Fairfax 2024

[gfp]

25 minutes ago, Luke said:

Paid 1.2b USD for this

 

How do you figure they are paying $1.2 Billion USD for this?

[Luke]

3 minutes ago, gfp said:

 

How do you figure they are paying $1.2 Billion USD for this?

Is my currency conversion wrong? 1.7b CAD to USD->1.2b? 

 

https://www.reuters.com/markets/deals/fairfax-buy-retailer-sleep-country-124-bln-deal-2024-07-22/

 

Fairfax to buy retailer Sleep Country in $1.24 bln deal

 

Or am I unware of something else? Please let me know. 

Edited July 25 by Luke

[gfp]

4 minutes ago, Luke said:

Is my currency conversion wrong? 1.7b CAD to USD->1.2b? 

 

https://www.reuters.com/markets/deals/fairfax-buy-retailer-sleep-country-124-bln-deal-2024-07-22/

 

Fairfax to buy retailer Sleep Country in $1.24 bln deal

 

Or am I unware of something else? Please let me know. 

 

That is an enterprise value with assumed debt and lease liabilities.  Fairfax is paying $35 CAD per share for 35 million shares so 100% of the equity is around $890m USD.  If you are going to use enterprise value, I would use something other than reported net income to see if it is expensive or not.

[Luke]

10 minutes ago, gfp said:

 

That is an enterprise value with assumed debt and lease liabilities.  Fairfax is paying $35 CAD per share for 35 million shares so 100% of the equity is around $890m USD.  If you are going to use enterprise value, I would use something other than reported net income to see if it is expensive or not.

You are right, it's late here, 356 in debt, 900m equity->debt gone->8% yield. 

 

Still, what's great here? A stable core business that will grow small forever? Debt also isn't vaporizing, has to be paid off, reducing IRR etc?  

Edited July 25 by Luke

[Hoodlum]

I see that Scotiabank increased their target from $1950 to $2000 cdn yesterday.  Does anyone have access to that report as they may have commented on this acquisition.

Edited July 25 by Hoodlum

[Junior R]

Does Sleep country own any land or warehouses or are they leased maybe thats the play for ffh not sure but if I remeber correctly with toys r us they kept the real estate and sold the business 

[Thrifty3000]

1 hour ago, Luke said:

So basically a business that will grow earnings very slowly with population growth if they manage to build enough housing so trend wont revert? (skeptical)

Growth doesn’t just come from new housing starts. With 39 million people comes about 39 million mattresses, of which, about 3 million of them have to be replaced every year. Sleep Country currently sells about one out of every three mattresses purchased in Canada.

 

That means they have opportunity to triple their domestic market share before even having to worry about selling mattresses to the world’s 8 billion other sleepers.

 

Over the last 10 years they have not only grown store count, but they have also grown via acquisition - acquiring competitors as well as companies with complimentary product lines, like fancy pillows and fancy weighted blankets.

 

Being the largest scale provider in Canada that’s also owned by a large financial backer will provide important competitive advantages. They will now be able to ramp up new stores, acquisitions and marketing at whatever pace they can justify to Fairfax (and these factors were well scrutinized by FFH during negotiations and diligence.) I suspect the base case expectation is to grow the value by 15% annually over at least the next decade, or the investment committee would have black-balled it.

 

Notice some of the main reasons Sleep Country’s profit declined year over year:

 

- acquisition/integration related expenses (hopefully to offer better value proposition)

 

- increased marketing/advertising spend (hopefully to increase sales)

 

- increased compensation (hopefully to attract/retain better talent)

 

^ those will either positively impact future results, or be reversed if results fail to materialized. I don’t have a problem with them sacrificing some current yield to more aggressively invest in growth.

 

Some other nice things to consider:

 

- in recent years the medical community has been emphasizing more and more the importance of sleep. Sleep is now one of the core pillars of health alongside diet, exercise and stress. If you look at Sleep Country’s mission statement it appears they are positioning the company as an expert sleep solutions service rather than just a mattress retailer. I think it’s a brilliant move that will become a key differentiator if they continue to stick to that promise. (I think sleep solutions providers will enjoy a multi-year tailwind of increasing wallet share as more people recognize the importance of high quality sleep. Who knows, maybe there will be a line of Sleep Country CPAP machines soon. Haha)
 

- I assume several hundred million mattresses are sold annually worldwide. If Sleep Country currently sells a million or so a year, then they have PLENTY of room to run with the right long term financial partner. What if they captured 30% of global market share? Now we’re talkin!

