Fairfax acquires Brit PLC

[Jurgis]

The stock price is over $500 per share. Of course it's expensive! Duh, what are you guys thinking...

 

 

 

 

 

Just kidding  8)

[LakesideB]

from transcript

 

Could anyone post a pdf file of the transcript?

 

Thank you! :)

 

Gio

FFH_Buys_Brit_Transcript.pdf

[giofranchi]

Thank you, LakesideB! :)

 

Gio

[Txvestor]

The stock price is over $500 per share. Of course it's expensive! Duh, what are you guys thinking...

 

 

 

 

 

Just kidding  8)

 

As value investors say, Price is what you pay, value is what you get.

I agree the price is expensive! As long as value builds, i want it to get even more pricey!

 

[Phoenix01]

from transcript

 

Could anyone post a pdf file of the transcript?

 

Thank you! :)

 

Gio

Thanks again for the transcript.  Prem mentioned last year that the US bond rally was coming to an end.  This could be really good time for FFH to dump them for productive assets.

[giofranchi]

So FFH agreed to pay £3.05 per share in cash, consisting of £2.80 in cash and the expected 2014 final dividend, payable by Brit, of £0.25 in cash to Brit shareholders.

 

… I am not sure I understand this clearly: so, FFH has paid £3.05 or £2.80 per share?... After all, FFH was not a Brit shareholder in 2014, right?... Therefore, no 2014 final dividend should be paid by Brit to FFH…

 

What am I missing here?

 

Gio

 

[petec]

So FFH agreed to pay £3.05 per share in cash, consisting of £2.80 in cash and the expected 2014 final dividend, payable by Brit, of £0.25 in cash to Brit shareholders.

 

… I am not sure I understand this clearly: so, FFH has paid £3.05 or £2.80 per share?... After all, FFH was not a Brit shareholder in 2014, right?... Therefore, no 2014 final dividend should be paid by Brit to FFH…

 

What am I missing here?

 

Gio

 

My understanding is that the 25p will be paid in 2015 and will all go to FFH as the 100% shareholder on the record date.  So they pay 305 and get 25p back, rather than paying 305 after the 25p has gone to the previous owners.

[WhoIsWarren]

From the press release:

 

"Under the terms of Fairfax’s offer for the Brit Shares (the “Offer”), Brit shareholders will be entitled to receive 305 pence in cash per Brit Share (the “Brit Offer Price”), inclusive of any final dividend for the year ended December 31, 2014."

 

petec, my understanding is that FFH will be paying 305p (not a net 280p, as you suggest).  Shareholders as at the record date are the ones who will receive the dividend and, while the record date hasn't been determined yet, it would be highly unusual in my experience for the acquirer to receive the dividend.  So as I see it, the current shareholders of Brit -- i.e. Apollo, CVC et al -- will receive 25p per share as a dividend, in addition to the 280p per share "ex-div".

 

 

[giofranchi]

My understanding is that the 25p will be paid in 2015 and will all go to FFH as the 100% shareholder on the record date.  So they pay 305 and get 25p back, rather than paying 305 after the 25p has gone to the previous owners.

 

Ok! But it seems to me that FFH gets the dividend from money earned by Brit during 2014, a year in which FFH’s capital was invested somewhere else, not in Brit.

 

In other words what I mean is the following: for £3.05 per share FFH is buying not only Brit’s future earnings from 2015 onward, but also Brit’s 2014 final dividend paid out from Brit's 2014 earnings.

 

Am I wrong?

 

Gio

 

[giofranchi]

Let’s suppose Brit pays out 100% of 2014 earnings. In June Brit declared an interim dividend of £0.0625 and now a final dividend of £0.25. This means that 2014 full year earnings have been: £0.0625 + £0.25 = £0.3125, which would be consistent with the statement that FFH is paying less than 10x 2014 earnings.

 

Now, given the fact Brit has earned £0.142 during the first half of 2014, the second half earnings should be: £0.3125 - £0.142 = £0.1705. Which added to net tangible assets at the end of June 2014 give us a net tangible assets at the end of 2014: £1.794 + £0.1705 = £1.9645.

