Fairfax India new issue

[dartmonkey]

2 hours ago, Crip1 said:

5 hours ago, gfp said:

Didn't they already sell 11.5% of Anchorage to OMERS?  Meaning the look-through ownership Fairfax India shareholders have in BIAL is less than 74%?  Or did the  OMERS / Anchorage deal never happen?

I appreciate the correction (completely forgot the OMERS piece, clearly). That changes the math. It reduces the 74% to 68.97%, which changes FFI's share of BIAL to be worth US$1.759B resulting in the rest of FFI to be valued at US$337M based on the share price mid-day. 

This seems to be correct, and corresponds to the statement in the Q3 report:

 

At September 30, 2024 the company held 43.6% out of its 64.0% (December 31, 2023 - 43.6% out of its 64.0%) equity interest in BIAL through Anchorage. As a result, the company's fully-diluted equity interest in BIAL was 59.0% (December 31, 2023 - 59.0%). Refer to note 8 (Total Equity, under the heading Non-controlling interests) for further discussion on Anchorage.

 

However, it is hard to understand why Fairfax India would issue a press release saying its ownership is going from 64% to 74%, with this transaction:

 

Fairfax India’s equity interest in BIAL will increase from 64% to 74% (30.4% to be held by its wholly-owned subsidiary and 43.6% to continue to be held by its subsidiary, Anchorage Infrastructure Investments Holdings Limited).

 

is is standard to say that you have a 64% equity interest in BIAL (going to 74%), when OMERS has a 5% interest? Clearly, that is the situation, because we know that OMERS has 11.5% of Anchorage, and Anchorage has 43.6% of BIAL, so that means OMERS has 11.5%*43.6% = 5.014% of BIAL. The PR also mentions that 2 Indian state entities, Airports Authority of India and Karnataka State Industrial and Infrastructure Development Corporation Limited, will continue to own 13% each, i.e. 26%, so Fairfax owns the rest, with OMERS having 11.5% of Anchorage, i.e. 4.98% of BIAL, leaving Fairfax with the rest, 100-13-13-5.014=68.986%. (Right? you say 68.97%, there must be a tiny error somewhere.)

[TwoCitiesCapital]

1 minute ago, dartmonkey said:

This seems to be correct, and corresponds to the statement in the Q3 report:

 

At September 30, 2024 the company held 43.6% out of its 64.0% (December 31, 2023 - 43.6% out of its 64.0%) equity interest in BIAL through Anchorage. As a result, the company's fully-diluted equity interest in BIAL was 59.0% (December 31, 2023 - 59.0%). Refer to note 8 (Total Equity, under the heading Non-controlling interests) for further discussion on Anchorage.

 

However, it is hard to understand why Fairfax India would issue a press release saying its ownership is going from 64% to 74%, with this transaction:

 

Fairfax India’s equity interest in BIAL will increase from 64% to 74% (30.4% to be held by its wholly-owned subsidiary and 43.6% to continue to be held by its subsidiary, Anchorage Infrastructure Investments Holdings Limited).

 

is is standard to say that you have a 64% equity interest in BIAL (going to 74%), when OMERS has a 5% interest? Clearly, that is the situation, because we know that OMERS has 11.5% of Anchorage, and Anchorage has 43.6% of BIAL, so that means OMERS has 11.5%*43.6% = 5.014% of BIAL. The PR also mentions that 2 Indian state entities, Airports Authority of India and Karnataka State Industrial and Infrastructure Development Corporation Limited, will continue to own 13% each, i.e. 26%, so Fairfax owns the rest, with OMERS having 11.5% of Anchorage, i.e. 4.98% of BIAL, leaving Fairfax with the rest, 100-13-13-5.014=68.986%. (Right? you say 68.97%, there must be a tiny error somewhere.)

 

Perhaps they're forced to consolidate the ownership since they have the controlling interest in Anchorage as well and thus 'control' 74% w/o the matching  economic ownership? 

 

Similar to financial results where they have to disclose the full look through P&L and then adjust for minority interests in a separate line item? 

[dartmonkey]

2 hours ago, Crip1 said:

That changes the math. It reduces the 74% to 68.97%, which changes FFI's share of BIAL to be worth US$1.759B resulting in the rest of FFI to be valued at US$337M based on the share price mid-day. 