 

Needless to say, I’m happy with the prospects of this one and look forward to seeing what they can do with it long term. I expect it will outperform treasuries, I’m hopeful it will compound by double digits for the foreseeable future, and I’ll be delighted if it does any better than that.

Edited July 25 by Thrifty3000

[Luke]

9 minutes ago, Thrifty3000 said:

Growth doesn’t just come from new housing starts. With 39 million people comes about 39 million mattresses, of which, about 3 million of them have to be replaced every year. Sleep Country currently sells about one out of every three mattresses purchased in Canada.

 

That means they have opportunity to triple their domestic market share before even having to worry about selling mattresses to the world’s 8 billion other sleepers.

 

Over the last 10 years they have not only grown store count, but they have also grown via acquisition - acquiring competitors as well as companies with complimentary product lines, like fancy pillows and fancy weighted blankets.

 

Being the largest scale provider in Canada that’s also owned by a large financial backer will provide important competitive advantages. They will now be able to ramp up new stores, acquisitions and marketing at whatever pace they can justify to Fairfax (and these factors were well scrutinized by FFH during negotiations and diligence.) I suspect the base case expectation is to grow the value by 15% annually over at least the next decade, or the investment committee would have black-balled it.

 

Notice some of the main reasons Sleep Country’s profit declined year over year:

 

- acquisition/integration related expenses (hopefully to offer better value proposition)

 

- increased marketing/advertising spend (hopefully to increase sales)

 

- increased compensation (hopefully to attract/retain better talent)

 

^ those will either positively impact future results, or be reversed if results fail to materialized. I don’t have a problem with them sacrificing some current yield to more aggressively invest in growth.

 

Some other nice things to consider:

 

- in recent years the medical community has been emphasizing more and more the importance of sleep. Sleep is now one of the core pillars of health alongside diet, exercise and stress. If you look at Sleep Country’s mission statement it appears they are positioning the company as an expert sleep solutions service rather than just a mattress retailer. I think it’s a brilliant move that will become a key differentiator if they continue to stick to that promise. (I think sleep solutions providers will enjoy a multi-year tailwind of increasing wallet share as more people recognize the importance of high quality sleep. Who knows, maybe there will be a line of Sleep Country CPAP machines soon. Haha)
 

- I assume several hundred million mattresses are sold annually worldwide. If Sleep Country currently sells a million or so a year, then they have PLENTY of room to run with the right long term financial partner. What if they captured 30% of global market share? Now we’re talkin!

 

Needless to say, I’m happy with the prospects of this one and look forward to seeing what they can do with it long term. I expect it will outperform treasuries, I’m hopeful it will compound by double digits for the foreseeable future, and I’ll be delighted if it does any better than that.

Thank you for the thought out and detailed reply, highly appreciated. 

[Parsad]

1 hour ago, Munger_Disciple said:

 

The silence is deafening.....

 

It was a good acquisition, but they paid fair value.  

 

For years, shareholders have been complaining about them paying too little for turnarounds and lesser quality companies, and then living with the consequences when they don't do that well. 

 

Now when they pay fair value for a good company, the bitching starts all over again on why they paid so much.  You're damned if you do, and damned if you don't.

 

Cheers!

[Munger_Disciple]

14 minutes ago, Parsad said:

 

It was a good acquisition, but they paid fair value.  

 

For years, shareholders have been complaining about them paying too little for turnarounds and lesser quality companies, and then living with the consequences when they don't do that well. 

 

Now when they pay fair value for a good company, the bitching starts all over again on why they paid so much.  You're damned if you do, and damned if you don't.

 

Cheers!

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least on the surface) this is a so so business with no obvious moat. And that's causing some understandable "heartburn". All the more so when the stock is trading at what seems like a decent discount to intrinsic value so they could just do a buyback with the capital as an alternative. 

Edited July 25 by Munger_Disciple

[Parsad]

1 minute ago, Munger_Disciple said:

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least in the surface) this is a so so business. And that's causing some understandable "heartburn". 

 

It's actually quite a good, durable business, making money on a consistent basis...which is something we don't see Fairfax invest in all of the time. 

 

Would I have been happier if they just put the money into a few undervalued public securities in the U.S.?  Probably.

 

I can see them growing this for a few years and then selling it to someone like Leon's for twice its current value when the economy and consumer spending normalize.

 

Unlike Berkshire, not all of Fairfax's positions are permanent.  They are more opportunistic and their strength lies in insurance and buying/selling assets.

