Auction Buyback Announced

[rkbabang]

11 minutes ago, Gregmal said:

Rule number 1 when buying crap is to never forget that it is crap. A close second is to have a well defined exit strategy and stick to it. When it comes to stuff like Resolute or BB I think he’s forgotten both those things. Or is willfully bypassing them and in that case you just scratch your head and hope for the best.  

 

Well said.  This is basically what I was thinking getting back into Fairfax this year.   I will not hold it forever.

 

[KPO]

3 hours ago, Gregmal said:

Rule number 1 when buying crap is to never forget that it is crap. A close second is to have a well defined exit strategy and stick to it. When it comes to stuff like Resolute or BB I think he’s forgotten both those things. Or is willfully bypassing them and in that case you just scratch your head and hope for the best.  

I can get my mind around Resolute and Stelco as natural hedges for their property insurance exposure (which has effectively mitigated their inflation exposure the last year or so), but holdings like BB and Recipe just seem like nationalism plays that will never drive material value creation. I hope I’m wrong, but I also don’t think it matters much because they’ve done very well with Digit and seem to be managing the insurance business well. This isn’t Berkshire and never will be, but we seem to all agree it is a good trade in the $400’s. 

 

 

[MMM20]

With odd lots first in line, why wouldn’t I tell all my friends to buy 99 shares at <$450 to tender at $500? Of course the deal could be modified but seems like the closest thing to a guaranteed 10%+ return I’ve seen, admittedly not necessarily scalable!

[StubbleJumper]

1 hour ago, MMM20 said:

With odd lots first in line, why wouldn’t I tell all my friends to buy 99 shares at <$450 to tender at $500? Of course the deal could be modified but seems like the closest thing to a guaranteed 10%+ return I’ve seen, admittedly not necessarily scalable!

 

Yes, you are absolutely right.  There's money to be made if you have some space available in a tax-advantaged account.  If you have friends who would understand what a SIB is and would not be afraid to exploit it, you would be doing them a favour because there's quite likely an easy ~US$5k to be made in a month's time with the odd-lot privilege (if you can make space in a tax-advantaged account).

 

In fact, if you wanted to be an even better friend, you could tell them to simply load up on the shares and tender, odd-lot privilege be damned.  If you have space to buy, say, 300 shares in a tax-advantaged account it almost certainly will work out well.  Chances are that you won't be pro-rated because the SIB will be under-subscribed.  And if it actually is fully-subscribed, your "bad" outcome is that a percentage of your shares will be tendered at the high-$400s and you end up holding a percentage into January/February.  When the Q4 earnings come out around Valentine's Day, FFH is quite likely to report book value at US$600+, which should propel the shares forward at least a bit.

 

This one is an asymmetric bet as long as you manage the income tax consequences.

 

 

SJ

 

 

[MMM20]

47 minutes ago, StubbleJumper said:

 

Yes, you are absolutely right.  There's money to be made if you have some space available in a tax-advantaged account.  If you have friends who would understand what a SIB is and would not be afraid to exploit it, you would be doing them a favour because there's quite likely an easy ~US$5k to be made in a month's time with the odd-lot privilege (if you can make space in a tax-advantaged account).

 

In fact, if you wanted to be an even better friend, you could tell them to simply load up on the shares and tender, odd-lot privilege be damned.  If you have space to buy, say, 300 shares in a tax-advantaged account it almost certainly will work out well.  Chances are that you won't be pro-rated because the SIB will be under-subscribed.  And if it actually is fully-subscribed, your "bad" outcome is that a percentage of your shares will be tendered at the high-$400s and you end up holding a percentage into January/February.  When the Q4 earnings come out around Valentine's Day, FFH is quite likely to report book value at US$600+, which should propel the shares forward at least a bit.

 

This one is an asymmetric bet as long as you manage the income tax consequences.

 

 

SJ

 

 

Makes sense. Only question is how we handicap the risk of a material modification to the terms at this point? I know deals break all the time in sharp down markets but I have a hard time seeing that here unless things truly fall apart over the next few weeks. But stranger things have surely happened.

 

I own a lot (for me) and plan to hold for a long time. But might size it up even more for short term trade.

