Fairfax 2021

[Viking]

What a way to close out one of your best years in history. Fairfax is finishing 2021 with a bang. Some early thoughts on the transaction:

 

1.) Fairfax pulls another rabbit out of their hat. One under-appreciated skill of Fairfax throughout their history is their creativity in surfacing value and finding big chunks of money when needed. In the recent past (last decade) the cash raised was used largely to cover big losses (failed shorting strategy in multiple years, big Allied losses year one of purchase). Today the cash raised is being used to drive significant and immediate shareholder value (big stock buyback). HELLO NEW FAIRFAX. This is affirmation of the significant pivot and progress the company has made with its business in recent years. Fairfax is no longer playing Chris Chelios defense; they are (finally) back to playing Wayne Gretzky offense.

2.) TRS position: FFH shares closed Sept 30 at US$403.61. Today they are trading at $466, up $63. Fairfax has exposure to 1.96 million share via TRS. As of today the pretax mark to market gain in Q4 is $123 million. This investment is going to make Fairfax some serious money over the next year. Another recent very large investment decision that is poised to deliver big time for shareholders. 

3.) Dividend savings: Fairfax wants to buy back 2.35 million shares (up to US$500/share). Their dividend is usually US$10/share and paid its entirety in January. They will save $23.5 million in dividend payments each and every year moving forward. 
4.) buying back shares at a price well below BV is a big deal. Basic shares will fall from 25.88 million to 23.53. Common shareholder equity Sept 30 was US$14.54 billion. Now i am not sure how the sale of 9.99% of ORH will affect common shareholder equity. We will get earnings in Q4. My guess is BV will be well north of $600 at Dec 31 (NOT including the $37 Digit gain). And a $700 BV looks pretty attainable for Dec 31, 2022. Even after the 7.5% increase today, the stock is trading at $465; still crazy cheap compared to my estimated YE 2022 BV. Buying back 10% of shares outstanding at under $500 is going to look like a brilliant move looking back in another 12 months time. 
5.) My guess is they are just getting started with share buybacks. More will be coming in 2022. 
6.) ‘the narrative’ for Fairfax continues to improve… chug, chug, chug  

Edited November 17, 2021 by Viking

[Parsad]

3 hours ago, Gregmal said:

Amazing what happens when you get off your ass and actually do something. Like I said, fundamentals weren’t gonna do it. Market wants to see real, meaningful action. This is definitely a start. 

 

Whatever Greg!  That's what Prem and the team do all day, sit on their asses and smoke cigars. 

 

The change in fundamentals is what allowed them to pay down debt, pay off their LOC, buy back shares and now issue a security for a portion of ORH to buy back even more shares.  Otherwise none of that would have happened.  Cheers!

[Parsad]

3 minutes ago, Viking said:

What a way to close out one of your best years in history. Fairfax is finishing 2021 with a bang. Some early thoughts on the transaction:

 

1.) Fairfax pulls another rabbit out of their hat. One under-appreciated skill of Fairfax throughout their history is their creativity in surfacing value and finding big chunks of money when needed. In the recent past (last decade) the cash raised was used largely to cover big losses (failed shorting strategy in multiple years, big Allied losses year one of purchase). Today the cash raised is being used to drive significant and immediate shareholder value (big stock buyback). HELLO NEW FAIRFAX. This is affirmation of the significant pivot and progress the company has made with its business in recent years. Fairfax is no longer playing Chris Chelios defense; they are (finally) back to playing Wayne Gretzky offense.

2.) TRS position: FFH shares closed Sept 30 at US$403.61. Today they are trading at $466, up $63. Fairfax has exposure to 1.96 million share via TRS. As of today the pretax mark to market gain in Q4 is $123 million. This investment is going to make Fairfax some serious money over the next year.

