Fairfax 2024

[LC]

Carson Block cashing that commission check from Prem as we speak (kidding)  

[cwericb]

Just before we leave the Fibrek situation lets not let the passage of time distort what actually happened. From the Financial Post:

 

Prem Watsa's 'mindboggling' explanation of forestry takeover prompts judge to award shareholders millions 

Testimony by Watsa was so problematic, judge awarded some Fibrek shareholders $13.5 million 

Canadian investor Prem Watsa was “purposely forgetful” and offered a “mindboggling” explanation in court testimony explaining why he backed a low-ball bid for a pulp mill in a sale to Resolute Forest Products Inc., a Montreal judge concluded in the seven-year-old case. 

Testimony by Watsa, chairman and chief executive officer of Fairfax Financial Holdings Inc., was so problematic it helped convince Montreal Superior Court Justice Michel Pinsonnault to award some Fibrek Inc. shareholders $13.5 million (US$10.2 million), plus interest. Fairfax “was in a blatant conflict of interest situation,” the Quebec judge said in his Sept. 26 ruling. 

“Watsa’s testimony was so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony,” Pinsonnault said. 

A spokesman for Fairfax disputed the judge’s conclusions, and said the company may appeal. 

“The decision distorts the facts, does not make business sense and unfairly characterizes Mr. Watsa’s testimony,” said Paul Rivett, Fairfax’s president. “All of Mr. Watsa’s statements were true and Fairfax acted throughout with honesty and integrity. We expect that the ruling will be appealed.” 

The case centred around Resolute’s December 2011 offer for Fibrek. Fairfax was the most important shareholder and insider of both Fibrek and Resolute, according to the judgment, having helped both companies survive financial difficulties in 2010. Toronto-based Fairfax agreed to sell its 33 million shares to Resolute for $1 apiece — locking in a price that dissenting shareholders considered too low. The judge considered the fair value of Fibrek shares to be $1.99, and found Watsa’s explanation for accepting less “mindboggling.” 

“It was obvious to the court that the witness was a reluctant witness not pleased to have to testify at the request of the dissenting shareholders’ lawyers who had accused Fairfax of being complicit with Resolute in the abusive hostile take-over bid scheme to the detriment and prejudice of the dissenting shareholders,” the judge said, adding that the court also found “that Watsa often appeared to be on the defensive and when pressed on crucial factual elements, the witness hastily took refuge behind ‘I do not remember’ or the like.” 

Watsa had decided that Fairfax would sell its Fibrek stake in February 2011, but didn’t want to do it on the open market, according to the ruling. So he seized the opportunity in May of that year to sell the stake to Resolute. The judge said the cash price was “of no significance” to Fairfax because it would convert the Fibrek shares into Resolute shares. The other shareholders were bound to a “conveniently” low cash price offered to and accepted by Fairfax, the judge said. 

Bloomberg News 

Doug Alexander 

Published Sep 30, 2019 

 

 

[SafetyinNumbers]

1 hour ago, cwericb said:

Just before we leave the Fibrek situation lets not let the passage of time distort what actually happened. From the Financial Post:

 

Prem Watsa's 'mindboggling' explanation of forestry takeover prompts judge to award shareholders millions 

Testimony by Watsa was so problematic, judge awarded some Fibrek shareholders $13.5 million 

Canadian investor Prem Watsa was “purposely forgetful” and offered a “mindboggling” explanation in court testimony explaining why he backed a low-ball bid for a pulp mill in a sale to Resolute Forest Products Inc., a Montreal judge concluded in the seven-year-old case. 

Testimony by Watsa, chairman and chief executive officer of Fairfax Financial Holdings Inc., was so problematic it helped convince Montreal Superior Court Justice Michel Pinsonnault to award some Fibrek Inc. shareholders $13.5 million (US$10.2 million), plus interest. Fairfax “was in a blatant conflict of interest situation,” the Quebec judge said in his Sept. 26 ruling. 

“Watsa’s testimony was so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony,” Pinsonnault said. 

A spokesman for Fairfax disputed the judge’s conclusions, and said the company may appeal. 

“The decision distorts the facts, does not make business sense and unfairly characterizes Mr. Watsa’s testimony,” said Paul Rivett, Fairfax’s president. “All of Mr. Watsa’s statements were true and Fairfax acted throughout with honesty and integrity. We expect that the ruling will be appealed.” 