 

Then, if we subtract the £0.25 final dividend, we get: £1.9645 - £0.25 = £1.7145.

 

And the multiple paid by FFH should be: £2.80 / £1.7145 = 1.63.

 

Is this almost right?

 

Now let’s look at it this way: if Brit keeps declaring dividends in 2015 which are in line with those declared for 2014, FFH will receive a £0.3125 / £2.80 = 11.16% dividend yield on the cash it has used to purchase Brit + Brit’s float to invest.

Am I looking at this in the right way? If so, not bad! What do you think?

 

Gio

 

[petec]

Let’s suppose Brit pays out 100% of 2014 earnings. In June Brit declared an interim dividend of £0.0625 and now a final dividend of £0.25. This means that 2014 full year earnings have been: £0.0625 + £0.25 = £0.3125, which would be consistent with the statement that FFH is paying less than 10x 2014 earnings.

 

Now, given the fact Brit has earned £0.142 during the first half of 2014, the second half earnings should be: £0.3125 - £0.142 = £0.1705. Which added to net tangible assets at the end of June 2014 give us a net tangible assets at the end of 2014: £1.794 + £0.1705 = £1.9645.

 

Then, if we subtract the £0.25 final dividend, we get: £1.9645 - £0.25 = £1.7145.

 

And the multiple paid by FFH should be: £2.80 / £1.7145 = 1.63.

 

Is this almost right?

 

Now let’s look at it this way: if Brit keeps declaring dividends in 2015 which are in line with those declared for 2014, FFH will receive a £0.3125 / £2.80 = 11.16% dividend yield on the cash it has used to purchase Brit + Brit’s float to invest.

Am I looking at this in the right way? If so, not bad! What do you think?

 

Gio

 

I think your maths is correct if the earnings are sustainable - probably why the market liked the deal so much.

 

For me it is mildly transformative in that it swings the mix of insurance businesses significantly towards the quality end (Odyssey, Zenith, Fairfax Asia, Brit) and away from the parts that aren't necessarily bad but have struggled more (Crum, Northbridge).  That's the impact for me.

[petec]

From the press release:

 

"Under the terms of Fairfax’s offer for the Brit Shares (the “Offer”), Brit shareholders will be entitled to receive 305 pence in cash per Brit Share (the “Brit Offer Price”), inclusive of any final dividend for the year ended December 31, 2014."

 

petec, my understanding is that FFH will be paying 305p (not a net 280p, as you suggest).  Shareholders as at the record date are the ones who will receive the dividend and, while the record date hasn't been determined yet, it would be highly unusual in my experience for the acquirer to receive the dividend.  So as I see it, the current shareholders of Brit -- i.e. Apollo, CVC et al -- will receive 25p per share as a dividend, in addition to the 280p per share "ex-div".

 

I think the effect is the same: either way, FFH are paying 2.80 for the ex-div book value of the company. 

[WhoIsWarren]

Yep. Mountain out of molehill and all that. I should sit back down and be quiet  ;)

[giofranchi]

If you think that Brit investments in June 2014 were worth £2,564.2 million and FFH is using (£1,220 / 305) x 280 = £1,120 million of its cash, and you assume HWIC could earn their historical 9% return on investments, FFH in addition to Brit’s dividend could achieve another £2,564.2 x 0.09 = £231 / £1,120 = 20.6% return on the cash employed.

 

Furthermore, £505 million in Brit’s portfolio are cash and equivalent. Therefore, the true cash used by FFH is: £1,120 - £505 = £615 million.

