Fairfax Financial to raise C$735 mln via equity issuance

[Phoenix01]

"That's how they make money! It's all about selling overvalued equity to the bagholders! They are so lousy investors, this is only reason they are still in business."

 

This will be a great post to review in 2 years, when FFH has doubled in BV!!!!

[giofranchi]

Cardboard - you beat me to it (nice to bump into you by the way - long time). But I already wrote my post so here it is anyway :)

 

what is this extra $500M going to do?

 

I share your concerns about dilution, but we have two transactions to be completed on the upcoming months - Eurolife (say $350 million) and ICICI Lombard ($230 million). It looks like Prem intends to fund these purchases at the Holding company level. So this $500 million will maintain holding company cash at current levels. I'd rather not see a repeat of past holdco liquidity issues should we get into a turbulent market. We are much better off to be issuing equity now, versus when these aquisitions were announced.

 

I suspect the fallback option may have been to have one of the subs close on the aquisitions. But after all the progress made over the years unstacking the capital structure, I think most would agree it is better to have these at the holding company level.

 

b.

 

I also think this explanation makes a lot of sense.

 

Thank you!

 

Gio

[giofranchi]

"That's how they make money! It's all about selling overvalued equity to the bagholders! They are so lousy investors, this is only reason they are still in business."

 

This will be a great post to review in 2 years, when FFH has doubled in BV!!!!

 

Though I don’t expect Fairfax to double BV in the next two years, I agree that judgement about their investing abilities is too harsh… Or was that simply an ironic remark? ;)

 

Cheers,

 

Gio

 

[DCG]

Well, it's tough to argue that they are good (or even average) investors at this point. I still hold a small amount of shares, but it's been close to a full decade now of dismal investing results. If they were a fund, they'd probably rank in the bottom 1%.

[cwericb]

If my net worth is $100,000 and I withdraw $10,000 from the bank and put it in my pocket, my net worth is still $100,000.

 

Fairfax sells X number of shares and retains the money earned within the company. The value of the company doesn’t change. So what is the logic behind a 6% drop in share price?

 

What am I missing?

 

[Buffett_Groupie]

Two more days of 6% drop each will create buying opportunities for those who missed out owning FFH before!  ;)

[giofranchi]

Well, it's tough to argue that they are good (or even average) investors at this point. I still hold a small amount of shares, but it's been close to a full decade now of dismal investing results. If they were a fund, they'd probably rank in the bottom 1%.

 

Mmm… We might very well be in an historical period in which a 10-year track record changes dramatically in just a few months. Of course I don’t know, but this is surely what Prem and others at Fairfax believe. If they are right, I’ll be glad I own a large position in Fairfax. If they are wrong, I also own other companies.

 

Cheers,

 

Gio

[ATLValue]

If my net worth is $100,000 and I withdraw $10,000 from the bank and put it in my pocket, my net worth is still $100,000.

 

Fairfax sells X number of shares and retains the money earned within the company. The value of the company doesn’t change. So what is the logic behind a 6% drop in share price?

 

What am I missing?

 

 

If your logic was sound than why doesn't every single company just issue shares all the time? Companies don't do this because for an issuance to be a neutral event you're assuming that Fairfax can earn an ROE that it is consistent with previous results (even though it has just increased equity)...

 

More importantly IMO, this action continues to reduce the voting power of those existing shareholders who don't participate in the offering

[Jurgis]

If my net worth is $100,000 and I withdraw $10,000 from the bank and put it in my pocket, my net worth is still $100,000.

 

Fairfax sells X number of shares and retains the money earned within the company. The value of the company doesn’t change. So what is the logic behind a 6% drop in share price?

 

What am I missing?

 

It also communicates to the market that the company believes its shares to be overvalued at the price at which they are selling them. Otherwise, why sell? Yeah, sure there are some somewhat valid reasons given in this thread, but these reasons also smack of rationalization. It's not as if they just got an incredible deal and had to come up with cash at moment's notice. They knew for a while that they will need cash and they decided that the best way is to sell equity - and since they have other options, this seems to mean that they don't value their equity or consider it overvalued.

 

Also, if some people are getting equity for $735 in private deal, then why should other people be paying more for it on market?

[cwericb]

ATL & Jurgis - Thank you for that.

 

ATL - Yes I now get the dilution point as it effects ROE, makes sense.

 

Jurgis - Bit of brain fade there, I overlooked that they were in effect setting their own price on the shares at $735/$536.

 

This is why I read this board every day. Much appreciate the education.

 

[Uccmal]

"What is this extra $500M going to do?"

 

This is how Fairfax has obtained its stellar book value growth results from the late 80's to the late 90's or by issuing overvalued stock. It was not just with the compounding of investment results or underwriting. Size also matters now but, when you look at per share book value growth over the last 15 years by just cherry picking the best periods, you see a much lower rate. This is due IMO to a lot of stock being issued at book or just above vs 3 times during the 90's.

 

The question is: are they going to redeploy this for more value than what they are giving? Same question that Buffett is asking himself when he is reluctantly issuing stock to make an acquisition.

 

I personally think that doing it now makes sense since the stock is popular vs the market. At the same time, piling cash for piling cash and if they are to re-deploy in so-so investments, then it is not a wise decision.

 

Cardboard

 

Yes.  They are masters at financial engineering.  Not saying it will happen this time but they raised 1 billion at 500/share in 1998 or 1999, just ahead of the unforeseen asbestos debacle at TIG and C&F. 

 

I expect its a little bit of alot.  There is institutional demand for Fairfax shares given it trades so little.  How else could you get a couple of hundred million dollars worth.  Speaks volumes as to how the company is respected in Canada, regardless of the stock investment results. 

 

[tengen]

It appears the underwrites have managed to sell only 50% of the shares from the deal. http://www.theglobeandmail.com/report-on-business/streetwise/bay-street-at-risk-of-million-dollar-losses-on-fairfax-financing/article29004098/ (paywall)

 

 

[Uccmal]

It appears the underwrites have managed to sell only 50% of the shares from the deal. http://www.theglobeandmail.com/report-on-business/streetwise/bay-street-at-risk-of-million-dollar-losses-on-fairfax-financing/article29004098/ (paywall)

 

 

 

It seems I really read this one badly. 

[Hoodlum]

Underwriter shares are now selling at $687.50 with all remaining shares expected to be sold last night.  But it looks like they still made some money on the deal.

 

https://webcache.googleusercontent.com/search?q=cache:g3Iv93XNaJcJ:https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20160308/RBSWFAIRFAX+&cd=5&hl=en&ct=clnk&gl=ca

 

After equity markets closed on Monday, bankers cut the offer price on the portion of a recent $735-million financing deal that did not entirely sell out to $687.50 a share. That is about 6.5 per cent below the original price of $735 a share, which was unveiled on Feb. 24.

 

Fairfax shares closed at $700.40 on Monday, about 1.8 per cent above the revised offer price. Underwriters were expected to aim to clear out any remaining shares overnight Monday.