Auction Buyback Announced

[Santayana]

Did everyone get notified of the auction through their broker?   I received a notification and instructions via Schwab, but a friend who only owns a few shares through JPM says they never heard anything about it until I told them.

[gfp]

8 minutes ago, Santayana said:

Did everyone get notified of the auction through their broker?   I received a notification and instructions via Schwab, but a friend who only owns a few shares through JPM says they never heard anything about it until I told them.

Yes, I believe even FRFHF shareholders were notified.  Not every broker handles corporate actions the same way, and some people have notification preferences set to postal mail, electronic only, or both.

[TwoCitiesCapital]

7 hours ago, Santayana said:

Did everyone get notified of the auction through their broker?   I received a notification and instructions via Schwab, but a friend who only owns a few shares through JPM says they never heard anything about it until I told them.

 

I've been notified by Schwab (FRFHF) and IB (FFH). 

[ICUMD]

I have received the auction notification.

It appears I am not smart enough to understand the pros and cons of the purchase price tender.

 

It seems that the chances of there being a large difference between the upper end of the offer at $500 and the purchase price tender price being negligible.  

 

Is it really just a gamble and an option for someone desperate to rid themselves of shares?

[MMM20]

I might also be too dumb too understand what’s happening here. Usually when I think there's blindingly obvious opportunity to pick up big alpha, it turns out I was just missing something. Why shouldn’t I load up at $450 and, idk, maybe buy some TSX puts, to tender in <10 days? Why shouldn’t I go full Munger and sell all my BRK, index funds, etc in my retirement accounts to raise as much capital as possible for what will almost certainly be a ~10% return? (famous last words, i know)

 

This now feels like a repeat of the Fairfax India SIB where there turned out to be a big opportunity to load up and tender right before the deadline. Is it not obvious based on the funky shareholder base, tax incentives, low trading volume, still-near-all-time-low valuation (even at the high end of the range), etc., that the tender will almost certainly happen at or close to $500? A la $14.90 with Fairfax India not even 6 months ago. Unless the world falls apart over the next week, I guess?

Is it simply that the bank prop desks are dead and everyone’s pulled money from the arb hedge funds to buy more FAAMNGTklsjgs? Are flows around the Fed decision (and/or insurance specifically with the tornadoes?) really just pushing this down to $450 when $480+ would clearly make more sense? Is that you, Mr. Market?

 

I'm not afraid to pick up free money if I see it. Just want to be sure I'm not picking up nickels ($100,000 bills?) in front of a steamroller.

 

Where are the arbitrageurs?

 

What am I missing?

Edited December 14, 2021 by MMM20

[StubbleJumper]

8 minutes ago, MMM20 said:

Why shouldn’t I load up at $450 and, idk, maybe buy some TSX puts, to tender in <10 days?

 

Because if you don't use a tax advantaged account, the Canada Revenue Agency will give it to you up the ass due to the deemed dividend.  But, yes, I've rearranged some space in my tax advantaged accounts and I'll be tendering 500 shares or so.

 

 

SJ

[MMM20]

1 hour ago, StubbleJumper said:

 

Because if you don't use a tax advantaged account, the Canada Revenue Agency will give it to you up the ass due to the deemed dividend.  But, yes, I've rearranged some space in my tax advantaged accounts and I'll be tendering 500 shares or so.

 

 

SJ

 

Got it. I know you are not my tax guy, so feel free to ignore this. But that is an issue only for Canadian residents, correct? Or will they come after USA residents if done in a taxable account? Sorry if this has already been discussed here.

Edited December 14, 2021 by MMM20

[StubbleJumper]

19 minutes ago, MMM20 said:

 

Got it. I know you are not my tax guy, so feel free to ignore this. But that this is an issue only for Canadian residents, correct? Or will they come after USA residents if done in a taxable account? Sorry if this has already been discussed here.

 

 

The normal withholding tax by the Canada Revenue Agency is 30%.  Under the Canada-US tax treaty, the withholding tax is 15%.  In the issuer bid circular, FFH has disclosed that its Paid-up Capital will be about US$252/sh.  If the shares tender at US$500, there will be a deemed dividend of US$248/sh.  The CRA will withhold 15% of that, or ~US$37/sh as a withholding tax for any US citizen that does not have an account that is tax advantaged under the tax treaty, and then the US holder needs to figure out what the IRS wants from him.  

 

If you bought today at US$450 and it works out that the tender price is US$500, there will be a slim profit for a US holder in a cash or margin account after paying the Canadian withholding tax...but, as @TwoCitiesCapital noted, a tender at US$500 would be a quick ~10% if you can figure out a way to elude the tax man.