 It's worth pointing out that the US$337m of the 'Rest of FIH (RoF)' is to be compared to the public equity stake of $1.1b and the private, non-BIAL stake of $0.7b. If a $2.55b valuation for BIAL is anything like a sane estimate, the RoF is being valued at about  20c on the dollar. Or alternatively, if the assessment of the RoF assets is right, it means the airport is only worth $1.95b, and they just bought another 10% at a valuation of $2.55b. Just goes to show what we knew already, is that FIH is really just about the airport, for the moment.

[kodiak]

I am wonderfully excited about Fairfax India buying another 10% of the airport. I think this is great news. I understand that some are concerned that the price Siemens is selling for represents 10% of the fair market value of the asset. I don't believe this is the right way to value the asset. This is a minority sale in which the possible buyers are a relatively small number of potential entities. Siemens has a strategy in which they make initial investments in airport type assets to insure that their technology systems are used in the infrastructure. They typically make these kinds of investments as a way to guarantee that they become the dominant technology/communications partner in the airport. Once the infrastructure asset is built and completed, they no longer need to be an investor in the project. Hence, the selling of their interests in this asset. Of course, we are the only real logical buyer and are able to buy the asset for a quite reasonable and below market value. Minority investors in general don't get a great execution on price and this is another example of that occurrence. Siemens will then likely recycle these proceeds to anchor their next infrastructure investment. 

 

I went on the Fairfax India tour in January of 2020 and I am scheduled to go on the tour again this January. I believe the airport and the monopolistic characteristics make this one of the finest assets to own in the entire world. The airport is growing quickly, the country is growing quickly and we are back to pre-Covid travel levels. This is a world class asset. Plus we have very strong management of the asset led by Hari Marar, CEO of the airport. 

 

I also believe that Fairfax India will have to have a shareholder vote as outlined in a previous post by Safety in Numbers, since they have a 25% asset threshold. I believe the vote will only cover this issue and I don't expect the company to issue extra shares or anything else that shareholders might be worried about right now. In fact, I have recently been slowly adding to my Fairfax India position as the valuation story seems too compelling. I have attached a picture of the airport taken in 202o from the control tower. It is much bigger today with the new terminal. 

 

On final note, while Fairfax Financial is about the 25th largest company based upon market capitalization and that alone should make us the most likely next company to be added to the TSX 60, we are the 7th most profitable public company in Canada. I learned that fact today and it makes perfect sense. What other big company in Canada is trading for 8 times earnings. I still think Fairfax Financial and Fairfax India represent two of my absolute favorite investments in my portfolio. 

[glider3834]

40 minutes ago, kodiak said:

I also believe that Fairfax India will have to have a shareholder vote as outlined in a previous post by Safety in Numbers, since they have a 25% asset threshold.

yes I think thats likely reason as well subject to official confirmation from FIH  - see clause below https://www.fairfaxindia.ca/wp-content/uploads/Corporate-By-laws.pdf - at Dec'23 they had invested $903M cash (or 23.6% of FV of total assets $3822M) for 64% of BIAL - this next $255M should take them over 25% threshold

Edited December 4 by glider3834

[nwoodman]

I am sure that it is not lost on anyone, but I did find it interesting that the way the deal is structured via installments it is actually cheaper than the 10% they bought from Siemens last year for $250m last year, even if it is notionally $5m more
 

• June 2023: Acquired an additional 3% equity interest for $75 million.

• December 2023: Acquired an additional 7% equity interest for $175 million.

 

Use a discount rate of your choice, but I get $238m in January 2025 dollars at r=10%

Edited December 4 by nwoodman

[nwoodman]

A brief primer on SPV, I believe there is a bit of a refocus by the parent but I don’t follow them closely.
 

Background

 

‘Siemens Project Ventures GmbH (SPV), as part of Siemens Financial Services, operates within a defined strategic framework set by Siemens AG. Its primary role is to invest in infrastructure and energy projects that align with the parent company’s long-term objectives. However, certain trends and strategic decisions within Siemens AG may have influenced SPV’s recent actions:

 

1. Strategic Realignment at Siemens AG

 

• Siemens AG has been undergoing significant restructuring in recent years, emphasizing its core competencies in digital industries, smart infrastructure, and mobility.

• Non-core assets, particularly those tied to infrastructure projects without a direct link to Siemens’ strategic technology focus, have been earmarked for divestment. This includes stakes held by SPV, such as in Bangalore International Airport Limited (BIAL).

