Fairfax India new issue

[rohitc99]

 

One point to keep in mind is to look at the history of infrastructure development in India. From 2003-2008, there was big boom in this (and real estate). a lot of capital flowed into airports, roads, power plants etc. There was a lot of optimism in these sectors. Since 2008, it has been a complete bust. A lot of these projects got stalled due to regulatory reasons, land not being available, coal linkage issues and so on. A lot of companies including GVK have been under financial distress and the whole banking sector has been hit badly. The NPA from all these infra projects have hit close to 10% of GDP and are still being worked through.

 

If you go to a bank and suggest an infra project, they wont even talk to you. there is absolutely no capital flowing into these sectors and the only capital is from the likes of fairfax, Blackstone etc. So it is not surprising that Fairfax got a good deal in 2011. GVK was a distressed seller.

 

If you look at the projections for BAIL, they have taken 3-4% as volume growth in their DCF in the past. I have lived in bangalore in the past ...nothing grows at 3% :) ...the city is growing rapidly and the area around the airport is becoming more valuable by the day even if it doesnt show up on the balance sheet.

 

Thanks for commenting. Very helpful to understand the GVK purchases in 2009 and 2011 and the bigger picture.

 

The growth of the airport the past 10 years has been impressive. Phase 1 (Terminal A1) expansion was completed in 2013 increasing passenger capacity to 25 million. The second runway was just completed in Dec 2019. And the new terminal (phase 1) is scheduled to open March of next year (2021) and when fully completed will add passenger capacity of 25 million. And they already have plans to add a third runway. Bottom line, the development of the airport is in the early innings of another growth phase.

 

Link to article discussing plans for the new terminal:

- https://www.trbusiness.com/regional-news/asia-pacific/bial-outlines-commercial-vision-ahead-of-t2-opening/170859

 

I lived in bangalore from 1995 to 2005 and have travelled through the old airport and now through the new one for the last few years (the difference is stark). There is a lot of pent up demand for air travel and the traffic growth is quite reasonable. A very small fraction of the population is flying for now and this should increase over the years. For a lot of indians, flying is still aspirational. Both domestic and international travel is increasing.

Also the new airports like bangalore, and other cities are world class now and provide a good flying experience - far better than some of the cities in US.

My guess is that this deal allows Fairfax to fund other assets via this platform. The risk aversion very high in the infra space and so hopefully then can get good risk adjusted returns. There is almost no appetite for such assets among the domestic investors

Something similar applies to financial services - my family has accounts with IIFL and the service levels are good and the number of investors/ borrowers is still a fraction of the potential.

[StubbleJumper]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

[petec]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

 

The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

[StubbleJumper]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

 

The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

 

 

Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions.  We have no actual knowledge of any wrong-doing or any other nefarious behaviour.  But, the math is pretty basic and that's what creates the risk:  The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10.  The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark.  So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself.  There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm.  A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact.

 

So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time.  If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure.  And once again, to my knowledge, there is no evidence that anything like this has actually occurred.

 

 

SJ

[petec]

Totally agree this is possible. Don’t think it likely.

[hobbit]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

I’m not a subscriber so can’t read the article. How well-sourced is it? Only asking because Fairfax deliberately aren’t disclosing the buyer and I can’t imagine why they wouldn’t if it was OMERS.

 

VCcircle has been pretty reliable in my experience so I would say there is decent chance of OMERS being the investor. OMERS has made other bets in infrastructure space in India and also is a part of consortium that acquired London airport. It also bid for brussels airport.

[hobbit]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

 

The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

 

 

Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions.  We have no actual knowledge of any wrong-doing or any other nefarious behaviour.  But, the math is pretty basic and that's what creates the risk:  The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10.  The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark.  So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself.  There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm.  A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact.

 

So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time.  If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure.  And once again, to my knowledge, there is no evidence that anything like this has actually occurred.

 

 

SJ

 

Possible but I highly doubt an investment group like FFH will burn their reputation in such a manner. I believe, given the state of the investments, Fairfax India would have truly EARNED their fees in the long run.

[petec]

Possible but I highly doubt an investment group like FFH will burn their reputation in such a manner. I believe, given the state of the investments, Fairfax India would have truly EARNED their fees in the long run.

