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Xerxes Grand Master

Xerxes

Posted
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Here is an interview with Mike Wilkerson for the FAH die hard fans.

You directly watch on YouTube as well.

 

https://www.google.ca/amp/s/seekingalpha.com/amp/article/4391791-michael-wilkerson-ceo-of-fairfax-africa-holdings-america-in-danger

 

I can’t help but think he should have focussed on running the company rather than writing this book.

 

100% agreed.

i was excited to listen to him, but then 1/4 through I realized it was more about his book.

 

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hobbit Explorer

hobbit

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What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasn’t traded that high in years and there are plenty of FAR better banks available at or below that price (Wells, Lloyds, even Eurobank)?

 

And even if they could, what makes you think they could have done it fast enough to satisfy Helios and get this deal done?

 

They’ve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. That’s a fairly clear admission of failure in my book and actions speak louder than words so I value it more than even the most groveling apology.

https://ca.finance.yahoo.com/news/atlas-mara-limited-announces-strategic-155000677.html

 

The transaction will include upfront cash consideration payable at closing equal to approximately 0.8 times book value as of 30 June 2020, plus additional cash consideration payable 24 months after closing of the transaction, subject to certain conditions.

 

 

https://www.benzinga.com/pressreleases/20/11/ac18543273/atlas-mara-limited-announces-strategic-transaction-with-kcb-group-plc

 

As part of the Transaction, KCB will acquire Atlas Mara's 62.06% shareholding in Banque Populaire du Rwanda Plc ("BPR") for cash consideration representing approximately 1.09 times book value and, through the Company's subsidiary ABC Holdings Limited, all of Atlas Mara's indirect interests in African Banking Corporation Tanzania Limited ("BancABC Tanzania") for cash consideration representing approximately 0.42 times book value. The actual cash consideration payable by KCB will be determined based on the final book value of the two banks at completion of the transactions. The transactions are expected to close during the first half of 2021, assuming regulatory approvals are received by then.

 

https://www.bnnbloomberg.ca/nigeria-s-biggest-bank-in-talks-to-buy-atlas-mara-assets-1.1530545

 

Do not be surprised if this happens close to BV as well which leaves them with UBN and following are the latest results for the same

 

https://thenationonlineng.net/union-bank-grosses-n118-8b-in-q3/

 

Chief Financial Officer, Union Bank of Nigeria (UBN) Plc, Joe Mbulu noted that the bank’s asset quality has continued to improve with non-performing loans (NPLs) down to 3.6 per cent from 5.8 per cent as at December 2019, supported by ongoing efforts to diversify loan book to include viable businesses and households.

 

“Our Capital Adequacy Ratio remains robust at 19.5 per cent, well above the regulatory threshold. With the $40 million financing secured from the International Finance Corporation for on-lending to trade finance customers, we are continuing to expand our funding engagements with DFIs to support our strategic business initiatives.

 

Again not surprised with zero transparency from FFH and FAH mgmt on why ATMA was sold to FFH for 0.25*BV except saying helios did not want it . FAH is  leaving close to 100 mil on the table by doing this deal with Helios which brings only 5 mil to bottom line for now on annual basis. If Helios was so keen on partnering with FFH , they could have done this deal with Helios and kept ATMA at the same time . They can sell it for 40 mil whenever they want or much more if they market it properly. And moreover FFH is only paying 20mil upfront. What a joke. I do not know why helios did not want it , may be they got the jitters after the deal with Equity group fell through. The only explanation is that FFH benefits at the expense of FAH shareholders and no one seems to care since there is no 'smart' money in FAH to seek an explanation from FFH.

 

 

 

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petec Experienced

petec

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What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasn’t traded that high in years and there are plenty of FAR better banks available at or below that price (Wells, Lloyds, even Eurobank)?

 

And even if they could, what makes you think they could have done it fast enough to satisfy Helios and get this deal done?

 

They’ve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. That’s a fairly clear admission of failure in my book and actions speak louder than words so I value it more than even the most groveling apology.

https://ca.finance.yahoo.com/news/atlas-mara-limited-announces-strategic-155000677.html

 

The transaction will include upfront cash consideration payable at closing equal to approximately 0.8 times book value as of 30 June 2020, plus additional cash consideration payable 24 months after closing of the transaction, subject to certain conditions.