 

 

SJ

[MMM20]

8 minutes ago, StubbleJumper said:

 

 

The normal withholding tax by the Canada Revenue Agency is 30%.  Under the Canada-US tax treaty, the withholding tax is 15%.  In the issuer bid circular, FFH has disclosed that its Paid-up Capital will be about US$252/sh.  If the shares tender at US$500, there will be a deemed dividend of US$248/sh.  The CRA will withhold 15% of that, or ~US$37/sh as a withholding tax for any US citizen that does not have an account that is tax advantaged under the tax treaty, and then the US holder needs to figure out what the IRS wants from him.  

 

If you bought today at US$450 and it works out that the tender price is US$500, there will be a slim profit for a US holder in a cash or margin account after paying the Canadian withholding tax...but, as @TwoCitiesCapital noted, a tender at US$500 would be a quick ~10% if you can figure out a way to elude the tax man.

 

 

SJ

 

Got it, makes sense. BTW I just found the below on Brookfield's website. Hope it is safe to assume this applies to this FFH situation. 

 

Withholding Tax on Dividends
Under Canadian domestic law, dividends paid by Brookfield Asset Management Inc. to a non-resident shareholder are subject to 25% withholding tax. Generally, the Canada – U.S. Income Tax Treaty will reduce the rate of dividend withholding tax from 25% down to 15% for a resident of the United States. Where the U.S. resident owns the shares of Brookfield Asset Management Inc. in a 401K, IRA or similar plan, the Canada – U.S. Income Tax Treaty will reduce the rate of dividend withholding tax to nil.

 

https://bam.brookfield.com/stock-distributions/tax-information

[StubbleJumper]

14 minutes ago, MMM20 said:

Hope it is safe to assume this applies to this FFH situation. 

 

No.  You should read the Issuer Bid Circular which was posted on SEDAR.com  FFH has dedicated a few pages to describe the income tax issues for both Canada and the US.  For your convenience, I have attached the filing.

 

 

SJ

fairfax.pdf

[Viking]

1 hour ago, StubbleJumper said:

 

Because if you don't use a tax advantaged account, the Canada Revenue Agency will give it to you up the ass due to the deemed dividend.  But, yes, I've rearranged some space in my tax advantaged accounts and I'll be tendering 500 shares or so.

 

 

SJ

@StubbleJumper my assumption is you hold your shares in US$ accounts? I took your suggestion and contacted RBC and they would transfer and any shares i wanted to tender from Can$ to US$ side - they need 1 day to settle the move (plus 2 more days to capture my instructions regarding the Dutch auction). I am waiting to see what happens with the Fed on Wed before making any final decisions. 

[StubbleJumper]

2 minutes ago, Viking said:

@StubbleJumper my assumption is you hold your shares in US$ accounts? I took your suggestion and contacted RBC and they would transfer and any shares i wanted to tender from Can$ to US$ side - they need 1 day to settle the move (plus 2 more days to capture my instructions regarding the Dutch auction). I am waiting to see what happens with the Fed on Wed before making any final decisions. 

 

Yes, I always try to hold FFH in US-dollar accounts.  That way, when the annual dividend is paid, it doesn't automatically get converted to Canadian dollars at an unfavourable exchange rate.  In the case of the tender, I'll be happy to take US dollars for the shares and then figure out what to do with those US dollars over the course of the next month (maybe I'll buy more shares from the US market, or maybe I'll convert them back to Canadian dollars, but it will be a conscious decision rather than an automatic conversion at an unfavourable exchange rate). 

 

If, by some freak of nature, the substantial issuer bid is over-subscribed and my tender is pro-rated, then at least the excess FFH shares not accepted for tender will be in a US-dollar account and I'll probably hold them for a month or two.  They'll probably trade X-D at the end of January, so that'll be US$10, and then FFH will likely release its Q4 results around Valentine's Day, which sometimes results in a bit of a pop.  My take is that somebody buying today at US$450 with the intention of tendering would not have any trouble at all to profitably collect the divvy and then dump the excess shares in mid-February if pro-ration actually occurs.

 

 

SJ

[MMM20]

15 minutes ago, StubbleJumper said:

 

No.  You should read the Issuer Bid Circular which was posted on SEDAR.com  FFH has dedicated a few pages to describe the income tax issues for both Canada and the US.  For your convenience, I have attached the filing.

 

 

SJ

fairfax.pdf 1.46 MB · 3 downloads

 

Thanks. I definitely skimmed over that whole section earlier. Time to sharpen the pencils!

[Matthew Lembo]

Is Fairfax Financial a PFIC?
 