• Divestment of such assets allows Siemens AG to redirect capital toward higher-priority growth areas like industrial automation, electrification, and digital services.

 

2. Global Financial and Market Pressures

 

• Siemens AG and its subsidiaries, including SPV, have been affected by:

• Global supply chain disruptions, especially in energy and infrastructure sectors.

• Geopolitical tensions, which have created uncertainties in some of Siemens’ markets, prompting a tighter focus on financial discipline.

• Divesting assets like BIAL helps ensure financial stability while enabling investments in transformative areas.

 

3. Specific Challenges in India

 

• Complex Regulatory Environment: The infrastructure sector in India often involves regulatory complexities and long gestation periods for returns on investment. This might have made the BIAL stake less attractive compared to Siemens’ other global projects.

• Shift in Focus: Siemens AG has been prioritizing digital and energy-efficient solutions in India, areas where it sees significant growth potential. Selling the airport stake aligns with this localized strategy.

 

4. Siemens Energy Spin-Off

 

• The spin-off of Siemens Energy in 2020 had ripple effects across Siemens AG’s operations, requiring divestments to strengthen financial positioning for Siemens Energy and other business units.

• Siemens Project Ventures may be under indirect pressure to liquidate legacy or non-strategic investments, like the BIAL stake, to align with the group’s new focus areas.

 

5. Efficient Capital Allocation

 

• Siemens AG’s capital allocation strategy emphasizes higher returns on investments. Infrastructure investments like BIAL often have a lower ROI compared to high-growth areas such as renewable energy technologies, industrial IoT, or smart grids.

• SPV’s sale of its BIAL stake could reflect this shift, allowing Siemens to consolidate resources for sectors where it holds a competitive advantage.

 

Summary

 

While there is no direct evidence of undue pressure from Siemens AG on SPV, the broader strategic realignment at Siemens, coupled with financial discipline, likely influenced SPV’s decision to divest its stake in BIAL. This move aligns with Siemens AG’s efforts to streamline operations, optimize its portfolio, and focus on technology-driven growth areas. For SPV, the sale is part of its ongoing mission to adapt its portfolio to the evolving priorities of its parent company.”

Edited December 4 by nwoodman

[dartmonkey]

8 hours ago, nwoodman said:

A brief primer on SPV, I believe there is a bit of a refocus by the parent but I don’t follow them closely.

Yes, interesting that they sold 10% last year for $250m and a year later they're selling their last 10% for $255m in 3 payments (at close, August 2025 and July 2026), so in effect, selling for less. Hopefully this is because they are refocusing, and not because the airport is actually worth less. Siemens originally had 40%, and had sold 14% to GVK in 2011, before FIH existed, at a valuation of about $1b.

 

A recap of FIH's ownership

 

March 2017 - 38% for $385m (valuation $1b), 33% of which was from GVK (the other 5% from an unnamed seller, maybe Siemens?) https://www.fairfaxindia.ca/press-releases/fairfax-india-and-fairfax-to-acquire-33-of-the-equity-of-bangalore-international-airport-limited-2016-03-28/

 

July 2017 - 10% for $200m (valuation $2b), also from GVK (their remaining stake), with the price tag justified by FIH because it gave them a controlling stake, 48% (2017 annual report)

 

May 2018 - 6% for $67m (valuation back to $1b) from Siemens, taking Siemens down to 20%, and putting FIH at 54% https://www.fairfaxindia.ca/press-releases/fairfax-india-acquires-an-additional-6-interest-in-bangalore-international-airport-limited-2018-05-16/

 

September 2021 - FIH sold 5% to OMERS, valuation $2.6b, so we can conclude that they got about $130m for this; they still 'control' 54% but only 'own' 49% https://www.fairfaxindia.ca/press-releases/fairfax-india-completes-sale-of-minority-position-of-anchorage-infrastructure-2021-09-16/ (they say that after this transaction, "Fairfax India’s effective ownership interest in BIAL decreased to approximately 49.0% on a fully-diluted basis, while its actual ownership remained unchanged."