 

 

https://www.benzinga.com/pressreleases/20/11/ac18543273/atlas-mara-limited-announces-strategic-transaction-with-kcb-group-plc

 

As part of the Transaction, KCB will acquire Atlas Mara's 62.06% shareholding in Banque Populaire du Rwanda Plc ("BPR") for cash consideration representing approximately 1.09 times book value and, through the Company's subsidiary ABC Holdings Limited, all of Atlas Mara's indirect interests in African Banking Corporation Tanzania Limited ("BancABC Tanzania") for cash consideration representing approximately 0.42 times book value. The actual cash consideration payable by KCB will be determined based on the final book value of the two banks at completion of the transactions. The transactions are expected to close during the first half of 2021, assuming regulatory approvals are received by then.

 

https://www.bnnbloomberg.ca/nigeria-s-biggest-bank-in-talks-to-buy-atlas-mara-assets-1.1530545

 

Do not be surprised if this happens close to BV as well which leaves them with UBN and following are the latest results for the same

 

https://thenationonlineng.net/union-bank-grosses-n118-8b-in-q3/

 

Chief Financial Officer, Union Bank of Nigeria (UBN) Plc, Joe Mbulu noted that the bank’s asset quality has continued to improve with non-performing loans (NPLs) down to 3.6 per cent from 5.8 per cent as at December 2019, supported by ongoing efforts to diversify loan book to include viable businesses and households.

 

“Our Capital Adequacy Ratio remains robust at 19.5 per cent, well above the regulatory threshold. With the $40 million financing secured from the International Finance Corporation for on-lending to trade finance customers, we are continuing to expand our funding engagements with DFIs to support our strategic business initiatives.

 

Again not surprised with zero transparency from FFH and FAH mgmt on why ATMA was sold to FFH for 0.25*BV except saying helios did not want it . FAH is  leaving close to 100 mil on the table by doing this deal with Helios which brings only 5 mil to bottom line for now on annual basis. If Helios was so keen on partnering with FFH , they could have done this deal with Helios and kept ATMA at the same time . They can sell it for 40 mil whenever they want or much more if they market it properly. And moreover FFH is only paying 20mil upfront. What a joke. I do not know why helios did not want it , may be they got the jitters after the deal with Equity group fell through. The only explanation is that FFH benefits at the expense of FAH shareholders and no one seems to care since there is no 'smart' money in FAH to seek an explanation from FFH.

 

The Access/Mozambique and KCB transactions are certainly positive, although small. It would be a very positive sign if Access buys the rest, and I think you're right that that could go at around or above 1x bv since the major asset there is ABC Botswana which has a stub trading at 1.3x book on the local exchange. A control stake would presumably go for more.

 

The only thing you neglect to mention wrt the valuation of ATMA is that UBN trades for 0.6x bv and is a melting ice cube in real terms (ROE<inflation) in a market where the downside risk is meaningful (e.g. Central Bank sets a floor for the loan/deposit ratio, which has the potential to be very scary). The benchmark asset in this space is Guaranty Trust Bank, which has nearly 3x UBN's ROE. I think UBN is probably a very valuable asset in the long term but I am not totally sure it is there yet. (Idle speculation: I wonder whether FFH's UBN stake might end up in CIB.)

 

But even allowing for that, it is clear that ATMA trades (and the FFH deal was done) below SOTP value. I don't dispute that, and in fact I think I have made that case at various points upthread. I've certainly pointed out that if ATMA ever gets >50% of UBN (not sure why that is taking so long) the optics of its financial statements will change overnight.

 

I just don't think the undervaluation is relevant in the way you do. To my mind there are three key points:

 

1. Helios don't want ATMA. They don't see the value. (That alone tells you something, given their record. In fact, they saw so much risk that they wanted FFH to guarantee FAH's loan to ATMA.) This leaves Fairfax with a choice:


  •  
    a) Walk away from the deal.
     
    b) Put the deal at risk by delaying it until ATMA's SOTP value is realised either via a sale or a breakup. There is absolutely no evidence that either of these can be done fast. Sale? There are no obvious strategic buyers for the whole. You might find a value buyer, but they'd want a low price and they'd need to do extensive due diligence. This is 1H20, and a global pandemic is getting started. This makes future value highly uncertain and makes getting on a plane to do due diligence impossible. Breakup? Given enough months you can probably find strategic buyers for each of the subsidiaries, but selling subsidiaries requires regulatory approval which takes many more months. Fairfax have been trying to break ATMA up for 2 years now and know very well how hard it is. Conclusion? Ask any major asset manager: to sell fast you have to sell cheap. To get a good price for ATMA is going to take 1-3 years. Helios might be long gone by then.
     
    c) Buy ATMA from FAH and get the deal done.
     