3.) Dividend savings: Fairfax wants to buy back 2.35 million shares (up to US$500/share). Their dividend is usually US$10/share and paid its entirety in January. They will save $23.5 million in dividend payments each and every year moving forward. 
4.) buying back shares at a price well below BV is a big deal. Basic shares will fall from 25.88 million to 23.53. Common shareholder equity Sept 30 was US$14.54 billion. Now i am not sure how the sale of 9.99% of ORH will affect common shareholder equity. We will get earnings in Q4. My guess is BV will be well north of $600 at Dec 31 (NOT including the $37 Digit gain). And a $700 BV looks pretty attainable for Dec 31, 2022. Buying back 10% of shares outstanding at under $500 is going to look like a brilliant move looking back in another 12 months time. 
5.) My guess is they are just getting started with share buybacks. More will be coming in 2022. 
6.) ‘the narrative’ for Fairfax continues to improve… chug, chug, chug  

 

+1!  Cheers!

[Gregmal]

31 minutes ago, Parsad said:

 

Whatever Greg!  That's what Prem and the team do all day, sit on their asses and smoke cigars. 

 

The change in fundamentals is what allowed them to pay down debt, pay off their LOC, buy back shares and now issue a security for a portion of ORH to buy back even more shares.  Otherwise none of that would have happened.  Cheers!

The fundamentals have been there for awhile. We've being hearing about hard markets and discount to NAV for years now. The market wants action. 

 

What is worth thinking about, to me, is why he is still refusing to unload the garbage in the equity portfolio? Sure, everyone is now convinced they're sitting on gold, but thats how cycles work...people fall and love and become believers when it swings the other way. In favor, out of favor, etc. Bottom line these arent good or best of breed companies for the most part. When you trade at a discount to NAV/BV, the textbook way to close the gap and grow per share value is buybacks. So, this is a good and welcome move and IMO this should have a nice floor for a bit, giving a window to trade this into the dividend. Wouldnt be shocked to see 15-20% in the next 2-3 months, which is an acceptable return here. 

[John Hjorth]

4 hours ago, Gregmal said:

Amazing what happens when you get off your ass and actually do something. Like I said, fundamentals weren’t gonna do it. Market wants to see real, meaningful action. This is definitely a start. 

 

Greg,

 

To me, this is a transaction only for accounting purposes, ref. what @StubbleJumper has alluded to earlier in this topic today.

[Gregmal]

@John it might be. But the market wants to see a pulse here in terms of proactive and meaningful steps to reconcile the past decade. Going from being a drunken sailor to simply below average manager probably takes a good chunk off the discount ascribed. Eventually being viewed as just plain average probably adds $200 a share. 

[Dazel]

Beautiful just so smart.

[StubbleJumper]

1 hour ago, Viking said:

4.) buying back shares at a price well below BV is a big deal. Basic shares will fall from 25.88 million to 23.53. Common shareholder equity Sept 30 was US$14.54 billion. Now i am not sure how the sale of 9.99% of ORH will affect common shareholder equity. We will get earnings in Q4. My guess is BV will be well north of $600 at Dec 31 (NOT including the $37 Digit gain). And a $700 BV looks pretty attainable for Dec 31, 2022. Even after the 7.5% increase today, the stock is trading at $465; still crazy cheap compared to my estimated YE 2022 BV. Buying back 10% of shares outstanding at under $500 is going to look like a brilliant move looking back in another 12 months time. 

 

I appreciate the sentiment, but I would caution you to temper your enthusiasm.  It is likely that this SIB will be undersubscribed due to the hella tax bill that tendering would cause for many shareholders. 

 

Under Canadian tax law, the difference between the ultimate tender price per share and the paid-up capital per share is treated as a deemed dividend.  I have not yet pulled the issuer bid off SEDAR, but I am guessing that when it is published we will see that the paid-up capital will be some trivial amount, perhaps CAD$200/sh or something, which would end up triggering a massive deemed dividend of something like CAD$400/sh.  Do the song and dance of grossing it up by 45% and then claiming your dividend tax credit, and you end up with a considerable tax bill if you tender shares that are not held in some sort of tax privileged vehicle (eg, RRSP or TFSA).  If somebody wanted to dispose of FFH shares, he'd likely be better off just selling them on the market, realising a capital gain, applying the 50% inclusion rate and then cutting a small cheque to Revenue Canada.

