Fairfax stock positions

[Tommm50]

3 hours ago, Xerxes said:

@Viking

 

if you have any take on TheHub it would interesting. They are an insurance broker.

https://www.investmentexecutive.com/news/industry-news/hub-intl-to-sell-subsidiaries-to-fairfax/

 

@dealraker brought it up couple of times. 

 

Hub was once partially owned by Fairfax. Their investment in Hub about 25 years ago gave them the capital to grow.

[dealraker]

45 minutes ago, Tommm50 said:

 

Hub was once partially owned by Fairfax. Their investment in Hub about 25 years ago gave them the capital to grow.

Hub is a fabulous business that for a short while we could own directly.

[Viking]

Pet Insurance – June 2022 – Capitalizing on a Mania in Cats and Dogs

 

Below is instalment 4 in my review of asset sales at Fairfax from the past 7 or 8 years. My goal is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

----------

Pets have been a rapidly growing business segment in North America for the past 30 years. Covid took this growth to a new, higher level. Especially the services part of the business (veterinary services, pet insurance, supplies etc). On the service side, the business model was shifting to a ‘one stop shop’ model for pet owners – get all your pet needs taken care by one provider. The big players in the industry (like JAB Holding) were in a race to consolidate (to get scale) and the price for good assets went through the roof – reaching mania/bubble proportions. 

 

Fairfax had no desire to expand into other aspects of the pet business (vet care or supplies). Therefore, consolidation was a significant risk to its pet insurance business.

----------

“While the pet insurance market was valued at US$10.1 billion in 2023, a report from Allied Market Research revealed that it is projected to reach US$38.3 billion by 2033, growing at a compound annual growth rate (CAGR) of 14.5% from 2024 to 2033.”

 

https://www.insurancebusinessmag.com/ca/news/breaking-news/doubledigit-growth-projected-for-pet-insurance-market-489864.aspx#:~:text=While the pet insurance market,14.5% from 2024 to 2033.

----------

What do you do when someone offers you an obscene price for a business?

 

In June 2022, Fairfax announced it had sold its pet insurance business (which resided in Crum & Forster) to JAB Holding for $1.4 billion. With the sale, Fairfax realized a gain of $1.2 billion pre-tax and $934 million after-tax.

 

The reaction from investors? Disbelief. Even investors who were knowledgeable about Fairfax didn’t know Crum & Forster actually owned a pet insurance business – it was so small. 

 

Fairfax’s stock actually sold off in the months after they announced the sale. It was like Mr. Market refused to believe that the announced deal was real. It was a little surreal. Of course, Q3-2022 was a wonderful time to buy Fairfax’s stock (it traded as low as $450/share). 

 

The sale of the pet insurance business has resulted in one of Fairfax’s great investment gains ever. The business was worth much more to JAB than it was to Fairfax. Selling it at a premium valuation was the right decision. This is a great example of Fairfax being open minded and opportunistic with its capital allocation framework. 

 

The fact they were able to execute the deal in the middle of a bear market (in both stocks and bonds) was also significant – this provided the opportunity to also reinvest the significant proceeds into other assets that were selling at steep discounts and/or support the growth of the insurance subsidiaries in the hard market. 

 

This is a great example of the significant benefits that can come from active management - sell an asset at a bubble high price and flip the proceeds into other assets selling at bear market low prices. 

 

Test driving a new capital allocator

 

JAB Holdings has a long and successful track record. As part of the deal to sell its pet insurance business, Fairfax agreed to invest $200 million with JAB – a relatively small sum for Fairfax. Fairfax has a long history of doing this. If they like what they see they will likely expand their relationship with JAB in the future - give them more money to invest. This is a great way to find/establish relationships with the best global capital allocators. 

 

A Short history of the pet insurance business at Fairfax

 

In 2013, Crum and Forster purchased pet insurer The Hartville Group (based in US) for $34 million. In 2014, Fairfax purchased Pethealth (based in Canada) for $89 million. In August of 2020, Pethealth was folded into Crum and Forster, creating the 4th largest pet insurance business. 

• https://www.cfins.com/pethealth-to-combine-with-crum-will-create-fourth-largest-pet-insurance-enti/

 —————

What was the size of the pet insurance business? 

 

Based on Prem’s answer to a question on Fairfax’s Q2, 2022 conference call, the annual revenue was $350 million. This was a very small business – when compared to the price it sold for.

 

Mark Dwelle (RBC): “…Another quick numbers question. If I may, on the sale of the Pet Insurance business. Can you give us a sense of kind of a range of about how much revenue you'll be, I guess, selling when that happens? And again, it's just I'm trying to understand as we get into next year, that's revenue that will go away from Crum and to be able to keep track of the run rate there.”