 

 

[value_hunter]

What's the chance of the over subscribe and tender price is around $460? If the stock price is constantly below $450, are many people willing to accept tender price of $460?  

[MMM20]

40 minutes ago, value_hunter said:

What's the chance of the over subscribe and tender price is around $460? If the stock price is constantly below $450, are many people willing to accept tender price of $460?  

 

True, I'm assuming it'll be undersubscribed. i think that's a fair bet but of course won't necessarily be the case.

[StubbleJumper]

1 hour ago, MMM20 said:

Makes sense. Only question is how we handicap the risk of a material modification to the terms at this point? I know deals break all the time in sharp down markets but I have a hard time seeing that here unless things truly fall apart over the next few weeks. But stranger things have surely happened.

 

I own a lot (for me) and plan to hold for a long time. But might size it up even more for short term trade.

 

 

 

There might be two risks. 

 

The first is that OMERS could pull the plug, which I find highly unlikely.  FFH has chosen a deep-pocketed partner that chronically has cash to deploy and requires more yield than government bonds can provide.  I am not worried about OMERS at all. 

 

The second risk is that FFH pulls the plug.  That sort of thing could occur if the world goes to hell in a handbasket over the next four weeks and FFH decides that it needs to conserve both equity and cash.  This seems like a bit of an extreme scenario, but we should never say never.  The pandemic market of March 2020 did result in a few things like that happening (example, MGM repriced its tender and then cancelled it altogether).  Given that FFH is offering about 0.8x book, my sense is that a pretty severe situation would be required for this one to not go through.

 

I added back in October and I added again today in a tax advantaged account.  If things go south, I don't mind being overweight FFH for a year or two.

 

 

SJ

[MMM20]

6 minutes ago, StubbleJumper said:

 

There might be two risks. 

 

The first is that OMERS could pull the plug, which I find highly unlikely.  FFH has chosen a deep-pocketed partner that chronically has cash to deploy and requires more yield than government bonds can provide.  I am not worried about OMERS at all. 

 

The second risk is that FFH pulls the plug.  That sort of thing could occur if the world goes to hell in a handbasket over the next four weeks and FFH decides that it needs to conserve both equity and cash.  This seems like a bit of an extreme scenario, but we should never say never.  The pandemic market of March 2020 did result in a few things like that happening (example, MGM repriced its tender and then cancelled it altogether).  Given that FFH is offering about 0.8x book, my sense is that a pretty severe situation would be required for this one to not go through.

 

I added back in October and I added again today in a tax advantaged account.  If things go south, I don't mind being overweight FFH for a year or two.

 

 

SJ

Agreed, added today too. Maybe the smart move is to size up FFH to the point it’s borderline uncomfortably big and also buy some OOTM puts on a broad index to hedge the ‘world falls apart’ risk

[Viking]

@StubbleJumper @MMM20 thanks for posting your thoughts on the odd lot opportunity. Given Fairfax’s very high share price 99 shares spread across a bunch of tax advantaged accounts (RRSP, TFSA, RESP) starts to add up to a pretty sizeable potential short term gain (especially considering most families have multiples of each type of account). 
 

A little more than just beer money  

 

PS: do you guys have any insight into currency transaction costs (what to elect to minimize them)? For investors who hold FFH in a Can$ account like an RESP (tax advantaged).

Edited November 27, 2021 by Viking

[StubbleJumper]

40 minutes ago, Viking said:

@StubbleJumper @MMM20 thanks for posting your thoughts on the odd lot opportunity. Given Fairfax’s very high share price 99 shares spread across a bunch of tax advantaged accounts (RRSP, TFSA, RESP) starts to add up to a pretty sizeable potential short term gain (especially considering most families have multiples of each type of account). 
 

A little more than just beer money  

 

 

It's 99 shares per beneficial holder, not per account.  So, 99 for you, 99 for your wife, and then you need to figure out who the beneficial holders are for your kids' RESPs because it might be 99 per kid too....

 

So that's the legalese, but who's going to enforce it?  Will your broker realise it and enforce the 99 per person rule as opposed to 99 per account?  Would Prem enforce it?  He wants to buy shares and will probably be undersubscribed, so I can't imagine that he'd fuss about it.  

 

I have no insight on the currency thing.  I always keep FFH in USD accounts because the divvy comes in USD.

