Auction Buyback Announced

[MarioP]

1 B us$ Price range : 425 to 500us$. Financed by the sale of 10% of Odysse

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-US1.0-Billion-Substantial-Issuer-Bid-and-Sale-of-9.99-Minority-Stake-in-Odyssey-Group/default.aspx

 

[MarioP]

Market cap is 12B. Si you buy back 8,3% of the company for 10% of Odyssey. My god. If odyssey value is 83% of market cap then the rest is really value like crap. 10 billion for Odyssey and 2 billions for the rest??? Or is the Yahoo market cap wrong?

[StubbleJumper]

So is FFH "borrowing" US$900m from OMERS at 9% to fund a US$1b repurchase of FFH stock?  Give the discount at which FFH shares trade, I guess that would work as long as they "repay" OMERS within a few years.

 

 

***EDIT*** I wonder whether FFH will close out some of the TRS following the repurchase.  The TRS were intended to lock-in a repurchase price, not to speculate in the market price of FFH, right?

 

SJ

Edited November 17, 2021 by StubbleJumper

[mcliu]

10% minority interest = $0.9B, implied valuation of Odyssey is >US$10B.

FFH trades at only US$13B.

[Cigarbutt]

More disclosure is needed but if this is the typical OMERS' kind of deal, the interest rate is 10% and the gradual buyback of the 'non-controlling interest' will be based on today's fair value valuation (whatever inputs used to decide the range in valuation). For Brit (after a dissection of both parent and sub reporting), the OMERS' stake was bought at 4.30 book value per share (essentially based on the contemporaneous visible transaction), and, almost like clockwork (although it doesn't look like it), 0.43 cents per share (per year) was paid to OMERS and the stake was bought back at a constant 4.30 per share. So, this is the (financing) hurdle rate.

 

@gfp

The only explanation that seems to make sense is that the net difference has to come from the difference between treasury shares reissued and acquired.

 

Disclosure: in the last few months, i've been 'trading' here (to confess an addiction is apparently the first step) and the near future may provide a window of opportunity.

[StubbleJumper]

Anybody got any ideas about what the Paid-up Capital will be for this transaction?  Presumably it will be relatively low, which will trigger a large deemed dividend?

 

If the deemed dividend is significant, I wonder whether this offer will even be fully subscribed?

 

 

SJ

[ander]

1 hour ago, Cigarbutt said:

More disclosure is needed but if this is the typical OMERS' kind of deal, the interest rate is 10% and the gradual buyback of the 'non-controlling interest' will be based on today's fair value valuation (whatever inputs used to decide the range in valuation). For Brit (after a dissection of both parent and sub reporting), the OMERS' stake was bought at 4.30 book value per share (essentially based on the contemporaneous visible transaction), and, almost like clockwork (although it doesn't look like it), 0.43 cents per share (per year) was paid to OMERS and the stake was bought back at a constant 4.30 per share. So, this is the (financing) hurdle rate.

 

@gfp

The only explanation that seems to make sense is that the net difference has to come from the difference between treasury shares reissued and acquired.

 

Disclosure: in the last few months, i've been 'trading' here (to confess an addiction is apparently the first step) and the near future may provide a window of opportunity.

 

The Brit deal done was originally done in 2015? When was it bought back in?

I wonder if in this environment maybe the rate would be more like 5 or 6%?

[bluedevil]

Yes - I think this deal must be viewed as a form of secured financing (secured with a stake in ORH) / preferred equity.  

 

I don't think the valuation of Odyssey is real and wouldn't get excited about that.

 

[Cigarbutt]

23 minutes ago, ander said:

The Brit deal done was originally done in 2015? When was it bought back in?

I wonder if in this environment maybe the rate would be more like 5 or 6%?

Interesting thought about 'this environment'.

In 02/03 2015, FFH issued ten-year notes at 4.95%. In 03 2021, FFH issued ten-year notes at 3.375%. My guess is that the specific credit spread on the OMERS-type credit instruments has not changed. So, an 8-9% 'deal' is within the realm of possibilities. 

[bluedevil]

I agree that it is likely 8-9% 

There is a reason that OMERS jumps at all of these deals!

 

[petec]

3 hours ago, Cigarbutt said:

the OMERS' stake was bought at 4.30 book value per share (essentially based on the contemporaneous visible transaction), and, almost like clockwork (although it doesn't look like it), 0.43 cents per share (per year) was paid to OMERS and the stake was bought back at a constant 4.30 per share.