 

Prem Watsa: “…But forex must be $350 million, and it's a Pet Insurance and it's in the United States, mainly, but Canada and then the UK, some, and obviously, we like the price. But JAB is they get a lot of good things from Crum, including data on 30 million pets, and ASPCA support for 16 years. And so we think it's a win-win. We think JAB is going to do extremely well. They're focused on this segment. Not only Pet Insurance, but supplies and pet care hospitals. And we just think they'll -- this company has done very well we've seen what they've done in coffee. And we think over time, they're going to do very well. Fairfax’s Q2 Earnings Conference Call

 —————

Comments from Prem on the sale of the pet insurance business from Fairfax’s 2022AR.

 

“Late in 2021, Gary McGeddy, who runs the Accident and Health division at Crum & Forster, called Andy to suggest that we sell our pet insurance business as there was much consolidation taking place in the pet industry (insurance, food, hospitals, etc.) and we were perhaps not well placed to benefit from it. After much discussion, Morgan Stanley introduced us to Olivier Goudet, CEO of JAB Holdings. JAB, under Chairman Peter Harf and CEO Olivier Goudet, has a terrific record of consolidating many industries, including coffee and restaurants, so we decided to sell our pet insurance business to them for $1.4 billion, resulting in a net pre-tax profit of $1.2 billion. As JAB has a very impressive record, we decided to invest $200 million in their Fund 5 (which focuses on the pet industry), and also take back a $250 million note with an interest rate of 6% as part of the sale proceeds. We think JAB will be a great owner of our pet insurance business and wish them and all our employees much success.” Fairfax 2022AR

 

More details on the sale of the pet insurance business from Fairfax’s 2022AR. 

 

“On October 31, 2022 the company sold its interests in the Crum & Forster Pet Insurance Group and Pethealth, including all of their worldwide operations, to Independence Pet Group and certain of its affiliates, which are majority owned by JAB Holding Company (“JAB”), for $1.4 billion, paid as $1.15 billion in cash and $250.0 in debentures. The company also committed to invest $200.0 in JCP V, a JAB consumer fund. As a result of the sale, the company recorded a pre-tax gain of $1,213.2, inclusive of foreign currency translation losses that were reclassified from accumulated other comprehensive income (loss) to the consolidated statement of earnings, and selling expenses, in gain on sale and consolidation of insurance subsidiaries in the consolidated statement of earnings (an after-tax gain of $933.9), and deconsolidated assets and liabilities with carrying values of $149.1 and $32.0.” Fairfax’s 2022AR

 —————

Details of Fairfax’s Acquisition of Hartville Group and Pethealth

 

Media release of Fairfax’s acquisition of Hartville in 2013.

 

TORONTO, ONTARIO--(Marketwired - May 15, 2013) - Fairfax Financial Holdings Limited (TSX:FFH) announces the signing of a merger agreement with Hartville Group, Inc., of Canton, Ohio, pursuant to which Hartville will become wholly-owned by Crum & Forster's United States Fire Insurance Company. The transaction, which is subject to customary conditions including regulatory approval, is expected to close early in the third quarter of 2013.

 

Hartville, one of the oldest and largest pet insurance providers in the U.S., provides pet insurance plans under several brand names, including Hartville Pet Insurance and the Petshealth Care Plan. Hartville also is the exclusive strategic partner for pet insurance with The American Society for the Prevention of Cruelty to Animals®.

 

"We are very excited to have Hartville join the Fairfax group," said Prem Watsa, Chairman and CEO of Fairfax. "This acquisition represents a new phase in our existing relationship with Hartville through Fairmont Specialty. As a result of the vertical integration created by this merger, Hartville's pet insurance programs will be uniquely positioned in the industry to generate sustainable growth."

 

Media release of Fairfax’s acquisition of Pethealth in 2014.

 

TORONTO, ONTARIO, August 29, 2014 – Fairfax Financial Holdings Limited (TSX: FFH) and Pethealth Inc. (TSX: PTZ) announced today that they have entered into an arrangement agreement under which Fairfax will acquire all of the outstanding common shares of Pethealth for $2.79 per share in cash. In addition, under the terms of the transaction, Fairfax will acquire all of the outstanding preferred shares of Pethealth for a purchase price of $2.79 per share in cash, plus any dividends accrued but unpaid up to, but excluding, the day of closing.

 

The purchase price represents a premium of approximately 26% to the closing price of Pethealth’s common shares on the TSX on August 29, 2014 and a premium of approximately 69% to the closing price of Pethealth’s common shares on the TSX on August 15, 2014.  The purchase price also represents a premium of approximately 69% to Pethealth’s volume weighted average share price for the twenty trading days ending on August 15, 2014 and a premium of 36% to the all-time high price of Pethealth’s common shares prior to such date.

