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Fairfax unloading more of Bank of Ireland stake


Buffett_Groupie
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Ah. Looks like you beat me to it. I just posted in the BKIR thread before I saw this. I guess I'll simply re-iterate my surprise.

 

Given Ross' comments about captive banks earning extraordinarily high ROEs (15-20%), I would've thought this would have been one of those buy-and-hold-forever type of investments for them or at least waited until the bank was consistently hitting that level of profitability.

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Financier Prem Watsa

Canadian investor Prem Watsa is to cut his stake in Bank of Ireland for the first time in more than a year, selling 2.9pc of the bank on the market.

 

 

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Watsa's Fairfax Financial was one of five investor who took a combined 35pc stake in the bank in 2011 in a deal that kept it from being nationalised.

 

Fairfax now plans to sell 935m of the shares it bought for 10 cents each in that deal through a share placing arranged by Deutsche Bank. Based on last night's 0.3840 a share close, the sale could reap a €265m profit.

 

It's the second time Fairfax has reduced its Bank of Ireland stake: the firm sold a third of its Bank of Ireland stake last year, at 33 cents a share.

 

 

 

Irish Independent

 

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Wasn't this supposed to be a long term investment?

 

Not at any price.  It's being reduced at 1.3x current book and 12.5x 2016 eps which is cheap if it can make 15-20% roe's as the poster above implies, but not otherwise, and he's keeping a holding for that time.

 

No-one (sensible) makes long term investments regardless of a) the size they grow to and b) valuation - least of all Prem who is very value-oriented, and especially not in highly levered businesses when your macro outlook is gloomy.

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Wasn't this supposed to be a long term investment?

 

Not at any price.  It's being reduced at 1.3x current book and 12.5x 2016 eps which is cheap if it can make 15-20% roe's as the poster above implies, but not otherwise, and he's keeping a holding for that time.

 

No-one (sensible) makes long term investments regardless of a) the size they grow to and b) valuation - least of all Prem who is very value-oriented, and especially not in highly levered businesses when your macro outlook is gloomy.

 

Pete,

very well said! :)

 

Cheers,

 

Gio

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Guest glavacem

 

Very well said, thank you.

 

 

Wasn't this supposed to be a long term investment?

 

Not at any price.  It's being reduced at 1.3x current book and 12.5x 2016 eps which is cheap if it can make 15-20% roe's as the poster above implies, but not otherwise, and he's keeping a holding for that time.

 

No-one (sensible) makes long term investments regardless of a) the size they grow to and b) valuation - least of all Prem who is very value-oriented, and especially not in highly levered businesses when your macro outlook is gloomy.

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This one reminds me of WEB's promise to divest a percentage of BRK shares annually to the Bill and Melinda Gates Foundation.  He gives away the shares, but the dollar value of WEB's ownership in BRK doesn't go down because the share price is increasing faster than his number of shares is decreasing.

 

Even with Prem selling 10% of BKIR, I would be surprised if FFH's holding of BKIR in April 2016 is worth less than the current holding...sell 10% of the shares, and if the stock price increases by 11.1%, your holding is steady.

 

Overall, I agree with the strategy of trimming this holding as the price increases.

 

 

SJ

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This one reminds me of WEB's promise to divest a percentage of BRK shares annually to the Bill and Melinda Gates Foundation.  He gives away the shares, but the dollar value of WEB's ownership in BRK doesn't go down because the share price is increasing faster than his number of shares is decreasing.

 

Even with Prem selling 10% of BKIR, I would be surprised if FFH's holding of BKIR in April 2016 is worth less than the current holding...sell 10% of the shares, and if the stock price increases by 11.1%, your holding is steady.

 

Overall, I agree with the strategy of trimming this holding as the price increases.

 

 

SJ

 

I disagree. Consider this.