I thought it was not, but after reading the notice that @StubbleJumper posted I’m confused so was wondering if anyone could set me straight? 
 

much appreciated!! 

[MMM20]

Ok, so here is the part (see pg 44-45) that I think is most relevant to my situation, in case this helps anyone else. Nothing in here that changes my prior assessment of the current opportunity. Don't come for me if you get stuck with a fat bill. 

 

 

 

 

Edited December 14, 2021 by MMM20

[ICUMD]

9 minutes ago, StubbleJumper said:

 

Yes, I always try to hold FFH in US-dollar accounts.  That way, when the annual dividend is paid, it doesn't automatically get converted to Canadian dollars at an unfavourable exchange rate.  In the case of the tender, I'll be happy to take US dollars for the shares and then figure out what to do with those US dollars over the course of the next month (maybe I'll buy more shares from the US market, or maybe I'll convert them back to Canadian dollars, but it will be a conscious decision rather than an automatic conversion at an unfavourable exchange rate). 

 

If, by some freak of nature, the substantial issuer bid is over-subscribed and my tender is pro-rated, then at least the excess FFH shares not accepted for tender will be in a US-dollar account and I'll probably hold them for a month or two.  They'll probably trade X-D at the end of January, so that'll be US$10, and then FFH will likely release its Q4 results around Valentine's Day, which sometimes results in a bit of a pop.  My take is that somebody buying today at US$450 with the intention of tendering would not have any trouble at all to profitably collect the divvy and then dump the excess shares in mid-February if pro-ration actually occurs.

 

 

SJ

 

17 minutes ago, StubbleJumper said:

 

Yes, I always try to hold FFH in US-dollar accounts.  That way, when the annual dividend is paid, it doesn't automatically get converted to Canadian dollars at an unfavourable exchange rate.  In the case of the tender, I'll be happy to take US dollars for the shares and then figure out what to do with those US dollars over the course of the next month (maybe I'll buy more shares from the US market, or maybe I'll convert them back to Canadian dollars, but it will be a conscious decision rather than an automatic conversion at an unfavourable exchange rate). 

 

If, by some freak of nature, the substantial issuer bid is over-subscribed and my tender is pro-rated, then at least the excess FFH shares not accepted for tender will be in a US-dollar account and I'll probably hold them for a month or two.  They'll probably trade X-D at the end of January, so that'll be US$10, and then FFH will likely release its Q4 results around Valentine's Day, which sometimes results in a bit of a pop.  My take is that somebody buying today at US$450 with the intention of tendering would not have any trouble at all to profitably collect the divvy and then dump the excess shares in mid-February if pro-ration actually occurs.

 

 

SJ

SJ-  So I presume you're going to go the route of the auction price tender as opposed to purchase price tender?  

[StubbleJumper]

3 minutes ago, ICUMD said:

SJ-  So I presume you're going to go the route of the auction price tender as opposed to purchase price tender?  

 

I don't think it will make a difference because I am guessing this one will be undersubscribed.  But, yes, instead of a purchase price tender, I will probably choose some dollar value, perhaps US$460 or US$470 as a tender price just in case some freakish event occurs that it is actually oversubscribed.  If the moons and stars align in a way that the tender is lower than that price range, I'll swallow hard and simply carry an over-allotment of FFH into 2022.  I like a concentrated portfolio with high-conviction positions, but there's a limit to my comfort with everything.  But, if push comes to shove, I'll carry more FFH than I'd like into Q1, collect the dividend and then hope for a favourable exit point after Q4 is released near Valentine's or, even hold until Easter when the annual meeting will be held.  Both the Q4 and the annual meeting have resulted in short-term pops in the past.

 

 

SJ

[MMM20]

One question for anyone else who might try to get cute and round-trip this one. How long does it take to actually receive the cash proceeds in these SIB processes? I saw a couple posts on the Fairfax India board that suggested the cash hadn't hit some accounts even 10+ days later, seemingly dependent on the broker (IBKR sooner, Schwab later). Anyone know?

Edited December 14, 2021 by MMM20

[StubbleJumper]

2 minutes ago, MMM20 said:

One question for anyone else who might try to get cute and round-trip this one. How long does it take to actually receive the cash proceeds in these SIB processes? I saw a couple posts on the Fairfax India board that suggested the cash hadn't hit some accounts even 10+ days later, seemingly dependent on the broker (IBKR sooner, Schwab later)

 

 

It won't be super fast.  The SIB closes on December 23.  The bean counters will do some work on the morning of Dec 24, but you should not expect full productivity on Christmas Eve.  In Canada, Christmas Day and Boxing Day (Dec 26) are both statutory holidays (but they fall on Saturday and Sunday this year so December 27 and 28 are statutory days off this year), as is January 1 (but January 1 is a Saturday, so Monday January 3rd is the statutory holiday this year).  So, really, a good outcome would be if we got our money on Dec 30 or Dec 31.  Given the number of business days available, January 4 or 5 would be an okay outcome at that time of year.