 

Total cash consideration of approximately $100 million will be paid for Pethealth’s common and preferred shares and options.  The transaction, which will be completed by way of a plan of arrangement (the “Arrangement”), is subject to certain customary closing conditions, and is expected to close in the fourth quarter of 2014.

Edited July 10, 2024 by Viking

[A_Hamilton]

19 hours ago, dealraker said:

Hub is a fabulous business that for a short while we could own directly.

From what I've seen of Hub's financials (they have some privately traded debt and if you own it you can get access) FFH shareholders can only wish Prem had decided to be an insurance broker as opposed to a multiline insurer.

[Viking]

Summary of Fairfax's P/C Insurance Asset Sales

 

Over the past week we have reviewed 4 different asset sales that Fairfax made in its P/C insurance business from 2017 to 2023. In my summary below I have included a 5th sale - Ambridge Group. It is smaller than the other sales, but still of a meaningful size.

 

The total proceeds from the 5 sales made from 2017 to 2023 was about $6.4 billion. The pre-tax gain was more than $3.8 billion or an average or about $540 million per year - for each of the past 7 years. WOW!

 

 

What else have we learned?

 

When looked at the 5 sales in aggregate:

 

1.) Delivered an outstanding return for Fairfax and its shareholders.

- First Capital, pet insurance and Ambridge were all sold at premium valuations.

2.) Improved the quality of the company

- Strategic pivot in India (from ICICI Lombard to Digit, where Fairfax now has a control position).

- sold RiverStone Europe (run-off), one of their lower quality P/C insurance businesses.

 

Both objectives of good capital allocation were achieved.

 

But the story gets even better.

 

Did the significant sales (proceeds were $6.4 billion) over the past 7 years materially shrink the size of Fairfax’s P/C insurance business? It makes sense that it would have. But it did not. In fact the opposite happened.

 

It appears Fairfax was able to use the significant proceeds from the asset sales to accelerate their growth - by acquisition and then in the hard market. Fairfax grew net premiums written from $8.1 billion in 2016 to $22.9 billion in 2023, growth of 183% or a CAGR of 16%.

 

We included the per share numbers. Importantly, the growth in NPW over the 7 years period (2016 to 2023) did not happen as a result of the issuance of new shares.

 

Fairfax was able to have its cake (significantly grow NPW)  and eat it too (monetize assets at premium valuations). Brilliantly executed.

 

 

Value investing

 

When most investors think of value investing, they think exclusively in terms of equities.

 

The value investing framework is infused into all parts of Fairfax - investments (equities and fixed income) and P/C insurance. 

 

The benefits of active management

 

Over the past 7 years, Fairfax has put on a clinic on the significant benefits of active management. The Fairfax team has been best-in-class among P/C insurers with their overall execution over the past 7 years. And it is not close.

 

Most investors have not figured this out yet. Despite its monster run the past three years, Fairfax’s stock continues to trade at a big discount to peers. Investors in Fairfax are getting best-in-class management at a significant discount.

 

What about the investment management business?

 

Fairfax has two businesses: P/C insurance and investment management. We have completed our review of asset sales in the P/C insurance business. Next we will review asset sales from the past 7 years in Fairfax’s investment management business. What else can we learn? Much more to come over the next week. Our story will read like Charles Dickens classic 'A Tale of Two Cities.' 

Edited July 11, 2024 by Viking

[Viking]

Bank of Ireland – 2014 to 2017 – Value Investing 101

 

Over the next week my plan is to continue reviewing a number of Fairfax's asset sales  - this time from the investment management side of the business. We will start with Bank of Ireland. We will also review the following 'sales': Equity hedges/shorts (2016/2020), Fairfax Africa (2020), Corporate bonds (2021), Resolute Forest Products (2022), Blackberry Debentures (2020/2024).  

 

What do you see with most of these sales? Fairfax fixing their biggest problems. But I am getting ahead of myself. 

 

My goal with reviewing the sales in detail is to provide some additional insights - that should provide a little more colour into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts / insights.

----------

Value investing is at the core of how Fairfax/Hamblin Watsa manage their investments. Fairfax’s investment in Bank of Ireland provides a great ‘how-to-do’ example of value investing.  

 

Ben Graham, the father of value investing, taught that stocks should be purchased when they trade at a large discount to their intrinsic value. Buying stocks with a large ‘margin of safety’ provides an investor with downside protection (should they be wrong) and significant upside potential (should they be right). Stocks trading at a large margin of safety are usually deeply out of favour. 

 

And Graham also taught that stocks should be sold when they are ‘dear’ or trade at a premium to their intrinsic value. Rinse and repeat.

—————

One of Fairfax’s great investments made in the decade of the 2010s was Bank of Ireland.