 

June and December 2023 - FIH bought another 10% from Siemens, in 2 tranches, for $250m (valuation $2.5b), so FIH controls 64% and owns 59% https://www.fairfaxindia.ca/press-releases/fairfax-india-completes-acquisition-of-an-additional-7-interest-in-bangalore-international-airport-limited-2023-12-12/

 

December 2024 - buys Siemens last 10%, $255m but in instalments, valuation a bit less than $2.5b, now control 74% and own 69% https://www.fairfaxindia.ca/press-releases/fairfax-india-to-acquire-an-additional-10-interest-in-bangalore-international-airport-limited-2024-12-03/

 

 

So with the exception of the control transaction at a higher price, we can say that the value attributed by management to the airport has gone fromo about $1b, 7 years ago, to $2.5b now. When they explain how it is valued, they say (AR, 2023) that "BIAL is carried on our books at 9.5 times normalized free cash flow, which we consider to be conservative." And in the 2023 Q3 report, they give more detail: "At September 30, 2024 the company estimated the fair value of its investment in BIAL using a discounted cash flow analysis for its four business units based on multi-year free cash flow forecasts with assumed after-tax discount rates ranging from 12.5% to 16.9% and a long term growth rate of 3.5% (December 31, 2023 - 12.4% to 16.9%, and 3.5%, respectively for three business units). At September 30, 2024 free cash flow forecasts were based on EBITDA estimates derived from financial information prepared in the third quarter of 2024 (December 31, 2023 - second quarter of 2023 and fourth quarter of 2022) by BIAL's management."

 

Those are pretty high discount rates - that should mean that the $2.5b valuation we got on this latest 10% is a very good price. But it is a bit hard to see wht has not changed since September 2021, if the story is playing out as we hoped. If the discounted future free cash flow is worth the same now as it was 3 years ago, then that would imply that there has been no growth for the last 3 years, right?

 

 

[Haryana]

"assumed after-tax discount rates ranging from 12.5% to 16.9% and a long term growth rate of 3.5%"

 

They could use discount rate of 3.5% and a long term growth rate ranging from 12.5% to 16.9% and we would reject the splash of muddy waters. 

[Xerxes]

Siemens is Siemens. It is not there to make directional bet on infrastructure assets using its balance sheet. 
 

Now unto some comparable transactions. Link below talks to GIP, Blackrock, their investment in Sydney Airports and the ones in UK. 

 

https://www.netinterest.co/p/hard-assets

 

 

[dartmonkey]

2 hours ago, Xerxes said:

Siemens is Siemens. It is not there to make directional bet on infrastructure assets using its balance sheet. 
 

Now unto some comparable transactions. Link below talks to GIP, Blackrock, their investment in Sydney Airports and the ones in UK. 

 

https://www.netinterest.co/p/hard-assets

 

 

Thanks for the links.

 

Siemens AG owns Siemens Project Ventures GmbH (SPV), as nwoodman noted, and SPV, "as part of Siemens Financial Services, operates within a defined strategic framework set by Siemens AG. Its primary role is to invest in infrastructure and energy projects that align with the parent company’s long-term objectives."

 

I don't know why an airport no longer fits the parents' long-term investments, because Siemens certainly is involved with airport logistics (https://www.siemens-logistics.com/en/airport-logistics). But they have held the Bangalore stake since 2001 (Siemens team wins bid to build international airport in Bangalore -(https://web.archive.org/web/20121024213153/http://www.rediff.com/money/2001/nov/01siemen.htm) so after 24+ years, maybe they have just had enough. In 2001, they had 74%, and the two government entities each owned 13%. Now the full 74% stake that Siemens owned originally has been transferred from Siemens to Fairfax (minus the OMERS stake, which they may have some arrangement for taking back some day), 20% of it directly from Siemens this year and last, and the rest from others that Siemens had sold stakes to, GVK and the Zurich Airport authority and perhaps someone else I am forgetting.

[Xerxes]

Just like Microsoft cashed in at some point on its investment on Facebook so did Siemens on the airport. At the end Microsoft didn’t invest in FB as an asset manager would with an eye to generate IRR on its FB stock performance. 
 

At some point, Siemens has finished planting its technology seeds, and holding on the asset within its four walls doesn’t give them a good IRR, which only means that it becomes available for a new investor with a different four walls, IRR and time horizon. 
 

just assets exchanging hands. 

[nwoodman]

5 minutes ago, Xerxes said:

just assets exchanging hands. 

It is the price discovery aspect of the exchange that is the interesting factor here.  Unless I am way off, I think FIH got a bargain.  

[SafetyinNumbers]

1 hour ago, nwoodman said:

It is the price discovery aspect of the exchange that is the interesting factor here.  Unless I am way off, I think FIH got a bargain.  

