Effect on Book Value of FFH when ORH purchase is completed

[Granitepost]

I am wondering if anyone has an idea of the effect on the book value of FFH when the purchase of the remaining shares of ORH is completed.  Will the fact that the ORH shares are being purchased for a higher price mean an adjustment to book value of FFH to reflect a higher value for the ORH shares already held?   Thanks in advance for your comments.

[watsa_is_a_randian_hero]

book won't have an effect.  For $100 transaction, your cash goes down $100, but your assets (net of liabilities) increases 100.  The plug figure is goodwill.

 

net book value will decrease, because we are paying a premium to book value.

[omagh]

When you're being presented with book value growth numbers by Fairfax, always remember that a substantial portion of book value growth is from share issuance.  About 8 or 9 years ago, I did a spreadsheet going back to 1985 to look at the approximate returns on book value using 1985 issued shares and returns on new capital to get a sense of how much return Fairfax generates per retained earning dollar.  Obviously there are some judgement calls in doing such a spreadsheet, but some fair assumptions can be made.  Fairfax's returns on existing 1985 capital and new issues are nothing stellar and are much less than the absolute book value growth that Watsa likes to showcase.  That said, I still think that Watsa is an excellent jockey.

 

-O

I am wondering if anyone has an idea of the effect on the book value of FFH when the purchase of the remaining shares of ORH is completed.  Will the fact that the ORH shares are being purchased for a higher price mean an adjustment to book value of FFH to reflect a higher value for the ORH shares already held?   Thanks in advance for your comments.

[frog03]

Omagh, care to share your spreadsheet?

[returnonmycapital]

I have calculated the growth rate in retained earnings (including comprehensive income) as well as book value for FFH and ORH since January 1, 1998. 

 

For FFH, retained earnings grew just over 8% per annum to June 30, 2009.  For book value, it was about 10% per year.  Shares outstanding have increased from just over 12 million to 17.44 million as at June 30, 2009. 

 

Over the same time period, ORH has grown retained earnings more than 23% per annum on average and book value by just over 16% per year. The share count went from 38 million to 60 million.

 

Based on these metrics, which I argue are very important - especially the growth rate in retained earnings (because it eliminates the beneficial accounting gimmick of issuing stock at premiums to book value) - ORH is worth a great deal more on a price to book basis than is FFH (and probably NB, although I haven't done the math on that one).

 

65/sh is a great deal for FFH. I am happy as an FFH shareholder but quite unhappy as an ORH shareholder and will vote against it (having 2X as much ORH as FFH).

 

 

[omagh]

Hi frog, It's probably on one of the old computers in storage, so I'll have a look for it in the next couple of weeks and post if I can find it.  If it was on a work laptop, it may not have survived.  For someone with some free evening time, it's easy enough to do but tedious now that there are about 25 years of annuals to wade through.

 

-O

Omagh, care to share your spreadsheet?