 

Cheers!

[TwoCitiesCapital]

2 hours ago, Luke said:

Again, is anybody here happy with this acquisition? Do you think this is a good allocation of 1b USD of cash in the current opportunity field? 

 

I'm indifferent to it - though I've not looked into it in depth

 

At this point - unless if its obviously lighting money on fire - I trust the management. People complained about Stelco too - Fairfax made out like bandits on that one. 

 

1 hour ago, sleepydragon said:

I have never heard of about this mattress company bacause it’s Canada. But in United state I don’t know any mattress company that has a strong moat and consistently sustain high profit margins

 

Other than Eurobank with its oligopoly that was bought on its way to bankruptcy - what Fairfax investments have "moats"? Fairfax is a classic value investor. Not a "buy and never sell" like Berkshire where the moat would be more important. 

Edited July 25 by TwoCitiesCapital

[Munger_Disciple]

23 minutes ago, Parsad said:

 

It's actually quite a good, durable business, making money on a consistent basis...which is something we don't see Fairfax invest in all of the time. 

 

Would I have been happier if they just put the money into a few undervalued public securities in the U.S.?  Probably.

 

I hope you are right @Parsad! As someone else said, we in the US can't think of a mattress retailer with a moat. May be Canada is a different beast? (they sleep more in the winter? Just kidding )

Edited July 25 by Munger_Disciple

[cwericb]

 

Really? Does anyone really think that the team at Fairfax just woke up really stupid the other day and decided to invest in some awful company?

 

Might one suspect the team at Fairfax just might know a whole lot more than I (and probably every other person on this board) about the companies in which they decide to invest and their future plans for that investment?

 

Remember that stupid pet insurance investment? And any idiot could see that getting involved in the terrible steel industry was going to be a disaster.

 

Perhaps this seems a bit odd on the surface, but these guys just didn't suddenly get stupid.

So personally, I just kinda trust Fairfax to know what they are doing.

Edited July 25 by cwericb

[Parsad]

Just now, Munger_Disciple said:

 

I hope you are right @Parsad! As someone else said, we in the US and can't think of a mattress retailer with a moat. May be Canada is a different beast? (they sleep more in the winter? Just kidding )

 

Sleep Country USA was acquired by Sleep Train almost 20 years ago...both owned by Mattress Firm which played with bankruptcy in 2018...so the markets as similar as they may seem, are quite different. 

 

Sleep Country Canada didn't grow as rapidly as Mattress Firm and has been managed by Christine McGee for almost 25 years.  She's done a great job of building the company.  It's a very well known brand/company in Canada and everyone knows the jingle...which was shared by Sleep Country USA. 

 

So a similar business model, but completely different results over the long-term! 

 

In regards to sleeping more...I certainly do, but I can't speak for everyone else!    Cheers! 

[Parsad]

8 minutes ago, cwericb said:

 

Really? Does anyone really think that the team at Fairfax just woke up really stupid the other day and decided to invest in some awful company?

 

Might one suspect the team at Fairfax just might know a whole lot more than I (and probably every other person on this board) about the companies in which they decide to invest and their future plans for that investment?

 

Remember that stupid pet insurance investment? And any idiot could see that getting involved in the terrible steel industry was going to be a disaster.

 

Perhaps this seems a bit odd on the surface, but these guys just didn't suddenly get stupid.

So personally, I just kinda trust Fairfax to know what they are doing.

 

+1!  But it seems like after almost every other decision, the COBF board questions the sanity and decisions of Hamblin-Watsa! 

 

I think it's the Buffett comparison syndrome.  We want to see Prem acquire all of Jack in the Box or Lululemon, not a mattress company...unless it's comparable to Nebraska Furniture Mart!

 

Cheers!

[maxthetrade]

14 minutes ago, Munger_Disciple said:

 

I don't think people have an issue with Fairfax acquiring good companies at fair prices like Berkshire does. Just seems (at least on the surface) this is a so so business. And that's causing some understandable "heartburn". All the more so when the stock is trading what seems like at least a decent discount to intrinsic value so they could just do a decent buyback with the capital as an alternative. 

 

Exactly! I don't mind aquiring a good business at a fair price but this looks like a mediocre business at full price. I hope I'm wrong (as I was with Stelco!). We'll see.

 

[Gamma78]

I don't think the issue here is that people think Sleep Country is a terrible business. It isn't. It's grown reasonably well for a very consistent period of time. 