 

In October 2011, Fairfax invested €280 million ($387) for an 8.7% stake in Bank of Ireland. Fairfax exited their position in 4 sales made in 2014, 2015, 2016 and 2017.

 

How did they do?

 

My estimate is Fairfax realized a total gain on this investment of about $800 million, or about 200%. That is an outstanding return over a 6-year period (with 1/3 of the position exited in year 3 and another 1/3 exited in year 4).

 

My final number (gain) is an estimate. Fairfax provided us with an update in March of 2017 (the 2016AR). My guess is they sold their remaining position in 2017 at close to where Eurobank was marked when they provided their update. It is interesting that Fairfax never provided a final summary for this investment in the 2017AR. 

 

Value Investing 101

 

Maximum pessimism is often a great time to buy out of favour and undervalued stocks. Buying an Irish bank shortly after the biggest real estate bubble in history popped was a deeply contrarian thing to do. In 2011, when Fairfax made its investment, Bank of Ireland was trading at a significant discount to book value.

 

Concentration

 

When they find the right opportunity, Fairfax is not afraid to concentrate their position. At the time, Bank of Ireland was a large investment for Fairfax (common shareholders’ equity was $7.4 billion at Dec 31, 2011). 

 

Bottom line, Bank of Ireland is a great example of value investing done well by the team at Fairfax.

 

Some additional thoughts: the power of relationships/connections and deal flow

• The idea to invest in Bank of Ireland came from Bill McMorrow at Kennedy Wilson.
• The initial investment was made with big partners: Wilbur Ross, Mark Denning (Capital Research) and Will Danoff (Fidelity).
• After stepping down as CEO of Bank of Ireland in 2016, Ritchie Boucher worked as an advisor to Fairfax, Eurobank and Kennedy Wilson. 

—————

Comments from Prem in Fairfax’s 2011 Annual Report

 

“And there is more to the McMorrow story. While Bill was negotiating the purchase of some real estate loans from Bank of Ireland, he was really impressed with Ritchie Boucher, the Bank’s CEO. Bill introduced Ritchie to us, and we too were very impressed. With the help of our friends at Canadian Western Bank, one of the best banks in Canada, we thoroughly reviewed the opportunity and then quickly formed an investment group with Wilbur Ross, Mark Denning from Capital Research and Will Danoff at Fidelity, which purchased $1.6 billion of Bank of Ireland shares on a rights issue (Fairfax’s share was $387 million). This issue reduced the Irish government’s stake in Bank of Ireland from 36% to 15%. In spite of having hundreds of years of history and the strongest credit culture in the country, Bank of Ireland barely survived the real estate crisis in Ireland, where both house prices and commercial real estate prices dropped by approximately 50% from their highs. It is the only major Irish bank to survive that crisis – the rest of the Irish banking industry is now government owned. The rights issue plus other capital generated by Bank of Ireland has resulted in the Bank having capital to withstand an even further drop in Irish commercial real estate prices and Irish house prices. Bank of Ireland is very strongly capitalized, led by an excellent banker, Ritchie Boucher, and its shares were available at a significant discount to book value. We look forward to being long term shareholders of Bank of Ireland and hope to make more investments in that country as it continues under strong leadership diligently remedying its economic problems. Ireland by the way is a leading location of choice for foreign direct investment because of its talent, tax regime and technology capabilities together with its unique pro-business environment. Our nSpire Re subsidiary has been in Dublin since 1990 and was a great help in making our decision to invest in Bank of Ireland.” Prem Watsa - Fairfax 2011AR

 

Comments from Prem in Fairfax’s 2013 Annual Report

 

“It is amazing to witness the transformation that has taken place in Ireland. In 2011, when we made our investment in the Bank of Ireland at €0.10 per share, 10-year Government of Ireland rates were 12%, housing prices had come down 40% and sentiment was bleak. Since then, 10-year Government of Ireland rates have dropped to 3.1%, house prices have bottomed out and have begun to rise, Ireland has access to the bond markets again and capital is flooding into Ireland! Under Richie Boucher’s strong leadership, the Bank of Ireland continues to do well as it recently refinanced its government-owned €1.8 billion preferred by doing a €580 million equity issue at €0.26 per share and selling the rest into the marketplace. Also, it did a €750 million unsecured five-year bond financing at 3.34%! The Irish Government has now had all its loans to the Bank of Ireland paid back and its 13.95% ownership of the common stock is in a sizeable profit position. We thank the Irish Government for its exceptional support of the Bank of Ireland and look forward to the Bank’s continued progress under Richie’s leadership. 

