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What are the odds re ORH


Uccmal
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I sold 1000 shares ORH at 62.39 just now.  I still hold 1000 shares.

 

By my way of thinking 62.40/share is betting about a 1 in 3 chance that FFH will up the price to around $67.00 closer to where it should be. 

 

By holding the 1000 shares I am betting that they will raise the bid further.  If they dont I lose 2400 dollars right now.  If they do I gain $4500 to my target of $67. 

 

What would you do?  Interesting conundrum isn't it... I made 14000 on the first 1000 shares.

 

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I think they buy out ORH at $60. No more. They already own 72% or so. Just bully the minorities into accepting. If they don't accept then FFH can just walk and life goes on, no big deal.

I think we forget who is in control here. 

This is why bogus news articles like that Tripp one pops up, because someone is trying to alert the public of the unfairness of the situation.

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What would you do?  Interesting conundrum isn't it...

 

 

If ORH special committee told me to pay more than $60 I would walk away from the deal. It's not like FFH need to consolidate ORH into the FFH group.

 

 

Yeah, just like they didn't need to pay 30% above book for NB.

 

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This is just an opinion, but I believe Fairfax being the good capital allocators that they are, will not use a dilutive equity offering to the tune of $1 Billion and just sit on it, or use it to retire debt. That would be a very poor use of capital, for a financially strong & smart firm (that is also undervalued) to issue all that expensive equity to pay cheap debt. I think more likely Fairfax will try to negotiate the best price possible with minority ORH shareholders, and there will be some back and forth price talk, not dissimilar to the way northbridge was negotiated. (I believe Fairfax, at one point in the negotiation, said their price was final and then subsequently raised their price). It just makes much better financial sense to get the deal done at a fair price than, than to dilute shareholders and sit on the cash and pay down debt. I think Fairfax shareholders would be MUCH more upset if they diluted shareholders for nothing (or for poor reasons that don't make sense).

 

Better to pay a fair price for a good business than issue all that equity and sit on it. But that is just my opinion.

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Hi Al,

 

I don't know the odds better than you, but suffice to say that as a value investor, I wouldn't think that Fairfax will stretch the price that much. If they back off because the special commitee and ORH remaining shareholders want to boost the price materially, I'll applause. FFH investment horizon doesn't start and end with the remaining of ORH.

 

Leucadia "Rules of the road":

 

1. Don't overpay, no matter what the madding crowd is up to.

(...)

5. Don't overpay!

 

Cheers!

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FFH has invested an enormous amount of energy to set the table to take ORH private. If the independent committee recommends a higher offer and FFH says no they lose their ability to take back ORH.

 

What happens? As has been posted, BV for ORH today is about $52 + $3 = $55. Add in ICICI Lombard and it is closer to $56 or even $57. Valuations for insurance companies will likely increase the end of October as we get through slow (so far) hurricane season. A hard market in insurance is coming at some point in the next year and ORH is ideally positioned to materially grow their business. Early next year there is a very good chance that BV of ORH will be over $60 and re-insurers/insurers will trade at a multiple above book (perhaps 1.1x). Bottom line, early next year ORH will likely trade higher than $60.

 

If FFH walks today how do they come back to the table to do a deal in the future? And what do they do with all this $ they have raised? They will look silly if they do not get this thing done.

 

Having said all this I have no idea if their takeout price will be higher.

 

I will be very surprised if the indepedent board approves of the $60 offer.

 

Also relevant... NB was taken out in Canada. ORH is being taken out in the US. I think litigation risk in US also supports higher takout price than $60...    

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Andy Barnard has 400,000 shares of ORH.

 

Now, if the deal goes through at $60 I wonder if Andy would get a big pat on the back with additional cash "for his performance and leadership".

 

They should be motivated to keep him happy.

 

This would be very distasteful, so I think there's no way they can do it -- yet one more reason price won't be $60 in the end.

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Several good points have been made. To all those who say that FFH can just walk away, consider that again ORH will likely have a $60 BV by the end of the quarter or by the end of October. So ORH shareholders wouldnt really be left out in the cold barring a takeover. Both sides have options and the best way to solve this is a fair deal with a slight premium to BV.

 

Thats crazy every $1 is worth almost half a million to him.

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I think the fact that they just sold a billion dollars worth of FFH stock suggests that they aren't going to walk away.  Highly unlikely they would retire debt with the money instead in my opinion.

 

Well they've issued equity at 1 billion. At 1.0+ x BV ... and markets all optimistic again, now was a good time to issue, if ever.

They expect to get ORH for a certain price.

Thing with this deal is that they don't have the cash vs. last time with NB.