The case centred around Resolute’s December 2011 offer for Fibrek. Fairfax was the most important shareholder and insider of both Fibrek and Resolute, according to the judgment, having helped both companies survive financial difficulties in 2010. Toronto-based Fairfax agreed to sell its 33 million shares to Resolute for $1 apiece — locking in a price that dissenting shareholders considered too low. The judge considered the fair value of Fibrek shares to be $1.99, and found Watsa’s explanation for accepting less “mindboggling.” 

“It was obvious to the court that the witness was a reluctant witness not pleased to have to testify at the request of the dissenting shareholders’ lawyers who had accused Fairfax of being complicit with Resolute in the abusive hostile take-over bid scheme to the detriment and prejudice of the dissenting shareholders,” the judge said, adding that the court also found “that Watsa often appeared to be on the defensive and when pressed on crucial factual elements, the witness hastily took refuge behind ‘I do not remember’ or the like.” 

Watsa had decided that Fairfax would sell its Fibrek stake in February 2011, but didn’t want to do it on the open market, according to the ruling. So he seized the opportunity in May of that year to sell the stake to Resolute. The judge said the cash price was “of no significance” to Fairfax because it would convert the Fibrek shares into Resolute shares. The other shareholders were bound to a “conveniently” low cash price offered to and accepted by Fairfax, the judge said. 

Bloomberg News 

Doug Alexander 

Published Sep 30, 2019 

 

 

I read that a few years ago and took it under consideration. 

[StubbleJumper]

3 minutes ago, SafetyinNumbers said:

I read that a few years ago and took it under consideration. 

 

And did you think it was "fair" when ORH was bought back at a price that was ultimately 0.95x BV?

 

 

SJ

[SafetyinNumbers]

7 minutes ago, StubbleJumper said:

 

And did you think it was "fair" when ORH was bought back at a price that was ultimately 0.95x BV?

 

 

SJ

I’m not familiar with all of the context around that transaction. I know they bumped after getting the largest shareholder to sign a lock up agreement. Fairfax was also trading at a similar multiple although it wasn’t a great time to be an investor as book value didn’t grow much for the next 11 years as a result of the hedges and low interest rates. Maybe cash to buy other stocks in September 2009 was actually quite valuable at the time as there were a lot of bargains post GFC. 
 

You don’t think so?

[SafetyinNumbers]

5 hours ago, hardcorevalue said:

i can’t imagine selling something that’s undervalued because it’s an ugly chart or vice versa

 

that’s what makes a market i guess.

I should celebrate more people doing it, more money for me if i’m right.

It’s not a judgment on value. It’s a bet on price given human psychology and flows. The beauty is the stop losses means you don’t end up owning losers for too long. It seems like a better way to live. I find owning businesses hard especially if they don’t screen well. 

[FearfulWhenOthersAreGreedy]

On the topic of FFH taking FIH private in my opinion there really is no need for FFH to buyout the remaining shares of FIH, why should they spend their capital on accumulating a larger stake when FIH has cash available and is buying up plenty in the open market, given enough time FFH and any holders of FIH will own an ever increasing stake of the underlying businesses all without laying out any more capital, which should be the point of companies buying back stock not just to prop up the share price. Although I'll rejoice in the short term with an immediate boost in my wealth, its likely best that I just do nothing and with time it can grow while I sit on my hands, watch & wait. 

[Viking]

3 hours ago, StubbleJumper said:

 

And did you think it was "fair" when ORH was bought back at a price that was ultimately 0.95x BV?

 

SJ

I was a very happy shareholder the day the deal was announced - i had my biggest one day gain in my portfolio to that point. A very big chunk of my portfolio was in ORH when Fairfax took ORH private. And one of the reasons i was so heavy at the time was there was a good chance that Fairfax was going to take it out. I think i was banging the table pretty hard on the opportunity. Not every shareholder is buy and hold  But that was back in the day when i was a trader. Today i am an investor (wink, wink…)

Edited August 2 by Viking

[petec]

On 8/1/2024 at 2:25 AM, SafetyinNumbers said:

They have a regulatory benefit in the insurance subsidiaries by owning a public company.

 

Why is this, please?

[SafetyinNumbers]

3 hours ago, petec said:

 

Why is this, please?

Public companies have more liquidity than private companies.

[StubbleJumper]

11 hours ago, SafetyinNumbers said:

I’m not familiar with all of the context around that transaction. I know they bumped after getting the largest shareholder to sign a lock up agreement. Fairfax was also trading at a similar multiple although it wasn’t a great time to be an investor as book value didn’t grow much for the next 11 years as a result of the hedges and low interest rates. Maybe cash to buy other stocks in September 2009 was actually quite valuable at the time as there were a lot of bargains post GFC. 
 