 

“As this letter went to print, because of the significant appreciation in our position in the Bank of Ireland, we rebalanced that position by selling a third of it at approximately €0.33 per share. The Bank of Ireland has been one of our most successful investments because of the outstanding performance of Richie and his management team. We continue to be strong supporters of Richie and the Bank of Ireland.” Fairfax 2013AR

 

Comments from Prem in Fairfax’s 2016 Annual Report

 

“Richie Boucher at the Bank of Ireland had another outstanding year in 2016 as the Bank earned €793 million. In 2016, the Bank continued to improve: non-performing loans fell by €4.1 billion (34%); pre-tax profit exceeded €1 billion for the second straight year; the pension deficit narrowed to €0.45 billion (from €1.19 billion); the CET1 ratio improved from 12.9% to 14.2%; and the Bank was number one or number two in every major product line in Ireland. Bank of Ireland is on firm footing and is poised to benefit from Ireland’s recovering economy – estimated GDP growth in 2016 was 5.2% and unemployment is projected to fall to 6.8% in 2017.”

 

“We purchased 2.8 billion shares of Bank of Ireland stock in late 2011 at €0.10 per share. As of today, we have sold 85% of our position at €0.32 per share, for a total realized and unrealized gain of approximately $806 million. Richie has produced outstanding results for us and we are fortunate that he consented to join the Eurobank Board. Bank of Ireland is expected to announce its first dividend in the last eight years in 2017!” Fairfax 2016AR

Edited July 12, 2024 by Viking

[glider3834]

https://cyprus-mail.com/2024/07/12/hellenic-bank-board-rejects-eurobanks-acquisition-offer-as-unfair/

[nwoodman]

5 hours ago, glider3834 said:

https://cyprus-mail.com/2024/07/12/hellenic-bank-board-rejects-eurobanks-acquisition-offer-as-unfair/

So does this get delayed now with Eurobank backstopping their shares?  All seems a bit cute.  I guess you work with the board and raise the offer price or sit tight for 6 months and see where the share price is at.

 

EDIT: or they all get left hanging and delisted as a result  of  less than 25% in the hands of the public.

 

“Additionally, the board highlighted the minimum dispersal criteria applicable in the case of the main market where the company is listed, as per Regulation 379/2014 of the Cyprus Securities and Exchange Commission, which requires “at least 25 per cent of the shares proposed for listing to be held by the wider public and by at least 300 natural or legal persons”.

 

Difficult to tell but if Logicom does have a minor holding then between the two entities they may have 25%
 

“Based on the information provided in the search results, there is no indication that Logicom has a direct stake in Eurobank. The key relevant details are:

1. Logicom Group is the largest shareholder of Demetra Holdings Plc, owning 29.62% of its shares. Demetra Holdings in turn owns 21.33% of Hellenic Bank's shares, making it the second largest shareholder after Eurobank.

2. Some sources mention that Logicom, along with Demetra Holdings, collectively hold around 25% of Hellenic Bank's shares. This suggests Logicom may have a small direct stake of around 3-4% in Hellenic Bank in addition to its indirect ownership through Demetra.”

 

This would leave only 20% in the “wider public”. In summary:

 

“The board highlighted that if Eurobank's ownership increases substantially, Hellenic Bank may not meet the Cyprus Stock Exchange's minimum free float requirement of 25% of shares being held by at least 300 minority shareholders. This could lead to the bank's shares being suspended from trading or delisted entirely”

With 55% of the shareholding Eurobank can pass ordinary resolutions.  They need another 20% and they can pass special and extraordinary resolutions I.e. do whatever they want.  Here’s hoping that the threat of a delisting and the subsequent illiquidity flushes out that 20%.

Edited July 13, 2024 by nwoodman

[Viking]

Resolute Forest Products – July 2022 – Being Opportunistic and Exiting a Mistake

 

Below is the next instalment in my review of asset sales at Fairfax from the past 7 years. What do we see? Fairfax fixing their biggest problems. But I am getting ahead of myself. My goal is to provide some additional insight into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts.

—————

In July 2022, Fairfax sold Resolute Forest Products (RFP) to Paper Excellence Group (a global diversified manufacturer of pulp and specialty, printing, writing and packaging papers) for total consideration of $665.6 million ($20.50/share).

 

Fairfax accomplished 3 things with this sale:

• Got a great price for the asset - they sold it at the peak of the bull market in lumber.
• Were able to shift the proceeds/capital into much better investments/opportunities.
• Exited a big mistake - got one of their worst ever equity purchases off their books.

—————

RFP was sold at $20.50/share. For perspective, back in March 2020, RFP shares traded as low as $1.20/share. Fairfax owned 30.5 million shares, so RFP’s market cap in March of 2020 was a total of $37 million. Two short years later Fairfax sold it for total proceeds of $665.6 million. Wow! Pre-pandemic, RFP’s shares traded at an average of about $6/share. In the historic lumber bull market of 2021, RFP’s shares traded at an average of about $12/share. Bottom line, at $20.50, Fairfax got an outstanding price for this company.