 

So, what's the school-boy arithmetic on this one?  Prem owns ~9% of the shares and he's not tendering.  Anyone holding them in a taxable account won't likely be tendering.  So, what's left is basically the shares held in tax advantaged accounts.  Realistically, how many shares can even be rationally tendered?  I am guessing that there's not a large percentage of those 25.88 million shares that are rationally available, and that a good portion of the rationally available shares will be retained by shareholders who know that they are worth more than US$500.

 

My take is that this substantial issuer bid will be undersubscribed and the buybacks through the normal course issuer bid will be more realistic.  Still, it's nice to see the SIB.

 

 

SJ

 

[glider3834]

6 hours ago, gfp said:

Can anyone clear up this question on share count of FFH:  In the Q3 press release they state

" At September 30, 2021 there were 25,876,369 common shares effectively outstanding."

 

In today's announcement they state:

"Fairfax’s 26,986,170 total issued and outstanding Shares,"

 

Why the difference / increase?

Yep I was unsure about this but it looks like restricted shares may have vested in Q4 (it seems like a lot but it may be a a consequence of Fairfax's expected profit/BV growth for 2021 which is likely to be a record result). Alternatively could it also be due to Odyssey sale transaction - there maybe clause to effect if Odyssey is sold for $X figure or a certain multiple of book value, then management/employees will receive incentive bonuses in the form of stock compensation or something along those lines.

[mcliu]

They really need to monetize some of those mediocre cyclical assets that have gone up a lot and buy back more!

[Viking]

6 minutes ago, StubbleJumper said:

 

I appreciate the sentiment, but I would caution you to temper your enthusiasm.  It is likely that this SIB will be undersubscribed due to the hella tax bill that tendering would cause for many shareholders. 

 

Under Canadian tax law, the difference between the ultimate tender price per share and the paid-up capital per share is treated as a deemed dividend.  I have not yet pulled the issuer bid off SEDAR, but I am guessing that when it is published we will see that the paid-up capital will be some trivial amount, perhaps CAD$200/sh or something, which would end up triggering a massive deemed dividend of something like CAD$400/sh.  Do the song and dance of grossing it up by 45% and then claiming your dividend tax credit, and you end up with a considerable tax bill if you tender shares that are not held in some sort of tax privileged vehicle (eg, RRSP or TFSA).  If somebody wanted to dispose of FFH shares, he'd likely be better off just selling them on the market, realising a capital gain, applying the 50% inclusion rate and then cutting a small cheque to Revenue Canada.

 

So, what's the school-boy arithmetic on this one?  Prem owns ~9% of the shares and he's not tendering.  Anyone holding them in a taxable account won't likely be tendering.  So, what's left is basically the shares held in tax advantaged accounts.  Realistically, how many shares can even be rationally tendered?  I am guessing that there's not a large percentage of those 25.88 million shares that are rationally available, and that a good portion of the rationally available shares will be retained by shareholders who know that they are worth more than US$500.

 

My take is that this substantial issuer bid will be undersubscribed and the buybacks through the normal course issuer bid will be more realistic.  Still, it's nice to see the SIB.

 

 

SJ

 

@StubbleJumper if you think there is a good chance the offer will be undersubscribed are you therefore thinking the price will be in the upper part of the range (closer to US$500)?
 

I must admit I had a hard time understanding the Fairfax India dutch auction; it ended up being priced at the high end of the range.

 

[John Hjorth]

2 minutes ago, MMM20 said:

... Reasonable minds can disagree on that point. But surely if you disagree there is a better use of your time than posting here?

 

@MMM20,

 

The purpose of CoFB is actually the crossing of swords [please read : factual based opinions] among the whole sprectrum between longs and shorts, to avoid group thinking and confirmation bias. 