Mainly it's hard to immediately see it as a "great" opportunity. But I'll keep an open mind and willing to learn more as the investment unfolds. The recent spate of investments are all "in partnership" with a great founder / owner / entrepreneur. I imagine here the quality of the existing ownership played a role too. 

[Munger_Disciple]

Is there a non-insurance/finance related operating business 100% owned by Fairfax that has worked out well?

[Junior R]

just need to wait until next week or week after for earrings call and we will get all the info on why they think  sleep country is a good buy

[Haryana]

This looks like a Tim Horton's type of company for Canadians. When Tim Horton's was a public company, I used to think that this was the type of business that Buffett would be interested in for how much it gets brand loyalty from Canadians. Canadians love their own brands and whatever is uniquely Canadian. Not having a Sleep Country USA is an advantage. Eventually, Buffett invested a part in Tim Horton's through 3G Capital.

 

"Since its 2010 acquisition of Burger King Holdings, 3G Capital has been the company's largest shareholder supporting the company's global growth transformation including the creation of RBI and acquisitions of Tim Hortons, Popeyes Louisiana Kitchen, and Firehouse Subs, generating approximately 21x in total shareholder returns"
https://www.rbi.com/English/news/news-details/2022/Restaurant-Brands-International-Inc.-Appoints-Patrick-Doyle-as-Executive-Chairman-to-Accelerate-Growth/default.aspx

 

Really impressed by how in the middle of all the greed, insanity, FOMO, crypto, AI, ... they still have the discipline to buy a boring business that is about the most basic of human needs, even more basic than food.

 

Mattress is one thing that would be the biggest hassle to order online and then keep returning back and forth until you found right fit.
You go to a store and you test for the firmness by lying on it to get feel to your body. Regardless, they also have online brands for direct delivery to less sensitive sleepers.

 

Mattress is more necessary than furniture. Sleep is the best medicine, especially for an aging population. There might be scope for medical innovation as already discussed here.

 

Also, worth re-repeating, they have 35-40% market share in Canada, making a no-brainer. Found a good report here including great details:
https://www.fairwayresearch.com/p/sleep-country-deep-dive-tsx-zzz
"While the mattress industry has been in turmoil, Sleep Country has delivered strong financial performance along with an increasing market share in Canada from 23% in 2015 to 37% in 2022."

 

[dartmonkey]

17 hours ago, Viking said:

@glider3834 That is great info. Canada had a housing bubble. And because of how our mortgage market is structured, much higher interest rates have had a big impact on those with a mortgage, especially those with a large mortgage. But only about 20% of mortgages ‘reset’ / are affected each year… so it has taken time for higher rates to bite. My guess is for mortgage holders things will get worse over the next 12-18 months. Our mortgage market looks like it was structured like the US back in 2004-2006 with all those adjustable rate mortgages… the shit didn't hit the fan in the US until enough of the resets happened - and that took much longer than people thought (the ponzi scheme was up at that point). Canada won’t be hit as hard as the US because you can’t walk away from your mortgage here - and we don’t have a bankruptcy culture. People will do anything they can yo hang on to their property here - including stopping spending on pretty much everything else. 
 

The Canadian economy has been driven by the housing bubble over the past 7 years or so. New building starts have cratered. But lots of existing projects have to be completed - so the impact of higher rates has been slow to hit construction (but it is coming - if rates remain at current levels).
 

Immigration / international students / temporary foreign workers has been adding 1 million new Canadians each year for the past couple of years - that should be a tailwind to GDP growth. But GDP per capital is the same today as it was back in 2017. And there is growing demands for the government to return to historical levels of new Canadians (total of about 400,000 per year). If they do that it will be contractionary as the numbers of some groups could go negative year over year - as people get kicked out of the country.
 

My read is the economy in Canada is sick. We just might remain at stall speed for a few years. I really have no idea. 

 The Bank of Canada has an inflation target of 2 to 3% and i think they want to run it as close to 3% as possible. Canada has too much consumer debt and the elegant way to solve that is to run elevated inflation for 5+ years (we are 3 years in). The problem with this approach is if inflation runs too hot again - gets back north of 4% or more - well people will see what they are doing and their credibility would be shot.
 

Bottom line, I am not optimistic or pessimistic. My guess is Canada muddles through. 

