Pakit financing by FFH

[omagh]

http://www.earthtimes.org/articles/show/pakittm-inc-announces-5-million-financing-by-fairfax,979889.shtml

The $5 million investment will enable PAKIT to expand its production capacity to meet equipment orders in the pipeline.

 

One wonders why FFH bothers with a $5M investment?  There are small outfits such as Accord Financial (TSX:ACD) and larger ones such as GE Capital or EDC (government crown corporation) that finance these kinds of deals.  This doesn't move the needle so why bother?

 

-O

[Crip1]

For a company the size of FFH, $5M is certainly not a game changer, but I would opine that we do not have sufficient facts to determine the ultimate worth of this investment...

 

* We do not know the terms and conditions of this arrangement, which may incude some sort of conversion potential, etc.

* There is always a time/value componant to these things. If this was a relitively quick and easy decision which required little human capital to put into place, then the cost benefit may make sense.

* Is the the harbringer of things to come? FFH has cash, and in a recession cash is king. Again, if the time/value analysis makes sense, it would seem logical that this can be replicated for other smaller financing deals which, in aggregate, would presumably move the needle.

 

I guess that I am going on faith here to a large extent, that Prem and co would not have had a week''s worth of 12 hour meetings before making this $5M investment which would earn FFH a modest premium to munis.

 

-Crip

[KFRCanuk]

The Pakit FAQ

http://www.pakitinc.com/index.730---3.html

 

I found this interesting:

    Q: How quickly can I get a new machine?

    A: The current lead time from order date to commissioning is 7 months.

 

  Q: How quickly can I get new tooling?

  A: New tooling has a 4 week lead time, and replacement tools have a 2 week lead time.

 

Granted the machine seems rather large but 7 months to get one after the order!

 

The technology seems interesting. Maybe they had some orders on the books and needed to expand their production capability. That would make the financing decision easy i think.

 

Watch out Winpak?

 

 

[Parsad]

Hey I met with these guys about a year ago.  They were looking at financing their expansion and we were offered a buy in.  Not our kind of business, as it doesn't really have alot of long-term competitive advantages.  There are other much larger companies that already offer biodegradeable packaging.  Their office is right behind ours and across from Tim McElvaine's.  If I knew Prem was looking for these types of businesses, I would have told him about them. 

 

It's a new form of packaging, and they've got interest from McDonalds and alot of other companies.  At that time, they were testing their products with these different companies.  The containers are solid and work, but definitely not something we were going to put MPIC's money in.  Perhaps, McDonalds testing has paid off and they've put in an order for the machines.  That would be a deal worth tens of millions long-term in North America alone!  Cheers!

[Guest Dazel]

 

 

A vertical play for sfk's recycled material? Fairfax is likely learning something from their business...paying tuition.

 

Dazel.

 

[Parsad]

Maybe, but not sure.  From what I remember, I think they were sugar and cellulose based.  Maybe the website has more details on the containers.  Cheers!

 

 

[nodnub]

Q: What type of fibres can you run?

A: Many types of virgin and recycled natural cellulose fibres including wood, bagasse, kenaf, hemp, palm, etc.

[Parsad]

From what I remember, their cost basis for each produced item was already on par or less than conventionally used packaging.  So in essence, if the companies they sell their machines to can utilize them with some scale, then they would not only be environmentally-friendly, but their existing costs for conventional packaging would decrease. 

 

One example was that their present cost for producing an environmentally-friendly lid for coffee cups (Starbucks, McDonalds, etc.) would be about five cents each.  Now if McDonalds or Starbucks could produce those lids in scale, by buying cellulose-based materials in quantity, then it could feasibly come down to 3 cents a lid or so.  I know they've sold two machines in the past, and they had raised about $20-30M, but not sure what Fairfax's long-term idea is.  Could be Prem was looking for a nice yield again, and whether it's $5M, $50M or $500M, that is money put to work.  Cheers!

[Rabbitisrich]

At $5M, YTM probably isn't a priority. Fairfax is likely forming a relationship with a management team Prem likes in a visionary industry, in my speculative opinion.