 

A belated welcome to CoBF, @MMM20! 

[StubbleJumper]

7 minutes ago, Viking said:

@StubbleJumper if you think there is a good chance the offer will be undersubscribed are you therefore thinking the price will be in the upper part of the range (closer to US$500)?
 

I must admit I had a hard time understanding the Fairfax India dutch auction; it ended up being priced at the high end of the range.

 

 

That's exactly what I think.  There's money to be made if you've got some RRSP space.

 

***EDIT***  We'll have a better idea of just how tax punitive this SIB is when the issuer bid circular is posted in the next few days.  The more tax punitive, the less likely it will be fully subscribed.

 

 

SJ

Edited November 17, 2021 by StubbleJumper

[Viking]

4 minutes ago, mcliu said:

They really need to monetize some of those mediocre cyclical assets that have gone up a lot and buy back more!

@mcliu what i like about the big share repurchase and how it is structured is it allows Fairfax to be patient with all their holdings. I expect they will be monetizing some equity holdings in 2022. 

[Parsad]

1 hour ago, Gregmal said:

The fundamentals have been there for awhile. We've being hearing about hard markets and discount to NAV for years now. The market wants action. 

 

 

33 minutes ago, Gregmal said:

@John it might be. But the market wants to see a pulse here in terms of proactive and meaningful steps to reconcile the past decade. Going from being a drunken sailor to simply below average manager probably takes a good chunk off the discount ascribed. Eventually being viewed as just plain average probably adds $200 a share. 

 

It was trading above book just 2 years ago...so we haven't been talking about this for years.  Of course markets want to see fundamental change at the company, but parlor tricks only work for the short-term...they won't raise the price on a permanent basis.  Solid improvements in the operations and investments at the company is what the market is recognizing...slowly but surely.  Cheers!

[Viking]

21 minutes ago, StubbleJumper said:

 

That's exactly what I think.  There's money to be made if you've got some RRSP space.

 

***EDIT***  We'll have a better idea of just how tax punitive this SIB is when the issuer bid circular is posted in the next few days.  The more tax punitive, the less likely it will be fully subscribed.

 

 

SJ

Most of my holdings are in TFSA, RRSP and RESP so what you are saying is music to my ears (as i am way overweight and would love to sell a chunk of Fairfax close to US$500, lock in some nice tax free gains, and ideally shift some $ into Atlas around $14 and Fairfax India around $13). 

Edited November 17, 2021 by Viking

[glider3834]

18 minutes ago, StubbleJumper said:

 

I appreciate the sentiment, but I would caution you to temper your enthusiasm.  It is likely that this SIB will be undersubscribed due to the hella tax bill that tendering would cause for many shareholders. 

 

Under Canadian tax law, the difference between the ultimate tender price per share and the paid-up capital per share is treated as a deemed dividend.  I have not yet pulled the issuer bid off SEDAR, but I am guessing that when it is published we will see that the paid-up capital will be some trivial amount, perhaps CAD$200/sh or something, which would end up triggering a massive deemed dividend of something like CAD$400/sh.  Do the song and dance of grossing it up by 45% and then claiming your dividend tax credit, and you end up with a considerable tax bill if you tender shares that are not held in some sort of tax privileged vehicle (eg, RRSP or TFSA).  If somebody wanted to dispose of FFH shares, he'd likely be better off just selling them on the market, realising a capital gain, applying the 50% inclusion rate and then cutting a small cheque to Revenue Canada.

 

So, what's the school-boy arithmetic on this one?  Prem owns ~9% of the shares and he's not tendering.  Anyone holding them in a taxable account won't likely be tendering.  So, what's left is basically the shares held in tax advantaged accounts.  Realistically, how many shares can even be rationally tendered?  I am guessing that there's not a large percentage of those 25.88 million shares that are rationally available, and that a good portion of the rationally available shares will be retained by shareholders who know that they are worth more than US$500.

 

My take is that this substantial issuer bid will be undersubscribed and the buybacks through the normal course issuer bid will be more realistic.  Still, it's nice to see the SIB.