What happened to Brit’s BVPS over this time? My vague sense is that it was flattish but I could be wrong. But that’s a key input. 

[Cigarbutt]

1 hour ago, petec said:

What happened to Brit’s BVPS over this time? My vague sense is that it was flattish but I could be wrong. But that’s a key input. 

We had discussed this a while back and here's an unaudited update. There has been a lot of capital movements so the focus is on pre-tax earnings. Since acquisition in 2015, the return (average net pre-tax earnings over book value) so far from both the underwriting and investment points of view has been very low (about 1-2% CAGR), with an average CR at 105-6%. Of course it's the future that counts and float has grown and there is an interesting new joint venture. Still, it's interesting to remember that, using their own (FFH-OMERS) internal private appraisals which were undoubtedly used to estimate the intangible part of the acquisition, IV growth at Brit was tagged at about 8%.

[petec]

4 hours ago, Cigarbutt said:

We had discussed this a while back and here's an unaudited update. There has been a lot of capital movements so the focus is on pre-tax earnings. Since acquisition in 2015, the return (average net pre-tax earnings over book value) so far from both the underwriting and investment points of view has been very low (about 1-2% CAGR), with an average CR at 105-6%. Of course it's the future that counts and float has grown and there is an interesting new joint venture. Still, it's interesting to remember that, using their own (FFH-OMERS) internal private appraisals which were undoubtedly used to estimate the intangible part of the acquisition, IV growth at Brit was tagged at about 8%.

 

I haven't looked at Brit's reporting but presumably there is a book value and a share count, so can't we calculate the BVPS? That might illuminate whether OMERS had a sweet deal or not?

 

My sense is that OMERS got 10% preferential dividend, paid from Brit, but that's where their upside was capped - whereas their downside had no floor because FFH didn't have to buy the shares back. It looks like a fairly priced deal to me, but we don't really have the details to know.

[Cigarbutt]

23 minutes ago, petec said:

 

I haven't looked at Brit's reporting but presumably there is a book value and a share count, so can't we calculate the BVPS? That might illuminate whether OMERS had a sweet deal or not?

My sense is that OMERS got 10% preferential dividend, paid from Brit, but that's where their upside was capped - whereas their downside had no floor because FFH didn't have to buy the shares back. It looks like a fairly priced deal to me, but we don't really have the details to know.

From an exchange that happened last Feb 15, 2021:

You:

I think the 516/516 might be the result of a tax structure. Could the deal have been designed to provide a return via dividends instead of capital gains?

But yes, in principle I agree OMERS is basically providing debt finance albeit I think they do take equity risk:

- I am not sure FFH have to buy back the stake if they don't want to.

- The valuation of Brit came down from 2018 ($251.8m for 11.2%) to 2020 ($206.6m for 10.5%).

Looking at it another way, by my maths FFH has paid a total of $1.85bn for 100% of Brit (before then selling 14% back to OMERS). I think that's a good chunk more than they originally wanted to pay, for a lower BV since Brit BV has barely grown.

Me:

i just spend 5-10 minutes on both Brit and FFH reporting and cross-checked a few things.

Summary (it's easier to take OMERS' perspective as FFH contributed capital and assigned its own dividends to Brit) (all numbers in USD)

Summer 2015: OMERS pay 4.30 per share for 120M shares (29.92% interest), with a shareholders' agreement stipulating an annual dividend at 0.43 per share. Total 516.0M

In 2016: OMERS gets 4.30 per share for 13.449M shares, 57.8M

In 2018: OMERS gets 4.30 per share for 58.551M shares, 251.8M

In 2020: OMERS gets 4.30 per share for the remaining 48.000M shares, 206.4M

i think the cumulative dividend has been paid effectively at 0.43 per share per year during the minority ownership. FFH had permission to buy back, on an annual basis and possibly with certain restrictions, the minority interest.

So, this type of partnership could be a win-win and has been a reliable source of funds for FFH so far but, so far, the win-win has been met 100% on OMERS' side and remains to be defined on FFH's side and is based on a 10% (+/-) hurdle rate.

You:

That’s really interesting, thanks.