 

Imo the market hasn't appreciated this deal highly enough! ;)

 

Gio

 

[petec]

Yep. Mountain out of molehill and all that. I should sit back down and be quiet  ;)

 

Ha ha!  I'm a little hungover today and you certainly had me scratching my head!  Along with a friend who is making my head hurt by trying to persuade me of the benefits of a full-reserve banking system, it's been a taxing day ;)

[petec]

If you think that Brit investments in June 2014 were worth £2,564.2 million and FFH is using (£1,220 / 305) x 280 = £1,120 million of its cash, and you assume HWIC could earn their historical 9% return on investments, FFH in addition to Brit’s dividend could achieve another £2,564.2 x 0.09 = £231 / £1,120 = 20.6% return on the cash employed.

 

Furthermore, £505 million in Brit’s portfolio are cash and equivalent. Therefore, the true cash used by FFH is: £1,120 - £505 = £615 million.

 

Imo the market hasn't appreciated this deal highly enough! ;)

 

Gio

 

Personally I think 9% is way too high and was boosted by the greatest bond bull run in history (unless the deflation swaps pay out big in which case 9% is not too high!).

 

Also, I don't think you should subtract the full £505m but only the part that is excess reserves and can be dividended to the holdco.  They don't actually own the rest.  I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

 

Still a good deal though.

[giofranchi]

I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

 

Ahahah!! ;)

No, well… When Watsa says 25% of FFH portfolio is in cash, he is thinking about float as well, either be it permanent capital or not! Right?

If you use part of that cash to buy other float held in cash, where is the difference?

 

Gio

 

[petec]

I know you can make an argument about float being permanent capital but I think you're heading towards what I might politely call "Italian fiscal accounting standards" with that argument  ;)

 

Ahahah!! ;)

No, well… When Watsa says 25% of FFH portfolio is in cash, he is thinking about float as well, either be it permanent capital or not! Right?

If you use part of that cash to buy other float held in cash, where is the difference?

 

Gio

 

I think float is best regarded as a permanent loan.  In other words, if you use float to buy Brit, what you're actually doing is borrowing to buy Brit.  That doesn't increase your net worth, it merely reallocates the loan from funding a cash position to funding a position in Brit.

 

Over time, as Brit pays out dividends, that repays the loan, and your net worth rises that way.

[giofranchi]

What I meant to say is this: FFH is giving £1,120 million in cash and among the things it will receive there are £505 million in cash…

 

Probably I don’t understand what I am missing! ;)

 

Gio

 

[gfp]

my apologies if this has already been posted/discussed, but I saw this blurb from Insurance Insider in my inbox a few moments ago and found it interesting.  I have not received the entire article yet - but it sounds like Prem pulled a Warren on this negotiation -

 

"Watsa forestalls Brit process with snap take-it-or-leave-it bid

 

Fairfax Financial founder Prem Watsa prevented a potential bidding war for Brit Insurance by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations, and threatened to walk away if the proposal was not accepted in short order.

 

Sources said that the ingredients were in place for a semi-formal auction process, with at least two other parties in discussions with Brit, including an Asian strategic interest.

 

It is understood that one of the other parties involved was Japanese big three member Mitsui Sumitomo - the business that came closest to consummating a deal with Brit before its IPO last spring."

 

[TwoCitiesCapital]

my apologies if this has already been posted/discussed, but I saw this blurb from Insurance Insider in my inbox a few moments ago and found it interesting.  I have not received the entire article yet - but it sounds like Prem pulled a Warren on this negotiation -

 

"Fairfax Financial founder Prem Watsa prevented a potential bidding war for Brit Insurance by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations, and threatened to walk away if the proposal was not accepted in short order…"

 

Ha ha! Nice!

[giofranchi]

If Brit PLC during the second half of 2014 has achieved results in line with the first half, net tangible assets per share might be 10% higher, therefore the right multiple paid might be: 305 / 197.3 = 1.55.

 

Well, it seems I was not too far off: from the 2014 AR in attachment tangible assets per share at the end of the year were 194 pps, therefore the multiple paid is: 305 / 194 = 1.57.

 

Cheers,

 

Gio

2014_Annual_Report.pdf

[FFHWatcher]

Wouldn't it be better to look at Brit's excess capital?  FFH operating subs have a $25B portfolio but aside from the surplus, that belongs to the policyholders. 