 

 

SJ

 

 how would this impact non-Canadian resident shareholders?

[Parsad]

30 minutes ago, StubbleJumper said:

 

I appreciate the sentiment, but I would caution you to temper your enthusiasm.  It is likely that this SIB will be undersubscribed due to the hella tax bill that tendering would cause for many shareholders. 

 

Under Canadian tax law, the difference between the ultimate tender price per share and the paid-up capital per share is treated as a deemed dividend.  I have not yet pulled the issuer bid off SEDAR, but I am guessing that when it is published we will see that the paid-up capital will be some trivial amount, perhaps CAD$200/sh or something, which would end up triggering a massive deemed dividend of something like CAD$400/sh.  Do the song and dance of grossing it up by 45% and then claiming your dividend tax credit, and you end up with a considerable tax bill if you tender shares that are not held in some sort of tax privileged vehicle (eg, RRSP or TFSA).  If somebody wanted to dispose of FFH shares, he'd likely be better off just selling them on the market, realising a capital gain, applying the 50% inclusion rate and then cutting a small cheque to Revenue Canada.

 

So, what's the school-boy arithmetic on this one?  Prem owns ~9% of the shares and he's not tendering.  Anyone holding them in a taxable account won't likely be tendering.  So, what's left is basically the shares held in tax advantaged accounts.  Realistically, how many shares can even be rationally tendered?  I am guessing that there's not a large percentage of those 25.88 million shares that are rationally available, and that a good portion of the rationally available shares will be retained by shareholders who know that they are worth more than US$500.

 

My take is that this substantial issuer bid will be undersubscribed and the buybacks through the normal course issuer bid will be more realistic.  Still, it's nice to see the SIB.

 

 

SJ

 

 

I agree with you on this.  I think this was just another way of showing the underlying value of the insurance businesses, force the price up based on the reality that Fairfax will buy any stock tendered up to $500 USD, without having to exercise the TRS or continue buying under the normal course issuer bid...which was not having the desired effect of closing the gap between intrinsic value.  This achieved what they wanted from all aspects.  Worst thing that will happen is that they buy a few hundred thousand shares at $500 USD to retire.  By the time they close, 4th quarter renewals will be coming in and they will have the remaining cash on hand to consider buying back their position from OMERS some time next year.  Cheers!

[StubbleJumper]

Just now, MMM20 said:

Does anyone have a good explanation for why Fairfax seems to pick the complicated route when the simple one would do just fine? Why not just sell 5% of Odyssey to the highest bidder- or something approximating it? Why risk the optics of a related party transaction? Wouldn't this clear up some of the overhang with respect to the CPPIB/OMERS? Feels like a straightforward sale and buyback would've been the better route if they're truly looking to provide a catalyst to fair value.

 

My opinion is that they don't want to actually sell Odyssey.  In five years, when we look back, we will probably recognize this as a debt-like transaction.  They are likely paying a significant annual "dividend" (9% or 10%) to their partner and there is probably a repurchase privilege that effectively guarantees a 9% or 10% return.

 

Usually I am not a happy shareholder when I see FFH seeking outside capital with that kind of hurdle, but if you can use the proceeds to buy back your shares at 20-25% less than book, it's not a terrible thing to do as long as you can "repurchase" the position within a few years.

 

 

SJ

[StubbleJumper]

1 minute ago, Parsad said:

 

I agree with you on this.  I think this was just another way of showing the underlying value of the insurance businesses, force the price up based on the reality that Fairfax will buy any stock tendered up to $500 USD, without having to exercise the TRS or continue buying under the normal course issuer bid...which was not having the desired effect of closing the gap between intrinsic value.  This achieved what they wanted from all aspects.  Worst thing that will happen is that they buy a few hundred thousand shares at $500 USD to retire.  By the time they close, 4th quarter renewals will be coming in and they will have the remaining cash on hand to consider buying back their position from OMERS some time next year.  Cheers!