-----

So the arrangement is basically fixed-income-like with a preferred-share-constant-principal-par-value aspect from OMERS' point of financial view. i assume OMERS face(d) counterparty risk and there must (have been) be provisions for some kind of forced redemption or recovery in case of 'default' but the relatively high coupon may mean that they rely more on qualitative factors related to top management (whom they got to know more and more over time) and less on explicit covenants. These deals make a lot of sense for OMERS (their mission, expected returns etc) and it's up to Fairfax to make good on the leveraged funds.

[petec]

4 minutes ago, Cigarbutt said:

From an exchange that happened last Feb 15, 2021:

You:

I think the 516/516 might be the result of a tax structure. Could the deal have been designed to provide a return via dividends instead of capital gains?

But yes, in principle I agree OMERS is basically providing debt finance albeit I think they do take equity risk:

- I am not sure FFH have to buy back the stake if they don't want to.

- The valuation of Brit came down from 2018 ($251.8m for 11.2%) to 2020 ($206.6m for 10.5%).

Looking at it another way, by my maths FFH has paid a total of $1.85bn for 100% of Brit (before then selling 14% back to OMERS). I think that's a good chunk more than they originally wanted to pay, for a lower BV since Brit BV has barely grown.

Me:

i just spend 5-10 minutes on both Brit and FFH reporting and cross-checked a few things.

Summary (it's easier to take OMERS' perspective as FFH contributed capital and assigned its own dividends to Brit) (all numbers in USD)

Summer 2015: OMERS pay 4.30 per share for 120M shares (29.92% interest), with a shareholders' agreement stipulating an annual dividend at 0.43 per share. Total 516.0M

In 2016: OMERS gets 4.30 per share for 13.449M shares, 57.8M

In 2018: OMERS gets 4.30 per share for 58.551M shares, 251.8M

In 2020: OMERS gets 4.30 per share for the remaining 48.000M shares, 206.4M

i think the cumulative dividend has been paid effectively at 0.43 per share per year during the minority ownership. FFH had permission to buy back, on an annual basis and possibly with certain restrictions, the minority interest.

So, this type of partnership could be a win-win and has been a reliable source of funds for FFH so far but, so far, the win-win has been met 100% on OMERS' side and remains to be defined on FFH's side and is based on a 10% (+/-) hurdle rate.

You:

That’s really interesting, thanks.

-----

So the arrangement is basically fixed-income-like with a preferred-share-constant-principal-par-value aspect from OMERS' point of financial view. i assume OMERS face(d) counterparty risk and there must (have been) be provisions for some kind of forced redemption or recovery in case of 'default' but the relatively high coupon may mean that they rely more on qualitative factors related to top management (whom they got to know more and more over time) and less on explicit covenants. These deals make a lot of sense for OMERS (their mission, expected returns etc) and it's up to Fairfax to make good on the leveraged funds.

Yes, I remember that exchange. For me the key points are 

1) the “preferred dividend” is paid by Brit, not Fairfax. 
2) Fairfax doesn’t have to buy back the shares. 
3) The price Fairfax pays doesn’t seem to change. 
 

This makes me think Omers got a preferred return capped at a fairly high level (10%), but took equity risk to do so. 

[Cigarbutt]

^Then we're on the same page: Fairfax is borrowing +/- permanent equity capital at an 8-10% cost (with ORH as collateral) in order to buy its own stock, a scenario which assumes that the expected return on the price paid for the buyback will be superior than the 8-10% cost of capital.

[Viking]

Given the proceeds will be used to buy back stock do we subtract the $10/share dividend Fairfax saves (each and every year moving forward) from the cost it will be paying to the pension funds? Does this not effectively reduce Fairfax’s ‘cost’ on this deal by about 2.5% per year?

[Buckeye]

This may be a terribly stupid question, but can someone please explain to me why this deal is being reported as a sale of 10% of ORH, when the language in the opening paragraph of the press release reads “OMERS will acquire 100% of a new series of securities representing a 4.995% interest in Odyssey Group Holdings, Inc.”? So it’s not a sale of 4.995% of ORH? 
 

Thanks!

 

[gfp]

44 minutes ago, Buckeye said:

This may be a terribly stupid question, but can someone please explain to me why this deal is being reported as a sale of 10% of ORH, when the language in the opening paragraph of the press release reads “OMERS will acquire 100% of a new series of securities representing a 4.995% interest in Odyssey Group Holdings, Inc.”? So it’s not a sale of 4.995% of ORH? 
 

Thanks!

