a very short period of time. A return more than enough to be satisfied in my point of view.

 

In the end, if ORH shareholders push their luck too much and if ORH asked price by it's shareholders does not give FFH a decent margin of safety, you know FFH have the right to say "No".

[oldye]

Keep in mind that:

 

- we will issue some FFH shares (an undervaluated currency) to finance the deal;

- ORH shareholders had more than 15% CAGR since 2001, wich is far from being bad, especially if you put that performance of the market context;

- ORH short term shareholders had their small bonanza in a very short period of time. A return more than enough to be satisfied in my point of view.

 

In the end, if ORH shareholders push their luck too much and if ORH asked price by it's shareholders does not give FFH a decent margin of safety, you know FFH have the right to say "No".

 

But if they push the price up, there should be quite a bit of value being unlocked at the holdco as well which will help with the financing. 

[ERICOPOLY]

- ORH short term shareholders had their small bonanza in a very short period of time. A return more than enough to be satisfied in my point of view.

 

That fits my sentiment.  There is nothing wrong with FFH anyhow, happy to switch back.

 

Anyone who thinks FFH has too much debt should borrow a bunch of money and then put the cash proceeds in the bank, and then just let it sit there.  Is it risky?  Nope, just pay the loan off if you need to.  But what if someday you really do need that money and it comes at a time when the capital markets are closed due to fear and panic in the markets?  So really, the debt makes it a lower risk enterprise, not a higher one  ;)

 

 

[kmukul]

Well if i am not confused, fairfax is buying 20% more stake in ORH which should take their stake to ~93% doesnt that mean that ~7% of ORH still trades and everyone isnt forced to sell?

[SharperDingaan]

 

You take Friday off & look what happens!

 

Its highly unlikely that it'll get done at $60 as short covering will force the price higher. The final number is probably around 10-15% higher ($65-$70).

 

The UW also suspiciously looks like there is another shoe to drop, & that FFH is simplifying the structure for some reason. Agreed that FFH needed the additional LT debt to offset the new equity this transaction will probably generate (D/E ratio) - but in both cases they didn't need to go the more expensive UW route, or pay what did. Especially when they are one of the very good credits issuing (competition).

 

If they paid an average 75bp premium to go the UW route, its significant $, & they'll want something in return. Same thing from the buyers of their recent note issue. A small investment now for a larger return later? 

 

SD

 

[Guest kawikaho]

ACK!  I've been meaning to buy ORH, but been waiting too long for the prices to drop a bit into the 40's!  Never happened.  Ack, oh well, we'll see more oppty's soon enough.

[valuecfa]

So really, the debt makes it a lower risk enterprise, not a higher one  ;)

 

 

Spoken like a true banker  ;D

[arbitragr]

 

You take Friday off & look what happens!

 

Its highly unlikely that it'll get done at $60 as short covering will force the price higher. The final number is probably around 10-15% higher ($65-$70).

 

SD

   

 

How sure are you of this? The only public offer made for the NB deal was $39, and the deal was done at that price, despite Prem offering a lower price privately. I am of the view that when Prem goes public with a price he expects to get it done at that price. FFH are majority owners of ORH so he is less worried about minority shareholder reservations/revolts about the premium paid.

[Cardboard]

Arbitragr,

 

You mentioned that you had trouble finding the Northbridge take-over documents under Sedar.com. You have to do your search for Northbridge and not Fairfax.

 

IMO, the fact that Prem came out publicly this time around with his initial offer does not seal the deal. Did they not come out publicly on their first offer to Advent and essentially failed?

 

Northbridge special committee essentially refused his initial offer and only accepted after he raised it to the middle of the range of fair value proposed by Scotia Capital. Why would it be different this time? Unless the bankers say that fair value for this take-over is right around $60, I can't see the special committee accepting this offer.

 

Why going public before sealing the deal? I think it has to do with the share issue which is large, material and was not a consideration when Northbridge was bought. 

 

Cardboard

[Mungerville]

My take:

 

ORH represent 150% of my portfolio.  Bid is too low.  Minimum $65 - God knows what the i-bankers will come up with as a "fair" price - those guys don't know what value is to begin with.  Even that is a steal.  I would rather hold for the next 10 years personally or at least the next 3-5 years than to take even $65. 

 

Muni bond portfolio is highly valuable and concentrated at ORH relative to a portfolio comprised mainly of stocks - especially if you think the stock market can come down some more from these levels as we get a double dip and deflationary pressures will exist before inflationary or hyper inflation as per Francis Chou's most recent comments.

 

 

 

 

 

[Guest longinvestor]

The average share price of ORH over the last 3 years=$40 (approx)

The average share price of ORH over the last 5 years=$30 (approx)

 

I agree with someone on this board suggesting that many are taking a take-it-and-run approach versus a value approach. For once, this is all about market price only. The offer that FFH is making is not something the market has offered in 5 years. Is it the permanent impatience that the market has inflicted upon ORH holders which is coming out?

 

Now here is the another hypothetical angle at this...FFH would like to buy ORH at $60. How much would you think they would like to sell their 73% stake at?

 

If FFH were to withdraw the offer, will ORH keep trading above $60 like today? Long term ORH folks will return to hope and trust that the market will "catch up". Been at it for 5 years...