 

But price is just the beginning of why this was a great move for Fairfax and its shareholders. RFP also owned some pretty crappy businesses: newsprint, paper and tissue. And the ‘good’ business, lumber, was/is getting killed by higher interest rates. I think RFP also had a large pension liability on its books. Bottom line, Fairfax sold what was overall (still) a very challenged business. 

 

The timing of the sale - in the middle of bear markets in both bonds and stocks - was also significant. It gave Fairfax the opportunity to redeploy the proceeds into opportunities with much better long term prospects. This sale improved the quality/earnings potential of Fairfax’s equity portfolio.

 

There is also the psychological benefit of Fairfax selling RFP. This shouldn’t matter - but it does. AbitibiBowater/RFP was one of Fairfax’s worst-ever equity investments.  I am guessing there are lots of long-term shareholders of Fairfax who are very happy that Fairfax sold RFP. It is a great example of another one of the ghosts of ‘old Fairfax’ being laid to rest by the current team at ‘new Fairfax’.

 

 

—————

Old Fairfax - A short history of a terrible long term investment

 

In 2008, Fairfax made an initial investment of $347 million in RFP (called AbitibiBowater back then).

 

What did they get?

 

Fairfax got a company - AbitibiBowater - that was:

1. Poorly managed.
2. Had a very stressed balance sheet (massive amount of debt).
3. Had a terrible core business/prospects (newsprint and paper).
4. Was statistically cheap - traded well below book value.

I like to call the investment framework used by Fairfax at the time as ‘old Fairfax.’ It appeared to be some kind of deep value investing - focussed pretty much exclusively on finding statistically cheap companies (trading at big discounts to book value).

 

What could possible go wrong?

 

In 2010 AbitibiBowater filed for creditor protection.

 

What did Fairfax do?

 

They then decided they were a turnaround shop - and they pumped in even more money and time.

 

By 2012, Fairfax had ‘invested’ a total of $791 million in RFP (AbitibiBowater was renamed RFP in 2011).

 

Also buried in RFP’s sad history was the smelly (putting it politely) take-out in 2012 of Fibrek (SFK Pulp).

 

Fairfax’s carrying value for RFP bottomed out at $134 million in 2020.

 

To be fair, the management team at RFP had been doing a better job in recent years. The purchase of the three lumber mills in the US south in 2020 (at the bottom of the lumber cycle) was perfectly timed. Bottom line, the management team got RFP to a position where it was sold at a very high price.

 

RFP is a great example of what Fairfax’s value investing framework USED TO LOOK LIKE. Not surprisingly, investments like RFP caused the returns on Fairfax’s investment portfolio to lag for much of the decade from 2010 to 2020. And this caused Fairfax's stock price to underperform over the same time period.

 

 

—————

Why was Abitibi-Bowater / RFP one of Fairfax’s worst ever investments?

 

Opportunity cost.

 

From 2008 to 2012, Fairfax invested a total of $791 million in RFP/AbitibiBowater. 10 years later (2022), after dividends received and total proceeds of $665.6 from the sale, Fairfax was still underwater on its original investment.

 

The real ‘cost’ of Fairfax’s investment in RFP was the opportunity cost. Over a 10 year period a $791 million investment should have returned more than $1 billion to Fairfax and its shareholders (if we assume a very low return of only 8.5% per year).

—————

Was the problem with this investment that value investing in general was not working?

 

This reason/excuse drives me crazy.

 

Value investing has always worked. And it will likely always work in the future.

 

But bad investing (usually) does not work - especially if you keep doing it. You might get lucky for a while. But eventually reality sets in.

 

Buying a company that:

1. Is poorly managed.
2. Is highly leveraged.
3. Has poor prospects.

And then doubling down (money and time) when things go from bad to worse?

 

That is not value investing. That is bad investing. Sorry there is no way to put lipstick on this pig. 

 

What AbitibiBowater/RFP investment (fiasco) illustrates is Fairfax had a problem with its value investing framework. It was a problem because the terrible investments (back in the 2014-2017 period) did not just include AbitibiBowater/RFP. It was also BlackBerry. And Eurobank (the initial investment). And Sandridge Energy. And Exco Resources. And Fairfax Africa. And APR Energy. And Farmers Edge. Fairfax had too many dogs in its equity portfolio all at the same time.

 

To 'discover' the source of the problem - well, Fairfax needed to take a good hard look in the mirror. And that is what they did. 