 

 

There are two separate pension funds, each purchasing the same amount of the new security.  4.995% interest each, for a total of just under 10% of Odyssey.  A few media reports have mis-stated the deal in headlines.  I read one that said $1 Billion for 4.995% for instance.

 

From your quoted press release, just include the few words before your quote for clarity:

" to which each of CPPIB Credit Investments and OMERS will acquire 100% of a new series of securities representing a 4.995% interest in Odyssey Group"

Edited November 18, 2021 by gfp

[Cigarbutt]

To Viking and Buckeye,

i guess one way to get perspective on this 'deal' is to appreciate it like an equity contract involving a sale of a minority interest of a crown jewel using a relatively high coupon in order to obtain an investor-friendly (FFH's perspective) control on the upside of their whole insurance business. It's also an extension of their own common share TRS instrument: they are paying a fee to OMERS and its credit unit (using ORH preferred shares with liquidation priority as collateral) in order to keep the return potential (both up and down) and that includes the return from dividends (they end up paying themselves then for the Dutch-auctioned shares).

It's really clever and is quite specific to FFH in terms of unconventional thinking. It's one of the things that make them special and which has caused them, in the past, to either do very well or to run into trouble.

[Buckeye]

37 minutes ago, gfp said:

 

There are two separate pension funds, each purchasing the same amount of the new security.  4.995% interest each, for a total of just under 10% of Odyssey.  A few media reports have mis-stated the deal in headlines.  I read one that said $1 Billion for 4.995% for instance.

 

From your quoted press release, just include the few words before your quote for clarity:

" to which each of CPPIB Credit Investments and OMERS will acquire 100% of a new series of securities representing a 4.995% interest in Odyssey Group"

Thanks GFP! I missed the fact that CPPIB and OMERS were two different entities. Thank you for the clarification.

[modiva]

1 hour ago, Cigarbutt said:

To Viking and Buckeye,

i guess one way to get perspective on this 'deal' is to appreciate it like an equity contract involving a sale of a minority interest of a crown jewel using a relatively high coupon in order to obtain an investor-friendly (FFH's perspective) control on the upside of their whole insurance business. It's also an extension of their own common share TRS instrument: they are paying a fee to OMERS and its credit unit (using ORH preferred shares with liquidation priority as collateral) in order to keep the return potential (both up and down) and that includes the return from dividends (they end up paying themselves then for the Dutch-auctioned shares).

It's really clever and is quite specific to FFH in terms of unconventional thinking. It's one of the things that make them special and which has caused them, in the past, to either do very well or to run into trouble.

 

This looks similar to margin loan, at least conceptually.  Taking loan against equity.  The difference is that the terms are custom.  The loan amount is very high relative to allowed amounts, and the loan interest is very high relative to the market rate.  Am I missing something?

Edited November 18, 2021 by modiva

[omagh]

On 11/17/2021 at 10:04 AM, MarioP said:

1 B us$ Price range : 425 to 500us$. Financed by the sale of 10% of Odysse

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-US1.0-Billion-Substantial-Issuer-Bid-and-Sale-of-9.99-Minority-Stake-in-Odyssey-Group/default.aspx

 

Fairfax's approach is complicated compared to Berkshire's approach which is to use operating earnings to buyback shares.  Imagine a Fairfax with an appropriate capital structure and you'll have a much better company.  Imagine Berkshire having to sell part of National Indemnity or GenRe to allocate capital to buybacks...I'd rather not. 

 

Yet here we are with Fairfax selling OdysseyRe ownership to raise capital.  Both BRK and FFH believe their shares are undervalued, so you can pick your own path.  BRK has bought back $51B in 5 quarters.  Check back to see how much FFH *actually* buys over the next 5 quarters.

[Buckeye]

^Good points omagh 

[gfp]

1 hour ago, omagh said:

Fairfax's approach is complicated compared to Berkshire's approach which is to use operating earnings to buyback shares.  Imagine a Fairfax with an appropriate capital structure and you'll have a much better company.  Imagine Berkshire having to sell part of National Indemnity or GenRe to allocate capital to buybacks...I'd rather not. 

 

Yet here we are with Fairfax selling OdysseyRe ownership to raise capital.  Both BRK and FFH believe their shares are undervalued, so you can pick your own path.  BRK has bought back $51B in 5 quarters.  Check back to see how much FFH *actually* buys over the next 5 quarters.

 

Berkshire has repurchased $38.2 Billion in the past 5 quarters.