In the NB deal they did have cash and the buyout was less, around 780M so they could afford to offer a bit more of a premium.

 

What happens if they don't have the funds this time? They gonna issue more equity and dilute?

FFH expect a certain price and it's going to be around 60. Not any higher.

At $60/share x remaining 28% shares left (i.e. 16.37M ) = 982M.

 

They aren't bluffing IMO ... $60 no more, no less ... and if it doesn't go through FFH will use those proceeds to improve the balance sheet.

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I might as well throw in my 2 cents worth. 

 

I think FFH/Prem will look even more silly to their true long term FFH shareholders if they chase the ORH price because a few greedy minority shareholders (who have likely made 50% in a few months), want to earn an extra 10%.  I believe much of this greed is based on the rest of the market rebounding aggressively.  If it wasn't, we wouldn't see this level of greed.  Greed perpetuates itself.  Who says their stocks holdings are worth what the market value is showing?  Maybe WFC and all others are worth a lot less than their market value?  What if all the ORH stock holdings in their portfolio were actually worth their book value and not their market value? 

 

People can say, "but the value is $X, because of this..." , they aren't just reinsurers anymore, their BV is understated because of ICICI, large gains due to the stock market rebound, etc...... 

 

At the end of the day, millions and millions of shares have traded at the market and never has a seller received anything close to $60.  Are all the holders of all those millions of shares wrong or stupid or did they think they were getting a fair price at the time?

 

ORH is worth more to FFH than to anyone else and they are paying up for it.  Why be greedy?

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Who says their stocks holdings are worth what the market value is showing? 

 

 

 

Prem does.  Otherwise you should hit him with a 2x4 for not selling.

 

 

lol, that was funny.

 

It's also pretty funny how the market is laying out the odds as 100% the deal closes higher, and significantly higher based on the current premium in the market. I would have figured the Arb funds (that might not follow the 2 companies too closely) would have closed this gap.

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Now I am confused.

BV is important when you own something that is at or under BV.

MV is important when you own something that is trading at 3X's BV.

Rhetorical questions/statements

 

I forgot to add disclosure.

I bought at around $40 in the summer and sold this morning at $62 something. Approx. 10% of net worth in it.

Still holding $45. -  2010 options...just in case greed wins and because they aren't trading at the same premium as the common...but pretty close. 

 

How do the 2010 options play out?  Has that been discussed.

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If the subs get cash for stock (the ones holding ORH stock) cant they dividend any surplus stock up. Also isnt ORH overcapitalized. I think the transaction itself will improve the balance sheet and increase holding company cash.

 

Am I missing something here? 

Why would FFH buy out/pay cash to their subs for the ORH that is held within the subs?  FFH is simply buying out the shares it does not already own and they already own the ORH shares held in the subs.  I assume the ORH shares will stay in the various subs.  Maybe some shuffling, maybe some exchanging, maybe they will dividend some shares to the holdco, if permitted, etc. 

 

They are buying the directors shares, their CEO's shares, Marshfield and Assoc. shares,

DIMENSIONAL FUND ADVISORS INC Aronson, Johnson & Ortiz

RENAISSANCE TECHNOLOGIES, LLC

VANGUARD GROUP, INC. (THE)

Barclays Global Investors UK Holdings Ltd 4

MADISON INVESTMENT ADVISORS

NORTHERN TRUST CORPORATION

HENNESSY ADVISORS, INC.

and a few hundred or a few thousand small shareholders like the people on this board and others that own a few hundred or a few thousand shares. 

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To avoid confusion I was not asking about the odds of ORH being taken out.  To me that is now about 98%.  I am just wondering if the price will go higher or not.

 

Is it worth holding out for the higher price or locking in my 62.50 before everyone realizes this is the final offer.  An interesting dilemna.

 

1) Worst case right now is a gain of 14000 on my remaining shares (60 takeout)

2) Live case this minute is a gain of 16400

3) Best Case?  19000-21000 (67-69)

 

After tax:

1) 9800

2) 11500

3) 13300 - 14700

 

The last set of numbers is interesting.

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A simplistic view of how much money FFH may "have" to spend ...

 

A) Cash (in USD)

   $880M as of June 30th

                PLUS

   $360M via debt offering ($400M CDn)

                PLUS

   $920M via stock offering (8% discount to CIBC via $1B bought deal)

                MINUS

   $66M for Chinese Insurer investment (assume purchased at holdco)

                MINUS

   $57M for Advent (assume purchased at holdco)

 

  TOTAL = $2040M

 

B) Desire after ORH transaction ...

 

"Following completion of the proposed acquisition of Odyssey Re and the proposed Fairfax new equity issuance, Fairfax expects to continue to have in excess of $1 billion in cash and marketable securities at the holding company level."