 

But there is a silver lining to this story - The Emergence of New Fairfax

 

From 2016 to 2017 it looks to me like Fairfax had its ‘come to Jesus’ moment with how it was managing its investment portfolio - Fairfax likely got tired of the investment portfolio’s constant bleeding of money (hundreds of millions every single year). And the fact it was stuffed with a bunch of shitty companies - so its prospects were bleak.

 

In his shareholder letter in the 2018AR, Prem admitted that RFP had been ‘a very poor investment.’ It seems Fairfax’s was ready to embark on a new course.

 

What did they do? Here is what I think happened (around 2018):

• Overhauled their value investing framework. Put a premium on:
  • Partnering with quality management/founders.
  • Strong balance sheet.
  • Solid prospects.
• Got to work dealing with all the shitty holdings.
• New money would go to the top opportunities/performers - not to the shitty companies in need of more cash to keep the lights on (like had been happening). Fairfax would no longer be a piggy bank for poorly run equity holdings.

Look at Fairfax’s new equity purchases beginning in 2018. They have been stellar (as a group). And over the past 6 years they also have been able to clean up most of the shitty holdings. Selling RFP for $665.5 million in 2022 was a very important part of this renewal process. We will review a few other of the larger sales in future posts.

 

Over the past 7 years we have witnessed a remarkable turnaround in Fairfax’s equity portfolio - it has improved markedly in terms of overall quality/earnings power. Fairfax's equity portfolio of today (2024) does not resemble the equity portfolio that existed in 2017. And in recent years, we have also started to see the impact of the turnaround in Fairfax’s record reported results. Instead of bleeding money every year, Fairfax’s equity holdings are now delivering solid returns. And the good news story is just getting started.

—————

The Genesis of Fairfax’s initial investment in AbitibiBowater in 2008

 

The 2 newspaper articles linked below provide some additional information on Fairfax’s initial investment in AbitibiBowater in 2008.

 

From The Globe & Mail (April 2, 2008)

 

"It may be tiny by global mergers and acquisitions standards, but the life-saving $350-million (U.S.) investment by Fairfax Financial Holdings Ltd. in troubled AbitibiBowater Inc. is giving deal makers lots to chew on.

 

"For one thing, Fairfax's convertible debenture investment was crafted in three short days over the Easter weekend after Abitibi called late Thursday night to say the plan was the best offer it had on the table after weeks of negotiating with other unidentified suitors.

 

"Within two days we went from zero to a fully drafted deal," said Fairfax's chief legal officer Paul Rivett, who credits his former Shearman & Sterling LLP Toronto partners Chris Cummings and counsel Stephen Centa with closing the deal so quickly. Assisting the group was Torys LLP partner David Chaikof."

• https://www.theglobeandmail.com/report-on-business/fairfax-abitibi-pact-sends-a-message-of-caution/article17983261/

From The Globe and Mail (March 14, 2008)  - describing the initial transaction:

 

Fairfax gambles on better times at AbitibiBowater

• https://www.theglobeandmail.com/report-on-business/fairfax-gambles-on-better-times-at-abitibibowater/article20383961/

 

It appears Paul Rivette was front and center with the AbitibiBowater investment for Fairfax. Paul ‘retired’ from Fairfax in February of 2020. Today Paul is Executive Chair and Director of Greenfirst Forest Products - a forestry company that closely resembles an ‘old Fairfax’ type of investment.

 

—————

Comments from Prem about Resolute Forest Products from Fairfax’s 2022AR.

 

“In July 2022, Resolute agreed to be purchased by the Paper Excellence Group. The cash portion of the deal, $20.50 per share, represented a 64% premium to Resolute’s pre-announcement price. Resolute’s shareholders will also receive contingent value rights tied to potential duty deposit refunds of up to $500 million. Fairfax, which held 40% of Resolute, agreed to vote in favour of the deal.”

 

“Paper Excellence’s acquisition of Resolute closed on March 1, 2023. Our journey with Resolute began in a significant way in April 2008 with the purchase of approximately $350 million of an 8% AbitibiBowater convertible bond (at $10 per share) – almost 14 years ago! We added to our investment in Resolute in common shares and bonds over the years with a net investment after dividends of $715 million. With the interest income received on our bonds, sale proceeds of $622 million and with a little bit of good fortune on our remaining holdings in the contingent value rights, we may end up breaking even over this long holding period – although clearly a very poor long-term return. A big thank you to Remi Lalonde, Duncan Davies and Brad Martin for leading a strong turnaround in Resolute’s results over the last few years.” Prem Watsa – Fairfax 2022AR

 

Comments from Prem about Resolute Forest Products from Fairfax’s 2018AR.

 

“We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!” Prem Watsa – Fairfax 2018AR

—————

For long term shareholders, here is a trip down memory lane for RFP. A link to historical milestones at the company from 2008 to present…

• https://www.resolutefp.com/About_Us/Our_History/

Edited July 14, 2024 by Viking

[UK]

11 hours ago, Viking said:

Was the problem with this investment that value investing in general was not working?