 

 

SJ

[ICUMD]

1 hour ago, StubbleJumper said:

 

 

The normal withholding tax by the Canada Revenue Agency is 30%.  Under the Canada-US tax treaty, the withholding tax is 15%.  In the issuer bid circular, FFH has disclosed that its Paid-up Capital will be about US$252/sh.  If the shares tender at US$500, there will be a deemed dividend of US$248/sh.  The CRA will withhold 15% of that, or ~US$37/sh as a withholding tax for any US citizen that does not have an account that is tax advantaged under the tax treaty, and then the US holder needs to figure out what the IRS wants from him.  

 

If you bought today at US$450 and it works out that the tender price is US$500, there will be a slim profit for a US holder in a cash or margin account after paying the Canadian withholding tax...but, as @TwoCitiesCapital noted, a tender at US$500 would be a quick ~10% if you can figure out a way to elude the tax man.

 

 

SJ

Thanks for the explanation SJ. 

 

Correct me if I'm wrong...

 

So I have a cost base of about $400 USD in a taxable account.  So it seems that there is a negative tax impact to tender by experiencing a deemed dividend of about $248 usd per share.

 

Otoh, I could potentially sell it for a capital gains of $100 should it hit $500. This seems much more favorable from a tax perspective. 

 

[StubbleJumper]

1 minute ago, ICUMD said:

Thanks for the explanation SJ. 

 

Correct me if I'm wrong...

 

So I have a cost base of about $400 USD in a taxable account.  So it seems that there is a negative tax impact to tender by experiencing a deemed dividend of about $248 usd per share.

 

Otoh, I could potentially sell it for a capital gains of $100 should it hit $500. This seems much more favorable from a tax perspective. 

 

 

No need to correct you.  That's the exact tax situation. 

 

If the tender price ends up being US$500 and you are able to actually dump the shares on the open market at that price, you'd have a capital gain of about US$100.  But if you successfully tender at that price, you'd have a deemed dividend of US$248.  If you already have a considerable taxable income (your username is ICU MD, so I presume that you make a decent buck), the tax consequences of tendering from a taxable account are daunting.

 

 

SJ

[ICUMD]

46 minutes ago, StubbleJumper said:

 

No need to correct you.  That's the exact tax situation. 

 

If the tender price ends up being US$500 and you are able to actually dump the shares on the open market at that price, you'd have a capital gain of about US$100.  But if you successfully tender at that price, you'd have a deemed dividend of US$248.  If you already have a considerable taxable income (your username is ICU MD, so I presume that you make a decent buck), the tax consequences of tendering from a taxable account are daunting.

 

 

SJ

Thanks very much SJ.  Ill definitely keep my shares for now and go along for the ride.

[TwoCitiesCapital]

1 hour ago, StubbleJumper said:

 

 

It won't be super fast.  The SIB closes on December 23.  The bean counters will do some work on the morning of Dec 24, but you should not expect full productivity on Christmas Eve.  In Canada, Christmas Day and Boxing Day (Dec 26) are both statutory holidays (but they fall on Saturday and Sunday this year so December 27 and 28 are statutory days off this year), as is January 1 (but January 1 is a Saturday, so Monday January 3rd is the statutory holiday this year).  So, really, a good outcome would be if we got our money on Dec 30 or Dec 31.  Given the number of business days available, January 4 or 5 would be an okay outcome at that time of year.

 

 

SJ

 

It will also depend on your broker. IB had given me my cash proceeds for FIH like a week faster than Schwab did. 

 

I can't say what will happen, but the tender by FIH did not provide much a floor under FIH's price and it is now back to lower than it was pre-tender despite having a significant chunk of shares removed from the market. My best guess is Fairfax may perform similarly in that the price will drift back down post-tender. 

 

I'm not trying to risk being out of the name to scalp a few dollars so I'll probably roll all of my IB proceeds back in immediately, but since Schwab is likely to take their sweet time getting me my cash I may try to be more opportunistic with that portion of my tender. 

[Parsad]

$900M capital raise from partial sale of ORH is complete:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-Successful-Completion-of--CPPIB-and-OMERS-Investment-in-9.99-of-Odyssey-Group/default.aspx

 

Let's see how many shares are tendered in the buyback over the next few weeks.  Cheers!

[hardcorevalue]

Would a registered LIF account avoid the deemed dividend?