 

 

C) ORH purchase

   - Part 1  ... Subtract the preferred shares ($32M worth outstanding) with a premium of $1 to par value

                    (let's assume FFH want/need to simplify structure as part of the deal)

               MAX AVAILABLE = $2040 -$33

                                     = $2007M

               DESIRED AVAILABLE = $2007M -$1000M (i.e. $1B cushion per "B" above)

                                           = $1007M

 

(Any other significant cash sources/sinks this quarter?)

 

  - Part 2 ... 16M common shares outstanding not owned by FFH (72.6% FFH ownership with 42.4M shares currently owned)

               MAX AMOUNT PER SHARE = $1007M/16M = $62.93

 

 

NB:   Given that fairfax just paid $80M to CIBC to help get these $1B in funds in place, and that that part of the deal will close by friday ... I think they will have a little motivation to up the ante a bit, and save face all around

 

http://www.fairfax.ca/Assets/Downloads/Press/fpr2009-09-08b.pdf

http://www.theglobeandmail.com/blogs/streetwise/cibc-steps-up-for-fairfax/article1279175/

 

 

UPDATE (1835 EDT) ... I stand corrected ... the $1B in funds was placed with $800 @ 1% commission, and $200M bought deal portion was @ 4% commission, so total commission would be $16M ... a lot less than earlier noted

 

http://www.financialpost.com/story.html?id=1971735

 

 

 

 

 

 

 

 

 

 

   

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I might as well throw in my 2 cents worth. 

 

I think FFH/Prem will look even more silly to their true long term FFH shareholders if they chase the ORH price because a few greedy minority shareholders (who have likely made 50% in a few months), want to earn an extra 10%.  I believe much of this greed is based on the rest of the market rebounding aggressively.  If it wasn't, we wouldn't see this level of greed.  Greed perpetuates itself.  Who says their stocks holdings are worth what the market value is showing?  Maybe WFC and all others are worth a lot less than their market value?  What if all the ORH stock holdings in their portfolio were actually worth their book value and not their market value? 

 

People can say, "but the value is $X, because of this..." , they aren't just reinsurers anymore, their BV is understated because of ICICI, large gains due to the stock market rebound, etc...... 

 

At the end of the day, millions and millions of shares have traded at the market and never has a seller received anything close to $60.  Are all the holders of all those millions of shares wrong or stupid or did they think they were getting a fair price at the time?

 

ORH is worth more to FFH than to anyone else and they are paying up for it.  Why be greedy?

 

Yes, with respects to ORH and FFH the  market is plain stupid :)

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Al, over the short term, the worst case in your scenario is that FFH says "Good bye folks, I'll leave the table now". The shares could then well go back to the 50$ range. That being said, I don't know the precise odds of that happening (but I would suggest that they are higher than 2%)

 

Cheers!

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ORH is worth more to FFH than to anyone else and they are paying up for it. 

 

Well, this is the issue, isn't it?  Lots of people on this board, including me, think that FFH is not paying up for the minority interest. 

 

Most people on this board do not value ORH based solely on the portfolio holdings at any given point of time, although there is a lot of discussion about what BV is at the moment.  Most people understand that ORH provides low cost (and possibly negative cost) float to FFH over time and adds diversification to FFH's lines of business.  In HWIC's hands, ORH is very valuable.  So are they really paying up for the minority interest?  I don't think so. 

 

I also think that ORH has been trading at a major discount in the market precisely because of FFH's involvement as an 80% owner. 

 

I just sold out of all my ORH.  I was leveraged through the February options, and I just feel more comfortable not chasing after a couple more dollars.  I think $65 is probably the max anyone can expect FFH to up the bid.

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ORH is worth more to FFH than to anyone else and they are paying up for it. 

 

Well, this is the issue, isn't it?  Lots of people on this board, including me, think that FFH is not paying up for the minority interest. 

 

Most people on this board do not value ORH based solely on the portfolio holdings at any given point of time, although there is a lot of discussion about what BV is at the moment.  Most people understand that ORH provides low cost (and possibly negative cost) float to FFH over time and adds diversification to FFH's lines of business.  In HWIC's hands, ORH is very valuable.  So are they really paying up for the minority interest?  I don't think so. 

 

I also think that ORH has been trading at a major discount in the market precisely because of FFH's involvement as an 80% owner. 

 

I just sold out of all my ORH.  I was leveraged through the February options, and I just feel more comfortable not chasing after a couple more dollars.  I think $65 is probably the max anyone can expect FFH to up the bid.

 

 

I just bailed at $62.50. 

 

Now the buyout will be raised I suppose. 

 

I'm back in FFH now.

 

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