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Looks like FFH added 1.2 million shares in Dec (at $30) and just under 1 million in Jan (at $29.70). This is in addition to the 991,000 they held at the end of Q3 (up from 554,000 at end of Q2).

 

Results reported today looked pretty ugly (underwriting loss and falling dividend and interest income). Outlook for future is bleak (business will continue to shrink and underwriting will likely remain over 100 until economy improves which is going to be when???).

 

Shareholder equity = $28.25/share.

 

Shares (ZNT) closed today at $27.90  Let's see what Mr. Market thinks about results on Monday...

 

For those who have not followed FFH for long, FFH owned a significant portion of ZNT a few years back and sold much of that stake for a nice gain when they needed cash. FFH understands this company very well and perhaps this is simply another situation where they are re-establishing postions in stuff they had to sell in the 7 lean years...??? Anyone have an update on HUB???

 

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HI Viking, where are you getting the purchase numbers from?

 

Going from 10% ownership to 100% is a mighty leap.  However, They certainly know Zenith very well so it may be a good company to buy.  This type of move appeals to me much more than acquisitions of companies they have no prior relationship with, particularly in the insurance sector. 

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Can somebody refresh my memory?  Did FFH have a "stand-still" agreement with Zenith?  Has that agreement now expired? 

 

I'm wondering whether this might be the next subsidiary for them....

 

Yeah, its already expired. It would have shown up in item 6 of the filing had it still been in effect. I believe it expired in 2006. As for a new sub, keep in mind the size of zenith, the current size of the FFH ownership stake, and the current multiple to book of znt. In other words, I wouldn't go out and buy call options just yet, but who knows.

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Can somebody refresh my memory?  Did FFH have a "stand-still" agreement with Zenith?  Has that agreement now expired? 

 

I'm wondering whether this might be the next subsidiary for them....

 

Yeah, its already expired. It would have shown up in item 6 of the filing had it still been in effect. I believe it expired in 2006. As for a new sub, keep in mind the size of zenith, the current size of the FFH ownership stake, and the current multiple to book of znt. In other words, I wouldn't go out and buy call options just yet, but who knows.

 

I'm getting a market cap of about $1B, of which FFH already possesses 10%?  So the remaining 90% would cost them $1b*90%*130%, assuming a similar premium to NB and ORH. 

 

They just issued a nice chunk of preferreds.  ORH and C&F have just a silly dividend capacity.....

 

Don't write it off!

 

SJ

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It would be a great fit for Fairfax:

 

1- Long tail policies meaning a lot of float to invest.

2- They know management very well and the culture around disciplined underwriting is very similar.

3- They know this line of business very well (workers compensation): ORH, TIG.

4- Essentially debt free.

 

The real missing element for ZNT to be an attractive business is their lack of investment skills, almost everything is in bonds and treasuries. In the hands of Hamblin Watsa, the portfolio would look quite different.

 

The issues I see for a deal:

 

1- Are they ready to sell?

2- Fairfax would need around $2 billion in cash and investments at holdco since they have mentioned a few times the desire to keep around $1 billion. We are not there even with the issuance of these recent preferreds. Share swaps with shareholders does not seem like their thing based on recent history: NB, ORH, Advent so we need to see cash. Not listed on the NYSE is also an issue for such option.

3- Over 50% of their business is in California. Too much for Fairfax's taste?

 

My guess is that they will continue accummulating the shares on the open market at these prices for quite a while. If the price don't move and cash starts to pile up at Fairfax holdco, then I could see a move.

 

Cardboard

 

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I'm not sure that financial resources are such a constraint (I made this same argument last summer when we were speculating on the potential of buying ORH).  My take on FFH's cash situation is:

 

Current Hold-co cash

 

Hold-co cash as at Sept 30: $2,340 (from Q3 report)

 

Less: ORH payments ~-$1,000

        Dividends ~-250

        Redeem A&B preferreds ~-150

        Corporate Overhead ~-30

 

Add: Issue C preferreds ~+250

      Issue E preferreds ~+200

 

Hold-co Cash as of today (before subsidiary dividends): ~$1,360m

 

 

 

 

Potential Subsidiary Dividends

 

Beyond current cash at the holding company level, there is significant dividend capacity at the operating subsidiaries.  In particular, last year's A/R showed that the net-written : statutory-surplus ratio was 0.7 for ORH and 0.8 for C&F.  Those two subs could issue a dividend large enough to take them to a 1.0 ratio without the regulators batting an eye.  Conservatively speaking FFH could pull dividends out of the subs of the following magnitude:

 

ORH $500

C&F $250

NB ???

 

Total: $750m+

 

 

In conclusion, if you take the holdco cash and augment it with subsidiary dividends, it is not inconceivable that FFH could have a war-chest of $2.1B at the hold-co level.  That's roughly enough to buy ZNT and still have adequate liquidity.

 

SJ

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I would think that they will just continue to buy it in the open market as Cardboard has suggested for now.  It will be alot cheaper to buy in a few hundred million in a year or two than 1 billion right now.  

 

One hopes that they are spending some of the surplus above their surplus on buying back their own shares now that they have reached somewhere in the range of 90-80% book value.  I am not seeing any significant impairments to book right now.  In fact I see a couple of significant additions rather than impairments (Magna, HR).  

 

They will also be committing some of that capital to the Brazilian, and European operations that are being developed.  