    2. FFH cannot pay much more than market for ATMA. Even ignoring the fact that a pandemic is just getting started which could erode significant book value, the fact is that FFH board's key responsibility is to FFH shareholders. ATMA trades on a recognised stock exchange. There is a market price at which FFH can buy if they want to. Accepted, the stock is not liquid, so perhaps a block premium is justified. If so, it is nearer 20% than 100%. If you were complaining that the price should have been $0.45, or $0.50, I wouldn't be arguing with you. But you think FAH left $100m on the table. If FFH had paid that full of a price, I guarantee you that this board would be full of the Prem haters saying that he'd used the FFH balance sheet to save face by bailing out FAH to get a deal done, and couldn't be trusted. And they'd be right.
     
    3. The Helios deal is transformational and may well create more future value for FAH minorities than has been "lost" on the ATMA trade. Last week FAH was a failed holding company, with no track record of creating value and a number of very challenged subsidiaries. Next week, when the deal closes, it will become a more diversified, more cash generative, better run company with the ability to leverage 3rd party capital to grow in an asset-light manner. Unfortunately there is no amount of disclosure that will help you figure out how much value the deal creates, because what you need to know is how much 3P capital the new company will raise and the IRR on its future deals. Only time will tell.
     
    Bottom line is that I just don't think FFH had many choices here, and I think they deserve some credit for getting a potentially superb deal over the line.

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hobbit Explorer

hobbit

Posted
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Latest twist: https://www.heliosinvestment.com/uploads/files/HFP-Portfolio-Insurance-Arrangement-Jan-21-2021.pdf

 

The interesting bit is that Fairfax has underwritten a bunch of the investments that Helios inherited.

 

I thought the plan for Helios was that partnering with Fairfax will give them more cred in the global market and help them with fund raising at their end . This is just asking Fairfax for money right after the close. and why is Fairfax bothered with Helios' second best ideas ( the first will go to the helios' fund I presume ) . Fairfax can get better exposure by investing directly in Fund 4 of Helios. And Fairfax has to underwrite the ' reference investments' ? why is that... what a mess...

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TwoCitiesCapital Veteran

TwoCitiesCapital

Posted
Posted

Latest twist: https://www.heliosinvestment.com/uploads/files/HFP-Portfolio-Insurance-Arrangement-Jan-21-2021.pdf

 

The interesting bit is that Fairfax has underwritten a bunch of the investments that Helios inherited.

 

I thought the plan for Helios was that partnering with Fairfax will give them more cred in the global market and help them with fund raising at their end . This is just asking Fairfax for money right after the close. and why is Fairfax bothered with Helios' second best ideas ( the first will go to the helios' fund I presume ) . Fairfax can get better exposure by investing directly in Fund 4 of Helios. And Fairfax has to underwrite the ' reference investments' ? why is that... what a mess...

 

I, too, am a little confused.

 

It seems Fairfax has underwritten an at the money put option in exchange for $3 million in annual premium and at-the-money warrants. Seems like this just leverages the exposure they currently have to FAH. 

 

If it goes well, they stand to make tens of millions. If it doesn't go well, they stand to lose tens of millions. All around though - not terribly concerning. The $3 million in annual premiums means that the fund has to have a -9% return over the next 3-years before Fairfax is out any cash.

 

That is certainly possible - maybe even likely - but seems to be giving Fairfax cheap exposure to the upside via the warrants and the downside is finite ($91 million), at a distance (-9% away minimum), and in the future (3 years before Fairfax has to pay the claims).

 

Seems like a decent way to leverage the exposure, but I'm not certain as to how portfolio insurance typically works or is priced to know how this compares to arms-length transactions.

 

 

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hobbit Explorer

hobbit

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Posted

Why is Fairfax bothered with Helios' second best ideas (the first will go to the helios' fund I presume).

 

What makes you think this?

they had a section in circular describing the conflicts policy --

 

The interests of Helios may conflict with the interests of the Corporation.

 

The Corporation will rely on the expertise of Helios (including the Partnership and the Manager, in its role

as sub advisor), in identifying and advising on investment opportunities, transaction execution and asset

management capabilities. Helios also provides similar services to other subsidiaries of funds it manages.

The advisory services to be provided by the Partnership under the IMA are to be provided on a nonexclusive basis to the Corporation and its subsidiaries, and accordingly, there are no restrictions on Helios

from providing similar services to other entities, including certain funds managed by Helios, or from

engaging in other activities in the future (whether or not their investment objectives, strategies and policies

are similar to those of the Corporation). The Corporation acknowledges that Helios will allocate investment

opportunities among the Corporation and its subsidiaries and the other portfolio clients of Helios in

accordance with Helios’ Conflicts Policy. As a result of this Conflicts Policy, the Corporation may, from time

to time, be precluded from participating in an investment opportunity available to the Partnership and the

Manager, in its role as sub advisor, that would otherwise be compatible with the Corporation’s investment

objectives and restrictions.