 

More persuasively - given SJ clearly doesn’t trust FFH to start with - it would require OMERS to risk their reputation, which is possible but unlikely.

[StubbleJumper]

Totally agree this is possible. Don’t think it likely.

 

 

I don't think it's likely either.  But pardon my French, why does FFH always seem to fuck-up the handling, communication and disclosure of these sorts of things? 

 

First off, is there, or is there not, a conflict of interest between Fairfax India unit holders and the FFH Holdco shareholders on that BIAL deal?  If that BIAL deal was overvalued, I would make out like a bandit because I currently only hold FFH and not Fairfax India, but the Fairfax India holder would be screwed.  Given that situation, how should FFH have dealt with it?  Well, first and foremost, having a temporal separation (say 6 or 12 months) between those deals would have been a good start.  Alternately, disclose the hell out of BOTH transactions to attempt to have some level of transparency, AND release an independent valuation opinion for both assets.  Instead, what we got were a couple of news releases that didn't tell us much -- one of them didn't even reveal the counterparty!  If you have a set of circumstances that could give the appearance of the possibility of a conflict of interest, you either need to take a pass, or you need to bend over backwards to be transparent.

 

It's the same story over and over again.  Hard to believe that they are not getting better about these things.

 

 

SJ

[ICUMD]

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.

 

[Viking]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

 

The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

 

 

Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions.  We have no actual knowledge of any wrong-doing or any other nefarious behaviour.  But, the math is pretty basic and that's what creates the risk:  The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10.  The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark.  So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself.  There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm.  A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact.

 

So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time.  If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure.  And once again, to my knowledge, there is no evidence that anything like this has actually occurred.

 

 

SJ

 

Stubble, i think you are going down the rabbit hole on this one. Fairfax has a long, mutually beneficial history of partnering with OMERS on many large deals. It also looks to be doing more deals with Mitsui Sumitomo. Both of these two organizations look to be quality, well run organizations. Neither organization is going to do anything that is not in its own interests (including maximizing returns for their owners).

 

1.) Yes, Fairfax is in the process of completing a deal to sell 40% of Riverstone UK to OMERS for $600 million. My guess is if someone on this investment board proposed this exact deal (before it was announced) they would have been laughed at; few would have said that the Riverstone UK runoff business was worth $1.5 billion.

 

The cash will likely be used by Fairfax to grow the business at the insurance subs that need $; we are in a hard market that may only last a year or two. Some of the cash may also be used to buy out minority partners (sounds like the timing is contractual). The deal will result in an increase in BV for Fairfax of $10/share. It sounds like the new Riverstone UK will have better access to capital needed to be able to grow their business more aggressively moving forward (likely due to OMERS involvement). This looks to me to be a very good deal for Fairfax and also a very good deal for OMERS. Nothing nefarious.

 

2.) Yes, Fairfax India is also in the process of creating a new subsidiary (Anchorage) to invest in the airport sector in India. This makes alot of sense as infrastructure investments are big money and it is good to have partners with deep pockets. Their investments in BIAL was $650 million, which is a massive number and not repeatable for Fairfax on their own. If they see other airport opportunities they will need to spend big money and will likely need partners to come up with the high price tag. And it sounds like there might be some big opportunities in India (see rohitc99’s comments).

 

They have sold an 11.5% stake in Anchorage to someone for $134 million. This transaction will decrease Fairfax India’s ownership of BIAL from 54% to 49%. These is lots we do not know and when Fairfax India releases its annual report (March 6? Same as Fairfax?) i am sure we will know more.

 

Is the new purchaser OMERS? I hope so as that would be a huge positive as they are a known entity and the perfect partner on this sort of transaction: a quality company with a long term focus (just like Fairfax) and they have deep pockets (access to capital). And it looks like OMERS is looking to grow their investments in Asia and they want to grow their exposure to infrastructure projects (in a low interest rate world with stock markets shrinking in size more money is moving to private markets).

 

With OMERS as the partner i see nice growth opportunities with Anchorage, especially if they are able to bring another partner or two over time. This will be a big win for Fairfax India shareholders as they will slowly be able to monetize BIAL at a very good price and also grow in a new direction.