 

SJ

[maxthetrade]

2 hours ago, StubbleJumper said:

If things go south, I don't mind being overweight FFH for a year or two.

 

What do you consider as an overweight position, 10%, 20%, 30%? After selling DLTR I'm thinking about buying more FFH and the maximum exposure I'd like to have. I'm pretty comfortable with 20% at this price but probably won't go above 30% even if it gets cheaper.

 

[StubbleJumper]

34 minutes ago, maxthetrade said:

 

What do you consider as an overweight position, 10%, 20%, 30%? After selling DLTR I'm thinking about buying more FFH and the maximum exposure I'd like to have. I'm pretty comfortable with 20% at this price but probably won't go above 30% even if it gets cheaper.

 

 

I don't like FFH being more than 20%.  But, at current valuation, I'll go there...

 

 

SJ

[glider3834]

On 11/27/2021 at 8:06 AM, value_hunter said:

What's the chance of the over subscribe and tender price is around $460? If the stock price is constantly below $450, are many people willing to accept tender price of $460?  

well the lower Fairfax's share price (relative to pricing under this tender), the more attractive this buyback might look to tax advantaged funds/individuals to participate IMO

 

Also volatility in the market would encourage funds to prioritise liquidity - another reason why funds might sell into this SIB.

 

Finally, timing - we are coming to end of the calendar year - funds are mindful of their annual performance (particularly if markets are weak) & may have incentive to lock in gains at a fixed price under this tender.

 

So a temporary period of volatility could work for Fairfax at least while this SIB is open - as long as we don't see the the economic recovery completely derailed (which I see as a low probability at this stage).

 

 

 

Edited November 28, 2021 by glider3834

[racemize]

It is not clear to me what the tax implications (e.g., Canadian withholding) if this is sold via a U.S. IRA.  Any thoughts from board members?

[StubbleJumper]

32 minutes ago, racemize said:

It is not clear to me what the tax implications (e.g., Canadian withholding) if this is sold via a U.S. IRA.  Any thoughts from board members?

 

IRA?  Check the tax section of the SIB circular and the Canada-US Tax Treaty to be sure, but when I exploit tenders from the other direction (ie, a US tender using a Canadian RRSP) there has been no withholding tax because the tax treaty exempts retirement accounts.  For Canadians this presents an interesting twist because a Registered Retirement Savings Plan doesn't get dinged with the withholding tax on dividends, but our Tax-Free Savings Accounts do get dinged because the TFSA is not explicitly a retirement account (even though most of us do intend to use it for that purpose).

 

When FFH kicks out its annual dividend, have you experienced a withholding tax in your IRA?

 

 

SJ

[racemize]

1 hour ago, StubbleJumper said:

 

IRA?  Check the tax section of the SIB circular and the Canada-US Tax Treaty to be sure, but when I exploit tenders from the other direction (ie, a US tender using a Canadian RRSP) there has been no withholding tax because the tax treaty exempts retirement accounts.  For Canadians this presents an interesting twist because a Registered Retirement Savings Plan doesn't get dinged with the withholding tax on dividends, but our Tax-Free Savings Accounts do get dinged because the TFSA is not explicitly a retirement account (even though most of us do intend to use it for that purpose).

 

When FFH kicks out its annual dividend, have you experienced a withholding tax in your IRA?

 

 

SJ

 

Good point, yes, have not had any withholding from the annual dividend in that account, so probably would work for this.

[glider3834]

Can't Fairfax execute its normal course issuer bid at the same time as its substantial issuer bid? With their shares trading in the mid US$400s, why would they bother waiting for the auction tender which we know could be a challenge to fill anyway? Looking at the TSX today the volume today is over 140,000 shares when its avg volume is normally around 50,000 shares.

[Mick92]

NCIB is suspended until the expiry of the auction according to the docs. Shame as it would be nice to see them buying back the max right now.

[ICUMD]

Has anyone tried to tender for the auction yet?  Contacted my broker with intent to tender at $500.  Was told the auction is not yet open. 

 

Also, was told that there will be probably be an option to receive funds in USD though my holdings are in Canadian  funds.

 

Can anyone verify this information?

 

Thanks!