 

This is a heads i win-tails you lose situation for FFH and the long term owners. Brilliant.

 

 

 

[tooskinneejs]

Is the meaningful question whether the final price will be $60 vs. $65 or is the meaningful question whether (if we assume $65 is the magic number) it makes sense to continue to own a security selling at 95 percent or more of IV when other securities offer greater discounts to IV?

[eggbriar]

I am guessing that the big outside holders of ORH are selling ORH at a slight premium to current estimated BV.

 

I am guessing that the big outside holders of ORH are also the ones buying the FFH offering at a slight discount ($347) to current estimated BV.

 

It makes me think that they will be on board for $60.

[eggbriar]

Oh, and that assumption makes me a seller of  a chunk of my stash of ORH @ $62.50, transferring over to FFH

[Mungerville]

ORH book value has been compounding faster than the compounding of the stock price.  So, of course, its wound-up like a cork screw right now and the bid comes in.  The unwind started as it moved swiftly from $37 per share to the low 50s earlier this year when everyone thought they held on to the long treasuries.  Then, when it became clear that they sold those and invested in the munis, the rally in the munis came about and brought the stock up along with the boost in the equity portfolio to where it was at the beginning of the year - in the 50s.

 

Now, this is not dead money.  The stock wasn't $25 too long ago, it moved swiftly to $37 (and stayed there for some time because the S&P cratered 55% - go figure...but book value per share kept compounding and the price necessarily follows over the long term), then it resumed its sporatic but unrelenting march upward to the 50s because book value per share keeps compounding.

 

All this to say that if anyone thinks ORH minority shareholders are better off selling at $60 relative to holding for the next 5 years, they are nuts.  Why do you think the offer is being made?

 

 

 

 

[Mungerville]

I don't want the $60.  I am a long-term value investor.  Pay me what it is worth not what some i-banker says it is.  How many insurance/reinsurance companies hold tax free munis guaranteed by Berkshire Hathaway equaling 2/3rd of book value per share?  Answer: not many because this group owns over one quarter of all the ones Buffet guaranteed.  Talk about an operating income head start.  Why the hell would you want to give it up at 10% above book value per share?  Yes, book value does mark that to market but the market value in my opinion is low as these have the risk of treasuries with Berkshire backing them and higher after tax yields. 

 

Price in that, then let's talk.  Problem is the i-bankers can't because they don't understand Berkshire.  Also, the Indian operations are non-negligible.

[Mikenhe]

I totally understand what you are saying and agree with it. However the conversation has to go beyond just being a ORH shareholder. With FFH being the buyer and only having to buy 27% then I’m taking a different outlook. I can’t believe that this buyout has gone ahead without FFH getting the undertaking of a few of the large players left in the game. If they bid gets accepted at 60 then its pretty much game over – if they up the bid to 65 then those that are holding get more – fair play.

 

I can’t see it going much beyond that price. If the bid doesn’t go through then I think the share price may drop and present an opportunity to get back into ORH. If FFH complete the take over then all the future development will go to FFH and their shareholders – and I’m ok with that because I’m one of them too. I suspect that a lot of people selling ORH are also FFH shareholders and will benefit through that investment.

 

[FlyingArrow]

Well, like some others here I pulled the trigger on a few ORH shares. 20 percent of my ORH holdings and only some common, not the options. I'll see what the days ahead bring and maybe get down to half of what I had like Al. I got $63 near days end which is pretty good. As I said before I'm conflicted as 15% of my portfolio is ORH common/options with about 110% FFH common/leaps.

 

Heads I win, tails you lose.

 

This is much more fun than 2003 and 2006!

[Grenville]

Details in regards to the buyout of Odyssey released on edgar!

 

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/0000950123-09-047403-index.htm

 

The following link has the discussion regarding the back and forth on the offer price.

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047398/0000950123-09-047398-index.htm

 

 

[SFValue]

very interesting, thanks for posting

 

I find it fascinating how the analysis relies on market prices so much (comps, % changes compared to market prices in different points in time, etc).  considering how FFH thinks about Mr. Market, that is how they were able (and willing) to pull this of at this juncture.  Fairness opinions are too mechanical, ideal for the Prem's of the world to take advantage in "friendly and Fair" way.

 

 

[omagh]

It's great to have the detail available on the deal.  Well played by FFH.  ORH was evaluated for price as Project Diamond.  This graphic shows ORH's growth in book value against peers.  ORH was definitely worth more than an industry average price/book multiple.  FFH knew what they were getting for a bargain price.

 

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0092.gif

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0092.gif

 

Following graphic shows industry trading at ~0.9 price/book multiple based on 30 June 2009 date.  The close date would be strategically chosen to avoid later data points for the valuation in a rising market.

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0093.gif

http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0093.gif

 

-O

 

very interesting, thanks for posting

 

I find it fascinating how the analysis relies on market prices so much (comps, % changes compared to market prices in different points in time, etc).  considering how FFH thinks about Mr. Market, that is how they were able (and willing) to pull this of at this juncture.  Fairness opinions are too mechanical, ideal for the Prem's of the world to take advantage in "friendly and Fair" way.