 

Part of all the lack of communication currently may have to do with getting all the ducks lined up. Selling a chunk of BIAL may not be simple... current owners might have first right of refusal. Setting up Anchorage may require local government approval. I have no idea; but this is India so my guess is they have some hoops to jump through. The fact a buyer was not named in the press release (or would not be confirmed by Prem on the conference call) does not suggest anything untoward to me. We will know more when they can tell us.

 

Regarding the price, perhaps the high price paid for 11.5% of Anchorage reflects the value the purchaser sees in not only the BIAL asset (which is all everyone is focussed on right now) but also the value of partnering with Fairfax in India and the value that will be created in the coming decade. Fairfax has a long successful history in India: ICICI Lombard, IIFL, Thomas Cook, Quess and more recently Digit and BIAL (just off the top of my head). Fairfax is very plugged in to India (understand the region and have the contacts) and it would be very rational for someone like OMERS to want to partner with them there (especially if they are not already well established in the region). It is also very encouraging to see the speed with which Fairfax is moving to develop BIAL; This shows a deep understanding of how to do business in India and also having the contacts to fill important positions with quality people. This will be a major drawing card for Anchorage as it expands.

 

The sale of 11.5% of Anchorage might be an example of Fairfax actually earning its high fee from Fairfax India. If BIAL is worth anything close to $2.6 billion then Fairfax India shareholders are going to make out like bandits (and it looks like it just might be :-)

 

[StubbleJumper]

Going down the rabbit hole?  No.  I would like my business partners to have integrity.  I want my business partners to earn money and I want to earn money, but I want it to be earned honestly, fairly and transparently.  Integrity is not a matter of degree.  On yet one more occasion, I find myself writing that FFH needs to improve its governance practices.  Hard to believe.

 

 

SJ

[bizaro86]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

That is interesting. I doubt OMERS paid more than their calculation of fair value to do Prem a favor. On the other hand, the release noted that they expect to do any future airport investments though the new firm, so OMERS is getting tag along rights for ~11% on any future airport buys, which is probably worth something.

 

I also think it's interesting that FIH didn't buy the Mumbai airport stake from GVK (which they sold this past fall). It would have been a big deal, but they could have swung it I think. I suppose at these prices they must be more of a seller than a buyer. I like the airport a lot more than the banking/chemicals businesses.

[petec]

Going down the rabbit hole?  No.  I would like my business partners to have integrity.  I want my business partners to earn money and I want to earn money, but I want it to be earned honestly, fairly and transparently.  Integrity is not a matter of degree.  On yet one more occasion, I find myself writing that FFH needs to improve its governance practices.  Hard to believe.

 

 

SJ

 

SJ I broadly agree with your take on this discussion, and although I don’t think I care about it as much as you do yours always good at raising things I haven’t thought of/through.

 

That said I wouldn’t conflate disclosure with integrity. Fairfax disclosure is often weaker than I’d like. That in and of itself doesn’t call their integrity into question.

[petec]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

 

 

Okay, that makes me yet a little more uncomfortable.  I had been holding out hope that it was a completely new player to the FFH world.  FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff.  I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets.  There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.

 

 

SJ

 

The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.

 

 

Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions.  We have no actual knowledge of any wrong-doing or any other nefarious behaviour.  But, the math is pretty basic and that's what creates the risk:  The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10.  The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark.  So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself.  There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm.  A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact.

 

So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time.  If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure.  And once again, to my knowledge, there is no evidence that anything like this has actually occurred.

 

 

SJ

 

Stubble, i think you are going down the rabbit hole on this one. Fairfax has a long, mutually beneficial history of partnering with OMERS on many large deals. It also looks to be doing more deals with Mitsui Sumitomo. Both of these two organizations look to be quality, well run organizations. Neither organization is going to do anything that is not in its own interests (including maximizing returns for their owners).

 

1.) Yes, Fairfax is in the process of completing a deal to sell 40% of Riverstone UK to OMERS for $600 million. My guess is if someone on this investment board proposed this exact deal (before it was announced) they would have been laughed at; few would have said that the Riverstone UK runoff business was worth $1.5 billion.