[Zorrofan]

Maybe Prem is looking at getting into merchant banking? Higher yield loans to smaller companies with an equity kicker?

 

cheers

Zorro

[omagh]

With the various financing deals (Megabloks, Brick, CanWest, Abitibi, etc) that have been negotiated and/or consumated, it could be part of a merchant banking thrust.  At $5M, it just strikes me as below their radar given the $18.6B portfolio and would demand some management/legal time to complete vs buying an undervalued after-market security.  It could be a favour/referral based on someone's relationship at FFH...a lot of business gets done based on relationships.  Obviously it was considered a low risk and I agree with Crip that we haven't seen the terms which could include conversion rights.  There may be a whole slew of well-managed small-caps out there with customers but no capital.  Definitely something to watch.

 

For fun, $5M on $18.6B is 0.027% portfolio weight.

 

-O

 

Maybe Prem is looking at getting into merchant banking? Higher yield loans to smaller companies with an equity kicker?

 

cheers

Zorro

[Guest longinvestor]

I dont have issues with any size deal. It may well be that Prem or management are not the ones making such deals. How about a "owner's manual" a-la Berkshire, except it is for internal use within FFH. Empower people to find deals and all management does is sign the deal after a review. After all, management was really busy in 2008 and big deals are arguably drying up. And there is loads of the dry powder. These are historic times of opportunity for FFH in terms of being able to deploy capital.

 

Hope they keep making many deals.

 

The issue maybe that readers of this board are spoilt by the letter "B" in _illion and they dont like their spreadsheets getting bigger.

;D

[txlaw]

Maybe Prem is looking at getting into merchant banking? Higher yield loans to smaller companies with an equity kicker?

 

cheers

Zorro

 

Boy, I hope so.

 

I was recently looking at companies that do mezzanine financing, and the CEO of one of the companies I was looking at noted in an interview that because of the turmoil in the credit markets over the past two years, there is a gap to be filled in terms of providing financing to small and medium size companies that have solid earnings potential and are well run.  This is because many of the companies that were lending in the mezzanine finance space were very leveraged and are now in the process of deleveraging.

 

I imagine that FFH would be a go-to lender for small companies in Canada that are looking for a trustworthy, deep pocketed partner to help them finance their growth.  Because the HWIC guys are such good business analysts, they would likely make a very good return over time on a portfolio of such hybrid loans.

 

Ultimately, I passed on all the companies I looked at, and I may never revisit the space if FFH starts deploying more cash into these sorts of investments.

[woodstove]

Here's a scary statistic ... in 2009 fiscal year ended Sept 30/09, the US Small Business Administration backed 44,211 loans from banks under its "7(a)" loan program, down 36 pct from FY 2008 loan count.  Loans totalled $9.3 billion in FY 2009, down 27 pct from FY 2008's $12.7 billion.

 

That's an average loan size of $210,000.  A lot smaller than Pakit's $5m, in a different range really, but an indication that the credit crunch monster is alive and rampaging up and down main street ... and devastating industrial parks too.  It is a movie from Japan, perhaps. Will the real Godzilla please stand up? Oh - but he looks just like ... ?!

 

CIT going down again, maybe this time for the count, is an indication too.  There is tremendous demand, and much of it is justified by sound business history, order book, and management.  If this were insurance, we would call it a really hard market, and recognize there are many good risks going uninsured.  Of course it is worse ... you actually can operate without insurance (until you trip over something) but credit is genuinely mandatory.

 

Selling insurance is retail - a policy with a premium of say $500,000/year is pretty large in the insurance biz.  There is no reason Fairfax or a related company cannot do very well.  The Pakit press release was from Pakit - there may be many others who didn't publicize as much.

 

If there is insufficient staffing to consider all the opportunities, perhaps an affiliation with some firm like Accord would be a good match.

[txlaw]

That's an average loan size of $210,000.  A lot smaller than Pakit's $5m, in a different range really, but an indication that the credit crunch monster is alive and rampaging up and down main street ... and devastating industrial parks too.  It is a movie from Japan, perhaps. Will the real Godzilla please stand up? Oh - but he looks just like ... ?!

 

Haha -- great post, woodstove.  ;D