[StubbleJumper]

17 minutes ago, ICUMD said:

Has anyone tried to tender for the auction yet?  Contacted my broker with intent to tender at $500.  Was told the auction is not yet open. 

 

Also, was told that there will be probably be an option to receive funds in USD though my holdings are in Canadian  funds.

 

Can anyone verify this information?

 

Thanks!

 

Ask your broker to journal the FFH shares over to the US side of your account before tendering and then when you receive US dollars from the tender, they won't be automatically converted into Canadian dollars.  When you finally decide what you want to do with the proceeds, you can make the decision about converting.  It's possible that your next purchase will be inter-listed and you can simply buy it from the NYSE without ever giving your broker an exchange rate spread (if you do the arithmetic about exchange rate spreads, a smallish conversion of $50k USD ends up being a spread of probably $600 or $700 Canadian dollars).

 

More broadly, any Canadian holder of FFH shares should probably always keep their FFH shares on the US side of their account because the annual dividend is in US dollars.  No need to convert it into Canadian until you are sure what you want to do with it.

 

 

SJ

[ICUMD]

4 minutes ago, StubbleJumper said:

 

Ask your broker to journal the FFH shares over to the US side of your account before tendering and then when you receive US dollars from the tender, they won't be automatically converted into Canadian dollars.  When you finally decide what you want to do with the proceeds, you can make the decision about converting.  It's possible that your next purchase will be inter-listed and you can simply buy it from the NYSE without ever giving your broker an exchange rate spread (if you do the arithmetic about exchange rate spreads, a smallish conversion of $50k USD ends up being a spread of probably $600 or $700 Canadian dollars).

 

More broadly, any Canadian holder of FFH shares should probably always keep their FFH shares on the US side of their account because the annual dividend is in US dollars.  No need to convert it into Canadian until you are sure what you want to do with it.

 

 

SJ

Thank you for the recommendation SJ.  I'll definitely do that.  Does the same strategy work for Canadian Bank stocks that are interlisted on the NYSE like Royalbank?  Will that provide a stream of US dividend income avoiding the currency exchange costs?

[StubbleJumper]

1 hour ago, ICUMD said:

Thank you for the recommendation SJ.  I'll definitely do that.  Does the same strategy work for Canadian Bank stocks that are interlisted on the NYSE like Royalbank?  Will that provide a stream of US dividend income avoiding the currency exchange costs?

 

No, the Canadian banks pay their common dividends in Canadian dollars.  But, that doesn't prevent you from using the US dollars from the proceeds of this tender to buy the shares in US dollars from the NYSE (because all 5 banks are inter-listed).  And then, it's the same logic as FFH, but in reverse.  You phone your broker and you ask to have your Canadian bank shares journaled from the US side of your account to the Canadian side because the Canadian banks pay their dividends in Canadian dollars.  You don't want to hold your Canadian bank shares on the US side of your account because every dividend payment will automatically be converted from Canadian dollars into US dollars if you keep them in your US account.  As much as possible, you want to do the currency conversions when and as you need them to minimize your costs.  And you probably want to use Norbert's Gambit when you do the conversion.

 

 

SJ

[ICUMD]

41 minutes ago, StubbleJumper said:

 

No, the Canadian banks pay their common dividends in Canadian dollars.  But, that doesn't prevent you from using the US dollars from the proceeds of this tender to buy the shares in US dollars from the NYSE (because all 5 banks are inter-listed).  And then, it's the same logic as FFH, but in reverse.  You phone your broker and you ask to have your Canadian bank shares journaled from the US side of your account to the Canadian side because the Canadian banks pay their dividends in Canadian dollars.  You don't want to hold your Canadian bank shares on the US side of your account because every dividend payment will automatically be converted from Canadian dollars into US dollars if you keep them in your US account.  As much as possible, you want to do the currency conversions when and as you need them to minimize your costs.  And you probably want to use Norbert's Gambit when you do the conversion.

 

 

SJ

Thanks SJ.  That's very helpful.

[glider3834]

5 hours ago, Mick92 said:

NCIB is suspended until the expiry of the auction according to the docs. Shame as it would be nice to see them buying back the max right now.

 thanks @Mick92

ok well if they can't fully complete the SIB, they will waste no time restarting the NCIB at these price levels  at lower end of tender pricing IMO