 

The cash will likely be used by Fairfax to grow the business at the insurance subs that need $; we are in a hard market that may only last a year or two. Some of the cash may also be used to buy out minority partners (sounds like the timing is contractual). The deal will result in an increase in BV for Fairfax of $10/share. It sounds like the new Riverstone UK will have better access to capital needed to be able to grow their business more aggressively moving forward (likely due to OMERS involvement). This looks to me to be a very good deal for Fairfax and also a very good deal for OMERS. Nothing nefarious.

 

2.) Yes, Fairfax India is also in the process of creating a new subsidiary (Anchorage) to invest in the airport sector in India. This makes alot of sense as infrastructure investments are big money and it is good to have partners with deep pockets. Their investments in BIAL was $650 million, which is a massive number and not repeatable for Fairfax on their own. If they see other airport opportunities they will need to spend big money and will likely need partners to come up with the high price tag. And it sounds like there might be some big opportunities in India (see rohitc99’s comments).

 

They have sold an 11.5% stake in Anchorage to someone for $134 million. This transaction will decrease Fairfax India’s ownership of BIAL from 54% to 49%. These is lots we do not know and when Fairfax India releases its annual report (March 6? Same as Fairfax?) i am sure we will know more.

 

Is the new purchaser OMERS? I hope so as that would be a huge positive as they are a known entity and the perfect partner on this sort of transaction: a quality company with a long term focus (just like Fairfax) and they have deep pockets (access to capital). And it looks like OMERS is looking to grow their investments in Asia and they want to grow their exposure to infrastructure projects (in a low interest rate world with stock markets shrinking in size more money is moving to private markets).

 

With OMERS as the partner i see nice growth opportunities with Anchorage, especially if they are able to bring another partner or two over time. This will be a big win for Fairfax India shareholders as they will slowly be able to monetize BIAL at a very good price and also grow in a new direction.

 

Part of all the lack of communication currently may have to do with getting all the ducks lined up. Selling a chunk of BIAL may not be simple... current owners might have first right of refusal. Setting up Anchorage may require local government approval. I have no idea; but this is India so my guess is they have some hoops to jump through. The fact a buyer was not named in the press release (or would not be confirmed by Prem on the conference call) does not suggest anything untoward to me. We will know more when they can tell us.

 

Regarding the price, perhaps the high price paid for 11.5% of Anchorage reflects the value the purchaser sees in not only the BIAL asset (which is all everyone is focussed on right now) but also the value of partnering with Fairfax in India and the value that will be created in the coming decade. Fairfax has a long successful history in India: ICICI Lombard, IIFL, Thomas Cook, Quess and more recently Digit and BIAL (just off the top of my head). Fairfax is very plugged in to India (understand the region and have the contacts) and it would be very rational for someone like OMERS to want to partner with them there (especially if they are not already well established in the region). It is also very encouraging to see the speed with which Fairfax is moving to develop BIAL; This shows a deep understanding of how to do business in India and also having the contacts to fill important positions with quality people. This will be a major drawing card for Anchorage as it expands.

 

The sale of 11.5% of Anchorage might be an example of Fairfax actually earning its high fee from Fairfax India. If BIAL is worth anything close to $2.6 billion then Fairfax India shareholders are going to make out like bandits (and it looks like it just might be :-)

 

I think you're right, except about getting ducks in a row. If that's the reason then either a) they should have delayed the release or b) they should have explained the situation.

 

One other thing both deals have in common is they surface value in FFH. FFH have been saying for years that the sheraes are undervalued. There are two ways to fix that: persuade the market to apply a higher P/BV or do deals that surface true BV. We have seen a spate of deals recently that do the latter and I think it is a deliberate strategy.

 

As an aside, I think often wonder why FFH and BAM don't partner up more often and India is a good example. FFH have great expertise in India and in financial services and BAM in infrastructure and businesses related to it. If the companies attacked the country together, they could broaden their opportunity set, reduce competition, and raise a ton of OPM to earn fees on.

[ABM]

Going down the rabbit hole?  No.  I would like my business partners to have integrity.  I want my business partners to earn money and I want to earn money, but I want it to be earned honestly, fairly and transparently.  Integrity is not a matter of degree.  On yet one more occasion, I find myself writing that FFH needs to improve its governance practices.  Hard to believe.