 

 

No, I hope they use at least some of the proceeds for their NCIB.  They should have lots of space remaining on that.

 

 

SJ

[StubbleJumper]

3 minutes ago, glider3834 said:

 how would this impact non-Canadian resident shareholders?

 

Worse.  So, suppose that my suspicion is correct that there will be a deemed dividend of, say US$300/share.  Right off the bat, there's a foreign income withholding tax by Revenue Canada (maybe 15% if you live in a country that has a tax treaty with us).  And then when you file your income tax, you get to pay your local dividend tax on that foreign income.  Ouch.

 

SJ

[Gregmal]

12 minutes ago, Parsad said:

 

 

It was trading above book just 2 years ago...so we haven't been talking about this for years.  Of course markets want to see fundamental change at the company, but parlor tricks only work for the short-term...they won't raise the price on a permanent basis.  Solid improvements in the operations and investments at the company is what the market is recognizing...slowly but surely.  Cheers!

Eh, there was an awful lot of hooting and hollering and table pounding about FFH in 2019. At basically the same prices or higher than todays close. But if people want to focus on the wrong things, thats on them. When the variables that need to change start doing just that, the investment will begin working. Today was a step towards that although again, there are lingering issues on the optics of it. As was just mentioned, why not just do something straight forward? Why not sell the garbage in the equity portfolio now that its in favor? Time will tell. I think its worth a shot here as maybe, just maybe, he's starting to get it. 

[Parsad]

6 minutes ago, MMM20 said:

Does anyone have a good explanation for why Fairfax seems to pick the complicated route when the simple one would do just fine? Why not just sell 5% of Odyssey to the highest bidder- or something approximating it? Why risk the optics of a related party transaction? Wouldn't this clear up some of the overhang with respect to the CPPIB/OMERS relationship and perceived sweetheart deals at above market interest rates? Just seems clear that straightforward minority sale and FFH buyback would've been the better route? What am I missing? 

 

OMERS is about a related party as Markel or Lloyds of London.  Fairfax does business with OMERS...there are no overlapping officers or directors...it is not a related party.  

 

The dutch auction puts a collar on the stock, allows Fairfax to buy back shares, without the daily restrictions of a normal course issuer bid.  At the same time, the issuance of the security to OMERS indicates to the public the true fair value of ORH, while allowing Fairfax the ability to buy back the position in the long-term. 

 

Fairfax does not want to give up that stake in ORH, but did so to reflect the true value of the company and announce the dutch auction.  If the dutch auction has its desired effect, Fairfax can use what cash is not utilized in the buyback, plus profits from the TRS to buy back its position in ORH with nominal cost.  Cheers!

[matthew2129]

2 minutes ago, StubbleJumper said:

 

Worse.  So, suppose that my suspicion is correct that there will be a deemed dividend of, say US$300/share.  Right off the bat, there's a foreign income withholding tax by Revenue Canada (maybe 15% if you live in a country that has a tax treaty with us).  And then when you file your income tax, you get to pay your local dividend tax on that foreign income.  Ouch.

 

SJ

Are you sure the taxable amount isn't based off of the tendering shareholder's cost basis? I'm not familiar with the tax treatment of Dutch auctions but that would seem logical

[StubbleJumper]

4 minutes ago, matthew2129 said:

Are you sure the taxable amount isn't based off of the tendering shareholder's cost basis? I'm not familiar with the tax treatment of Dutch auctions but that would seem logical

 

I have attached the issuer bid circular for Home Capital Group, which came out with their SIB announcement a few days before Fairfax.  Go down to page 32 and read the tax treatment, both domestic and foreign.  The numbers will be different for Fairfax, but the tax law should be roughly the same.

 

***EDIT*** The Home Capital SIB has an odd-lot privilege, so there's some easy beer money to be made by a Canadian taxpayer who has enough space in his RRSP to buy 99 shares...

 

 

SJ

homecapital.pdf

Edited November 17, 2021 by StubbleJumper