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  • 3 weeks later...

congratulations to any boardmembers that may have speculated on this! I was certainly in the camp that they would continue to buy in the open market . . . but as of this morning its hard not to think this was staring us in the face. FFH is gonna be a powerhouse when the insurance market turns.

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Looks like its a done deal at $38 per share . . .

 

"Fairfax intends to finance the acquisition with a combination of holding company cash and subsidiary dividends, but will also raise $200 million through an equity issue prior to the closing. Following the completion of the acquisition, Fairfax expects to continue to maintain approximately $1.0 billion in cash and marketable securities at the holding company level."

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I really do not like the fact that Fairfax is issuing equity in this situation considering they just recently paid a dividend which is equal to the amount of the equity issue... Dividends are paid when the company cannot find better use of the capital YET in the last 2 years there have been numerous opportunities to use that capital much more efficiently...  I understand the dividend fuels Mr. Watsa's lifestyle but that is rediciolous. 

 

but will also raise $200 million through an equity issue prior to the closing.

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I'm not happy about the dividend either, but I must repeat what I have said before . . . I think people are way too hard on this company considering that FFH is run in a more shareholder friendly manner than 95-99% of the other companies out there.

 

Yes I am a shareholder and expect to be treated fairly, but I do not forget that Prem and everyone else at FFH is creating wealth and value for me - not the other way around!

 

From my understanding Prem does not lead and extravagant lifestyle by any means, and if he did I would not begrudge him that at all! If you would prefer that Prem paid himself and other insiders multi-million dollar salaries rather than pay dividends that every owner receives equally then go invest in Goldman Sachs. I don't mean this to be offensive or to start an argument, I just think that we are lucky to be able to invest in a company like FFH - not the other way around.  

 

Prem has said on numerous occasions that he holds all the votes, wouldn't sell-out for 4 times book and that if you don't like it don't invest.

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Guest longinvestor

I'm not happy about the dividend either, but I must repeat what I have said before . . . I think people are way too hard on this company considering that FFH is run in a more shareholder friendly manner than 95-99% of the other companies out there.

Yes I am a shareholder and expect to be treated fairly, but I do not forget that Prem and everyone else at FFH is creating wealth and value for me - not the other way around!

From my understanding Prem does not lead and extravagant lifestyle by any means, and if he did I would not begrudge him that at all! If you would prefer that Prem paid himseld and other insiders multi-million dollar salaries rather than pay dividends that every owner receives equally then go invest in Goldman Sachs. I don't mean this to be offensive or to start an argument, I just think that we are lucky to be able to invest in a company like FFH - not the other way around. 

Prem has said on numerous occasions that he holds all the votes, wouldn't sell-out for 4 times book and that if you don't like it don't invest.

Well said. With increasing dividends and Mr Market always in catch-up mode when it comes to pricing the stock, the "fortress" of FFH ownership gets reinforced each time. The consensus will get cheerier. Just have to wait. A combination of a growing book, a small float of shares, a small lot of wildly loyal and long term holders will ensure this. If doubters get filtered out along the way, that's a good thing.  

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I am definitely not trying to start an argument at all and do not want to discuss the merits in my fairfax position... (It's my largest position in my portfolio)

 

1.  I could not agree more, Fairfax is one of the most shareholder friendly companies around...

 

2.  I defintiely would not want Prem to pay himself and other insiders on the same scale as GS... (That bonus structure makes me SICK) I also feel Fairfax is not paying Mr. Watsa a fair wage as he requires money from other sources. I will be the first to let the company know to bump up  his salary as he definitely earns it and let's pay him a fair wage so that he does not need to supplement his income from Fairfax dividends!

 

Thanks,

 

S

 

I'm not happy about the dividend either, but I must repeat what I have said before . . . I think people are way too hard on this company considering that FFH is run in a more shareholder friendly manner than 95-99% of the other companies out there.

 

Yes I am a shareholder and expect to be treated fairly, but I do not forget that Prem and everyone else at FFH is creating wealth and value for me - not the other way around!

 

From my understanding Prem does not lead and extravagant lifestyle by any means, and if he did I would not begrudge him that at all! If you would prefer that Prem paid himseld and other insiders multi-million dollar salaries rather than pay dividends that every owner receives equally then go invest in Goldman Sachs. I don't mean this to be offensive or to start an argument, I just think that we are lucky to be able to invest in a company like FFH - not the other way around. 

 

Prem has said on numerous occasions that he holds all the votes, wouldn't sell-out for 4 times book and that if you don't like it don't invest.

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It will likely be another preferred share offering (equity  $200m)...well worth it.

 

I looked at Zenith and its 7% dividend at the time and did not invest ($21 a share)...sad to say. Their portfolio is a cash equivalent and those that have been around recall that Stanley Zax is a rock star. In 2004, he had a purple suit on at the Fairfax annual. Zenith was the home run hitter at that time and he was the envy of the other subs managers. I am very happy with this deal. For the Buffett followers...Buffet had a position in Zenith at that time.

 

Dazel.

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It will likely be another preferred share offering (equity  $200m)...well worth it.

 

I looked at Zenith and its 7% dividend at the time and did not invest ($21 a share)...sad to say. Their portfolio is a cash equivalent and those that have been around recall that Stanley Zax is a rock star. In 2004, he had a purple suit on at the Fairfax annual. Zenith was the home run hitter at that time and he was the envy of the other subs managers. I am very happy with this deal. For the Buffett followers...Buffet had a position in Zenith at that time.

 

Dazel.

 

Dazel, thanks for the color! Pretty interesting.

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