 

This reason/excuse drives me crazy.

 

Value investing has always worked. And it will likely always work in the future.

 

But bad investing (usually) does not work - especially if you keep doing it. You might get lucky for a while. But eventually reality sets in.

 

Buying a company that:

1. Is poorly managed.
2. Is highly leveraged.
3. Has poor prospects.

And then doubling down (money and time) when things go from bad to worse?

 

That is not value investing. That is bad investing. Sorry there is no way to put lipstick on this pig. 

 

Thanks for all these posts Viking! They contain some real gems:)

[Hoodlum]

@Viking  It looks like you will have another Investment exit to do a writeup on.

 

https://www.businesswire.com/news/home/20240715698371/en/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share

 

Quote

HAMILTON, Ontario--(BUSINESS WIRE)--Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Arrangement Agreement”) with Cleveland-Cliffs Inc. (NYSE: CLF) (“Cliffs”), pursuant to which Cliffs has agreed to acquire all of the issued and outstanding common shares of Stelco (the “Transaction”) at a price of C$70.00 per share (the “Consideration”), consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock (equivalent to C$10.00 based on the closing price of Cliffs common stock on July 12, 2024) per Stelco share.

 

The total enterprise value pursuant to the Transaction is approximately C$3.4 billion. The Consideration represents an 87% premium to Stelco’s closing share price of C$37.36 on July 12, 2024, and a 37% premium to Stelco’s 52-week high.

 

Fairfax Financial Holdings, an affiliate of Lindsay Goldberg LLC, Alan Kestenbaum, and each of the other directors and executive officers of Stelco collectively holding approximately 45% of the current outstanding Stelco common shares have entered into support agreements to vote in favour of the Transaction, subject to customary exceptions.

 

Edited July 15, 2024 by Hoodlum

[MMM20]

43 minutes ago, Hoodlum said:

@Viking  It looks like you will have another Investment exit to do a writeup on.

 

https://www.businesswire.com/news/home/20240715698371/en/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share

 

 

Wow. Is that really a ~75% premium? 

[Hoodlum]

21 minutes ago, MMM20 said:

Wow. Is that really a ~75% premium? 

yes, although it was trading at $50/share at the beginning of this year. 

[nwoodman]

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

[gfp]

12 minutes ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

I lost track of all the Stelco dividends over the years - are you factoring those in?

[gfp]

So Stelco is on the books under the equity method ("associates") and looks to be carried at $274.4m USD at the end of Q1.  There will be slight adjustments but looks like about a $392m USD write-up pre-tax.

[Junior R]

5 minutes ago, gfp said:

 

I lost track of all the Stelco dividends over the years - are you factoring those in?

The dividends would make it way higher as they paid many special dividends ...I think last year was $4

 

CAGR is prob 20% with Dividends 

[Hoodlum]

Faron Mining announced new equity investments this morning with Fairfax taking part. 

 

https://foranmining.com/wp-content/uploads/2024/07/Foran-News-Release-Foran-Announces-Strategic-Investments-by-Fairfax-Financial-Agnico-Eagle-and-other-Cornerstone-Investors-Formal-Construction-Decision-for-Phase.pdf

 

$222 million brokered private placement, with participation indications received from various existing long-term shareholders, including Fairfax, underscoring continued strategic support

 

[petec]

2 hours ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

The board HATED this investment when it was made! 

[SafetyinNumbers]

2 hours ago, petec said:

 

The board HATED this investment when it was made! 

Alan says it’s a 32% CAGR

 

[gfp]

Fairfax bought about a year after the IPO I believe.  That might not reduce their CAGR though.  This has been a good one for FFH.

 

edit:  looks like Stelco went public for $17/sh and Fairfax bought most of the position about a year later for $20.50/share

Edited July 15, 2024 by gfp

[Viking]

6 hours ago, petec said:

 

The board HATED this investment when it was made! 

I was one of them. 
 

Here is an update on Fairfax’s investment in Stelco. Stelco is just one example of the significant value that is building on Fairfax’s balance sheet that will be realized in the coming years. This is the big thing most investors do not grasp (leading them to undervalue the company - still). This is likely a big reason why Fairfax continues to aggressively buy back stock at current prices - they know the value (although hidden) is there.

 

 

Edited July 15, 2024 by Viking

[gfp]

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

[Junior R]

the next thing I think could happen within the next 1 year is the Bangalore airport IPO...which should add more gains to FFH...I just hate that FIH is so hard to buy as there is no volume and I try to put low ball offers like $13.90 lol

[SafetyinNumbers]

50 minutes ago, gfp said:

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

Looks like Q1 2019