 

 

SJ

 

I largely agree with your sentiment although I find some relief in the fact we're still one year away from end of the 2nd perf fee measurement period. However, it doesn't look good especially after the losses reported in IIFL and NCML assets.  Next 3-yr perf fee measurement period ends 12/31/20 so while the carry has not crystallized it still reported as a liability on the BS showing $50M value as of 12/31/19.  When you put the $50M in the context of being used to incentivize the management of FFXDF sitting within FFH holdco as the GP then it is easier to see how quickly this becomes very material. 

 

Now to Prem's credit, Fairfax is the only company I have seen report share dilution impact in such a transparent and clear way in the financial statements.  They literally include a table in stmts (pg 93 of 2018 report) showing the per share value waterfall assuming no perf fee compared to actual post-performance fee dilution.  I love this! 

[tradevestor]

Epictetus, India and Patience

https://www.woodlockhousefamilycapital.com/post/epictetus-india-and-patience

[valueinvesting101]

Some commentary about future growth at the Bangalore airport.

 

https://www.passengerterminaltoday.com/news/expo/pte-interview-reimagining-indias-fastest-growing-gateway.html

 

I think Mr. Watsa also referred to taking passenger capacity to 90 million in few years. 10-15 years predictions can be too rosy but given growth in the aviation sector in India it is possible if GDP continues to grow in high single digits.

[wondering]

https://podcasts.google.com/?feed=aHR0cHM6Ly9pbnRlbGxpZ2VudGludmVzdGluZy5wb2RiZWFuLmNvbS9mZWVkLnhtbA&episode=aW50ZWxsaWdlbnRpbnZlc3RpbmcucG9kYmVhbi5jb20vY2M1ZDY3NzYtZGQ4OC01YWRjLWE2MWEtM2ExOTViNGU1NmJk&hl=en-CA&ved=2ahUKEwjJjoKd_vvnAhVYlHIEHYLfCjUQieUEegQIBxAE&ep=6

 

I am not sure if anyone posted this yet.  There is an interesting discussion of Fairfax India and Thomas Cook India on the Intelligent Investing Podcast.  Just recent.

[Xerxes]

At $10.95, trade with a huge discount to BV.

But I am guessing things will get worse before they get better.

[Viking]

I agree. Hard to pull the trigger on airlines right now. An airport (BIAL)? Need more information.

[hobbit]

So BIAL IPO at 3bn . I wonder if coronavirus will have an impact on the timing or valuation. If it goes through as planned at 3Bn , that would be a significant win for the shareholders.

[petec]

So BIAL IPO at 3bn . I wonder if coronavirus will have an impact on the timing or valuation. If it goes through as planned at 3Bn , that would be a significant win for the shareholders.

 

Link?

[hobbit]

So BIAL IPO at 3bn . I wonder if coronavirus will have an impact on the timing or valuation. If it goes through as planned at 3Bn , that would be a significant win for the shareholders.

 

Link?

 

annual letter just published

"

Fairfax India intends to complete an IPO of AIIHL, targeted to value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for 100% of AIIHL). A ‘‘ratchet’’ mechanism has been agreed with the investor whereby if the IPO is completed at a valuation of AIIHL below $1.3 billion, the investor will receive incremental shares of AIIHL to compensate for the difference between that actual valuation and $1.3 billion.

"

https://s1.q4cdn.com/293822657/files/doc_financials/annual_reports/2019/Website-Fairfax-India-2019-Shareholders-Letter.pdf

 

do not know what to make of the ratchet clause though, I have seen it in some VC deals before.

[petec]

So BIAL IPO at 3bn . I wonder if coronavirus will have an impact on the timing or valuation. If it goes through as planned at 3Bn , that would be a significant win for the shareholders.

 

Link?

 

annual letter just published

"

Fairfax India intends to complete an IPO of AIIHL, targeted to value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for 100% of AIIHL). A ‘‘ratchet’’ mechanism has been agreed with the investor whereby if the IPO is completed at a valuation of AIIHL below $1.3 billion, the investor will receive incremental shares of AIIHL to compensate for the difference between that actual valuation and $1.3 billion.

"

https://s1.q4cdn.com/293822657/files/doc_financials/annual_reports/2019/Website-Fairfax-India-2019-Shareholders-Letter.pdf

 

do not know what to make of the ratchet clause though, I have seen it in some VC deals before.

 

Thanks!