 

Small correction: BoC target is not 2-3%, it’s 1-3%:

 

The Bank of Canada aims to keep inflation at the 2 per cent midpoint of an inflation-control range of 1 to 3 per cent. The inflation target is expressed in terms of total CPI inflation. The Bank of Canada uses measures of core inflation as an operational guide to help achieve the total CPI inflation target.

[Thrifty3000]

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

Key Points:

 

- They have 305 stores

 

- They are opening at least 6 new stores this year

 

- they have a long list of locations they want to open new stores in as soon as space is available. They said the constraint isn’t on their side, that the constraint is finding landlords with space in their desired locations. (Curious if Kennedy Wilson might have any helpful connections here.)

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

- First, they have rolled out a “store in a store concept” that sells higher margin cash and carry items. In their pilot stores the new concept takes up 25% of the floor space, but has generated 35% of the revenue (so it’s not only more revenue, but more importantly, it’s higher margin revenue!). I’m going to make an educated guess that this concept can generate closer to $3 mil revenue per store.

 

- Second, they are rolling out 2 pilot stores this year that they are calling their version 4.0 stores. Obviously, they hope the pilots will generate even higher volume than the version 3.0 concept they’ve been migrating to for years. Hopefully these prove capable of generating at least $3 mil revenue with higher margins.

 

- another nugget… on the call they said the reason they pay out 40% of income as a dividend is because their North American competitors have an average dividend payout ratio of 35%. Well, what do you think happens when ZZZ no longer has to follow the institutional imperative with their divvy policy? #growth

 

Now, if three or so years from now every one of Sleep Country’s stores have been upgraded, all the while Sleep Country has been able to increase marketing spend, then what’s going to happen to their Canadian competition? They get squeezed! Next thing you know, FFH will be buying out the competition for a song, converting those stores to version 5.0 or 6.0, extracting even greater margin, and enjoying even better than 15% growth, until a private equity buyer comes along and begs FFH to sell Sleep Country for $10+ bil!

 

 

Edited July 25 by Thrifty3000

[Junior R]

3 hours ago, Hoodlum said:

I see that Scotiabank increased their target from $1950 to $2000 cdn yesterday.  Does anyone have access to that report as they may have commented on this acquisition.

 

[Junior R]

12 minutes ago, Thrifty3000 said:

VERY BIG clues about the investment opportunities at Sleep Country in ZZZ’s Q1 conference call transcript.

 

Key Points:

 

- They have 305 stores

 

- They are opening at least 6 new stores this year

 

- they have a long list of locations they want to open new stores in as soon as space is available. They said the constraint isn’t on their side, that the constrain is finding landlords with space in their desired locations. (Curious if Kennedy Wilson might have any helpful connections here.)

 

- they historically renovate 20 legacy stores annually

 

- over the last 7 ish years the renovated stores’ experienced average revenue increase from $1.8 mil CAD to $2.4 mil, which is 30% growth (HINT: what happens after renovating the 170 ish stores that haven’t been renovated yet?? What if they renovate immediately instead of waiting 7 more years?? Why would you wait 7 years to increase sales (market share) by 30%?!)

 

- they are testing several concepts that show even better prospects than the existing renovation!

 

- First, they have rolled out a “store in a store concept” that sells higher margin cash and carry items. In their pilot stores the new concept takes up 25% of the floor space, but has generated 35% of the revenue (so it’s not only more revenue, but more importantly, it’s higher margin revenue!). I’m going to make an educated guess that this concept can generate closer to $3 mil revenue per store.

 

- Second, they are rolling out 2 pilot stores this year that they are calling their version 4.0 stores. Obviously, they hope the pilots will generate even higher volume than the version 3.0 concept they’ve been migrating to for years. Hopefully these prove capable of generating at least $3 mil revenue with higher margins.

 

- another nugget… on the call they said the reason they pay out 40% of income as a dividend is because their North American competitors have an average dividend payout ratio of 35%. Well, what do you think happens when ZZZ no longer has to follow the institutional imperative with their divvy policy? #growth

 

Now, if three or so years from now every one of Sleep Country’s stores have been upgraded, all the while Sleep Country has been able to increase marketing spend, then what’s going to happen to their Canadian competition? They get squeezed! Next thing you know, FFH will be buying out the competition for a song, converting those stores to version 5.0 or 6.0, extracting even greater margin, and enjoying even better than 15% growth, until a private equity buyer comes along and begs FFH to sell Sleep Country for $10+ bil!

 

 

Thanks good information...From 10 feet up without no facts acquisition is questionable ...They must have a reason why they bought this ..It would have had to go through full assessment