 

Prem bought the position in 2011 at EUR 0.10. He sold 1/3 of it at EUR 0.33 in 2014. This means that he incurred capital gains tax around 0.075 EUR per share. His next investment will have return 30% just to get back to even with his investment had it remained in BKIR - that doesn't even include whatever value accrues to BKIR over that interim. Looked at another way, he could have incurred a permanent 23% drop in BKIRs stock price before being on par with selling and incurring capital gains tax.

 

The transaction was done again this year selling at EUR 0.36. The numbers are similar to the above. EUR 0.09 per share in tax means that the next investment needs to return 33% to break even (not including returns that would have accrued to BKIR) or that Prem could withstand a permanent loss of 28% on the investment from current prices to be on par with selling.

 

Now consider that the position in question a bank with a captive market with limited competition. Banks in this environment have historically generated returns in the mid-teens on their equity (which is higher than normal). So, by selling and incurring capital gains tax, you already place yourself at a disadvantage for your next position to outperform, but it has to outperform a business that has a very good probability of being above average itself meaning that your next use of capital had better have extraordinary opportunity.

 

I'm not saying it doesn't make sense to sell ever. I'm saying that the higher the proportion of your deferred capital gains to your position value, the higher the bar is for you to sell that position in favor of another one. With deferred capital gains, the bar for Prem is extremely high. I'm not sure it was met in 2014 and I'm not sure it was met with this sale either. If he's concerned about the size, he could've hedged the position for less money. If he's concerned about the market, he can take solace in the fact that it would require a significant double digit, permanent loss (and no correction in current currency value) to impair him more than selling would. If he needed the cash, it would have been better to issue equity above book value or debt at low rates as opposed to incurring the loss of $100M in capital gains tax.

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This one reminds me of WEB's promise to divest a percentage of BRK shares annually to the Bill and Melinda Gates Foundation.  He gives away the shares, but the dollar value of WEB's ownership in BRK doesn't go down because the share price is increasing faster than his number of shares is decreasing.

 

Even with Prem selling 10% of BKIR, I would be surprised if FFH's holding of BKIR in April 2016 is worth less than the current holding...sell 10% of the shares, and if the stock price increases by 11.1%, your holding is steady.

 

Overall, I agree with the strategy of trimming this holding as the price increases.

 

 

SJ

 

I disagree. Consider this.

 

Prem bought the position in 2011 at EUR 0.10. He sold 1/3 of it at EUR 0.33 in 2014. This means that he incurred capital gains tax around 0.075 EUR per share. His next investment will have return 30% just to get back to even with his investment had it remained in BKIR - that doesn't even include whatever value accrues to BKIR over that interim. Looked at another way, he could have incurred a permanent 23% drop in BKIRs stock price before being on par with selling and incurring capital gains tax.

 

The transaction was done again this year selling at EUR 0.36. The numbers are similar to the above. EUR 0.09 per share in tax means that the next investment needs to return 33% to break even (not including returns that would have accrued to BKIR) or that Prem could withstand a permanent loss of 28% on the investment from current prices to be on par with selling.

 

Now consider that the position in question a bank with a captive market with limited competition. Banks in this environment have historically generated returns in the mid-teens on their equity (which is higher than normal). So, by selling and incurring capital gains tax, you already place yourself at a disadvantage for your next position to outperform, but it has to outperform a business that has a very good probability of being above average itself meaning that your next use of capital had better have extraordinary opportunity.

 

I'm not saying it doesn't make sense to sell ever. I'm saying that the higher the proportion of your deferred capital gains to your position value, the higher the bar is for you to sell that position in favor of another one. With deferred capital gains, the bar for Prem is extremely high. I'm not sure it was met in 2014 and I'm not sure it was met with this sale either. If he's concerned about the size, he could've hedged the position for less money. If he's concerned about the market, he can take solace in the fact that it would require a significant double digit, permanent loss (and no correction in current currency value) to impair him more than selling would. If he needed the cash, it would have been better to issue equity above book value or debt at low rates as opposed to incurring the loss of $100M in capital gains tax.

 

Unless you have losses to offset, and/or somewhere great to put the proceeds. The problem is that we passive investors often do not know this except in retrospect.

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