 

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SafetyinNumbers Experienced

SafetyinNumbers

Posted
Posted

Are the “Reference Investments” legacy FAH investments or Helios?

 

I guess that question was already answered.

 

This deal seems like it’s all about aligning incentives. New management did not want to underwrite legacy investments and Fairfax gets more leverage to the upside on the whole portfolio. Better for Helios shareholders but good for both.

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petec Experienced

petec

Posted
Posted

Are the “Reference Investments” legacy FAH investments or Helios?

 

I guess that question was already answered.

 

This deal seems like it’s all about aligning incentives. New management did not want to underwrite legacy investments and Fairfax gets more leverage to the upside on the whole portfolio. Better for Helios shareholders but good for both.

 

I think that’s right although new management’s scepticism about these investments didn’t stop them closing the deal.

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SafetyinNumbers Experienced

SafetyinNumbers

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Posted

Are the “Reference Investments” legacy FAH investments or Helios?

 

I guess that question was already answered.

 

This deal seems like it’s all about aligning incentives. New management did not want to underwrite legacy investments and Fairfax gets more leverage to the upside on the whole portfolio. Better for Helios shareholders but good for both.

 

I think that’s right although new management’s scepticism about these investments didn’t stop them closing the deal.

 

That's true but mitigating any losses on the "Reference Investments" now should theoretically materially reduce Helios's cost of capital resulting in an increase in the share price which benefits everyone.

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jfan Rising Star

jfan

Posted
Posted

I attended. I think I was the only outside passive shareholder there. Got all my questions answered.

I didn't take extensive notes but here are a few observations:

1) These guys are honest and not afraid to openly discuss the poor investments made in the past in the presence of Fairfax leadership. They said prior investments were loaded up too much with debt, poorly timed, and lacked execution.

2) In order to consummate the deal, fairfax had to provide them with insurance to set the floor on asset devaluation from their prior investments.

3) Helios brings in some existing carried interest and fee revenue that they present valued at 22% and 19% discount rates respectively.

4) I asked about the competitive landscape among asset managers in Africa. They said that it was very specific to each country. They prefer to focus on larger economies that may have lower margins. They spoke of how capital flows were very cyclical and many of the larger players are questioning their continued activities there. In their 3rd fund, they looked through 400 potential investments for 12 picks. 75% were proprietary (i guess they meant no other bidders), and of the 25% that had other offers, only a very small # were based on price. Most were based on how the asset manager can add value to the transaction.

5) I asked about stakeholder alignment. They said there are 3 parties. The fund LPs, Helios investment manager, and Helio Fairfax shareholders. Helios partners invest along side their funds (I assume personally) to align with their LPs in addition to their management fees and carried interest. Helios is aligned with HFP by being equity owners of HFP shares. HFP is aligned because fee and carried interest sharing between with Helios and LPs.

6) HFP will co-invest with all of Helio's future funds. In fact, there may be investment opportunities that would not be fitting for the funds but better within HFP's structure.

7) I asked about inflation risk management. They said they are USD return focused and of this currency risk, they manage very carefully. They look to invest in businesses that have the ability to pass on these currency risks and have less import reliance.

8 ) They are looking for secular growth or consumer non-discretionary (not cyclical), growth rates that are multiples higher than gdp, capital light except for situations of high revenue visibility. Sectors of interest include financial services and tech, clean energy and power, telecom/internet infrastructure, consumer non-discretionary.

9) Their portfolio assets now are $0.61/share in cash, $1.50/share in insured and guaranteed investments, $0.14/share in public investments, and $0.73/share in non-guaranteed private African investments. The present value of carry income was $0.81/share and present value of fee income was $1.71/share.

10) I "feel" Fairfax Africa shareholders may have gotten lucky that Fairfax Financial was able to put this one off.

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Xerxes Grand Master

Xerxes

Posted
Posted

Thanks for posting, i listed to it as well and you pretty much covered anything.

The two new managers are humble and eager to get things done.

I like the question about alignment. If I understand correctly, what he refers to "investment manager" is not owned by the new operators personally. The two new operators own actual shares of the company.

The one thing is missing is that the new management is not "new" in Africa. So i felt they should have perhaps showcased their own past deeds, for the shareholders to get some meat as to what expect.

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