(from Brit press release) After allowing for these dividends, our excess of capital resources over management entity capital requirements of £251.7m, (which is about $388M US$.

 

Prem always breaks out their holding company investments vs. their operating company portfolio investments.  I do not believe FFH is using their float/operating company $25B investment portfolio to buy Brit.  That will be financed and paid for from the holdco. 

[gfp]

insurance insider article this morning -

-----------------

Brit CEO Mark Cloutier has underlined his intention to remain at the company for the foreseeable future, as well as indicating that there may be opportunities for him in the longer-term at other operations within Fairfax Financial.

 

In addition to publishing its full-year results this morning (25 February) - which showed a 40.5 percent jump in pre-tax profits to £149.1mn - Brit announced the promotion of Matthew Wilson from head of global specialty to group deputy CEO and CUO.

 

Wilson has long been assumed to be Cloutier's designated successor, which the CEO said the business has made no secret of.

 

"Matthew has been the architect of the significant improvement in our underwriting business, and in my view his leadership is critical to the future of the business," Cloutier told The Insurance Insider.

 

"That doesn't mean that I'm going anywhere soon...but it does set a clear indication of the future direction of the business."

 

Cloutier went on to say that there was no timetable for how long he would remain in charge at Brit, but that he intended to be at the helm for "some time", adding: "My principal job right now is to make Brit fit into Fairfax and make it a big contributor to shareholder value at Fairfax."

 

And hinting at future collaborations with Fairfax CEO Prem Watsa, Cloutier added: "My hope is that I'll continue to work with Matthew and the team here for the foreseeable future, and it may be that I'll have the opportunity to poke my fingers around into things that Prem may ask me to help out with."

 

Watsa has known Cloutier since the latter worked for Fairfax's loss adjuster Morden & Helwig. The two have remained in contact ever since, and their relationship was thought to be a key factor in the speed at which the proposed merger was agreed.

 

The Fairfax CEO prevented a potential bidding war for Brit by offering a $1.88bn binding all-cash offer just 10 days after entering into serious negotiations.

 

Commenting on the importance of his personal relationship with Watsa in getting the deal over the line quickly, Cloutier said that the fact they'd done business together in the past and knew how each other worked certainly helped.

 

"There have been a couple of pretty large transactions that I've been involved in with Prem where we were able to do [them] on a hand shake, the old-fashioned way. So I think a combination of a longstanding relationship and understanding of each other - and certainly from my side an appreciation of how Prem does things - was an enabler for the transaction to move very quickly," he said.

 

"Given we'd traded in the past, there was a level of trust that really enabled the transaction, which is what underpinned the ability of the deal to get done quickly. Given the business we're in, the market outlook and all the uncertainty facing our businesses today, a rapid, well-priced deal with the highest level of certainty was in the best interest of all of our shareholders."

 

Cloutier also suggested that Brit's chief investment officer John Stratton, the main architect behind the carrier's impressive 2.9 percent investment return, could yet be retained.

 

Under traditional Fairfax take-overs, the investments of the merged entity are moved into Fairfax's portfolio.

 

Cloutier said that he expected Brit would move towards the Fairfax model, but said he would not speculate on what that meant for the company's staff.

 

He added: "Having said that, John's done an outstanding job for us, and that's recognised, so I don't think people should make any assumptions one way or the other."

 

 

 

[petec]

Wouldn't it be better to look at Brit's excess capital?  FFH operating subs have a $25B portfolio but aside from the surplus, that belongs to the policyholders. 

After allowing for these dividends, our excess of capital resources over management entity capital requirements of £251.7m, (which is about $388M US$.

 

Prem always breaks out their holding company investments vs. their operating company portfolio investments.  I do not believe FFH is using their float/operating company $25B investment portfolio to buy Brit.  That will be financed and paid for from the holdco.

 

That's exactly what I think you should use.  So they pay £1120 and get to take out £252m of excess capital (in theory anyway) so really they paid £870 for the company itself.  Which is nice...