Presumably Siemens wants to turn that capital over to generate sales from building and supporting new infrastructure. The returns on that are conceivably much higher than hanging onto a BIAL stake plus management probably has goals on recycling that capital so there may be other incentives. I think it’s fair to say FIH got a bargain given everything we know. 

[nwoodman]

1 hour ago, SafetyinNumbers said:

Presumably Siemens wants to turn that capital over to generate sales from building and supporting new infrastructure. The returns on that are conceivably much higher than hanging onto a BIAL stake plus management probably has goals on recycling that capital so there may be other incentives. I think it’s fair to say FIH got a bargain given everything we know. 

Agree, decent amount of work for Siemens in just connecting the airport by rail, let alone everything else that is going on

 

https://press.siemens.com/in/en/pressrelease/siemens-consortium-partners-bengaluru-metro-rail-corporation-limited-rail

[glider3834]

 

 

[bluedevil]

Imagine how valuable BIAL will be in 5 years, when it has expanded to full capacity, and is moving 70 million passengers a year; is connected to the metro system, has expanded highway access, and has a developed real estate campus surrounding the airport that will benefit from this connectivity.   And Fairfax India will have 76% of it for about $1.2 billion.

 

A perfect asset for a vehicle like Fairfax India.  It requires investors to put in money and not harvest any returns (as it gets re-invested) for a very long time - by 2030, Fairfax India will have been invested about 13 years, and will not have taken out any cash.  It probably won't take out any cash until the investment is closer to 20 years old -- after the airport has been fully maxed, based on having two runways, to 90 million or so passengers. 

 

But at that point, Fairfax India will have 76% of an extremely valuable asset.    

[Munger_Disciple]

If I understand correctly, US investors can only buy this in retirement accounts?

[gfp]

16 minutes ago, Munger_Disciple said:

If I understand correctly, US investors can only buy this in retirement accounts?

As a US investor, you should probably not hold FIH in taxable accounts.  You are allowed to own it - there is nothing stopping you - it's just a huge pain if you follow the rules.  The other option is to not follow the rules, which is common.  Not advice

[Munger_Disciple]

1 hour ago, gfp said:

As a US investor, you should probably not hold FIH in taxable accounts.  You are allowed to own it - there is nothing stopping you - it's just a huge pain if you follow the rules.  The other option is to not follow the rules, which is common.  Not advice

 

Thanks @gfp

[benchmark]

2 hours ago, gfp said:

As a US investor, you should probably not hold FIH in taxable accounts.  You are allowed to own it - there is nothing stopping you - it's just a huge pain if you follow the rules.  The other option is to not follow the rules, which is common.  Not advice

what rules need to be followed in a taxable account? why is it not advisable? 

[gfp]

8 hours ago, benchmark said:

what rules need to be followed in a taxable account? why is it not advisable? 

I feel like this conversation repeats every year or so. Google “is Fairfax India a PFIC” or passive foreign investment company. Then you and your tax professional can explore the requirements of “following the rules” for a taxable US investor.   Like I alluded to above, I’m sure many US investors own Fairfax India in taxable accounts and just don’t do anything. Not advice. Not a tax professional. 

[benchmark]

2 hours ago, gfp said:

I feel like this conversation repeats every year or so. Google “is Fairfax India a PFIC” or passive foreign investment company. Then you and your tax professional can explore the requirements of “following the rules” for a taxable US investor.   Like I alluded to above, I’m sure many US investors own Fairfax India in taxable accounts and just don’t do anything. Not advice. Not a tax professional. 

Thank you. 

[gfp]

https://www.fairfaxindia.ca/wp-content/uploads/2024/12/2024_12_December_20-PRFFH-Circular-Filing-Special-Meeting.pdf

 

Special meeting

 

"to approve a one-time deviation from the Company’s investment concentration
restriction set forth in its by-laws in order to complete the previously announced acquisition of an
additional 10% equity interest in Bangalore International Airport Limited, as more particularly described
in the management proxy circular."

Special_Meeting_Circular.pdf

Edited Saturday at 02:49 AM by gfp

[nwoodman]

Normally don’t get too excited by these renders but these guys do seem to deliver.  I remember thinking the same thing about T2 and what they delivered, IMHO,  was better than the initial pitch deck.  This  looks pretty swish.

 

 

Edited Saturday at 04:43 AM by nwoodman