You don’t think so?

 

 

When the minority position of a company is bought out at less than 1x, what the majority shareholder is saying is that it's worth more dead than alive. 

 

One of the ways that you can get a sense of "fairness" is to invert the situation.  Would Prem have allowed his ORH position to be sold for that price?  Not even close.

 

Same deal for the Atlas takeout.  None of the principal owners (FFH, Washington, Sokol, etc) would have accepted the price that minority shareholders received.

 

Okay, that's business and that's life.  But, these types of events do put a tarnish on the "fast and friendly" image that Prem has tried to cultivate over the decades.  And, as you have read in these comments, it has led some investors to have a preference to invest in FFH directly rather than invest along with FFH in some other company like Fairfax India.

 

 

SJ

[StubbleJumper]

8 hours ago, Viking said:

I was a very happy shareholder the day the deal was announced - i had my biggest one day gain in my portfolio to that point. A very big chunk of my portfolio was in ORH when Fairfax took ORH private. And one of the reasons i was so heavy at the time was there was a good chance that Fairfax was going to take it out. I think i was banging the table pretty hard on the opportunity. Not every shareholder is buy and hold  But that was back in the day when i was a trader. Today i am an investor (wink, wink…)

 

 

Nothing wrong with making a quick buck if that was your investing hypothesis (I sometimes like a quick hit too!).  But, an interesting mental exercise would be to construct a parallel universe where the minority position in ORH was NOT repurchased and was still trading on the NYSE.  What might be the stock price today?

 

 

SJ

[SafetyinNumbers]

4 minutes ago, StubbleJumper said:

 

 

When the minority position of a company is bought out at less than 1x, what the majority shareholder is saying is that it's worth more dead than alive. 

 

One of the ways that you can get a sense of "fairness" is to invert the situation.  Would Prem have allowed his ORH position to be sold for that price?  Not even close.

 

Same deal for the Atlas takeout.  None of the principal owners (FFH, Washington, Sokol, etc) would have accepted the price that minority shareholders received.

 

Okay, that's business and that's life.  But, these types of events do put a tarnish on the "fast and friendly" image that Prem has tried to cultivate over the decades.  And, as you have read in these comments, it has led some investors to have a preference to invest in FFH directly rather than invest along with FFH in some other company like Fairfax India.

 

 

SJ

You take all responsibility off of the minority shareholders who need to approve the transactions. I think that’s what makes it fair and friendly. For Atlas, FFH didn’t put any new cash up so it’s not a great comparison but again the minority approved the transaction.

[StubbleJumper]

32 minutes ago, SafetyinNumbers said:

You take all responsibility off of the minority shareholders who need to approve the transactions. I think that’s what makes it fair and friendly. For Atlas, FFH didn’t put any new cash up so it’s not a great comparison but again the minority approved the transaction.

 

 

Well, again, that's a bit of a philosophical question.  Is it okay to screw a few of your business partners as long as a bunch of your other business partners agree?

 

And on Atlas, FFH provided its approval for the take-private transaction even if they didn't add any cash.  They still agreed to screw some minority shareholders.

 

As I said, that's business and that's life.  But, these sorts of transactions, along with the periodic governance abuses, do tend to tarnish the image that Prem has attempted to cultivate over the years.

 

 

SJ

[cwericb]

Yes the Fibrek case was neither fair nor friendly. But you don't have to take my word for it. Large shareholders sued Fairfax, took the matter to court and won. The Court found that the take over price was neither fair, nor friendly, nor legal. 

 

The Court also found that Prem's testimony was evasive and made no sense. If one reads the actual judgement I am putting the Judge's comments mildly. If memory serves me right, Fairfax appealed and also lost the appeal.

 

In the end, the Court found for the Plaintiffs (the large shareholders of Fibrek) and adjusted the sale price to double what Fairfax got away with paying. Unfortunately that only applied to the shareholders who were part of the lawsuit and the small shareholders got screwed by Fairfax.

 

Now we all make mistakes as did Prem in this case. But from the Fibrek take over many of us learned, or should have learned, that just because Fairfax may have a nice sounding motto i.e. "Fair and Friendly", a motto is no guarantee that all takeovers will necessarily be treated as such. "He who ignores history ...."

 

[dartmonkey]

Yes the Fibrek case was neither fair nor friendly. But you don't have to take my word for it. Large shareholders sued Fairfax, took the matter to court and won. The Court found that the take over price was neither fair, nor friendly, nor legal. 

 

 

1 hour ago, cwericb said:

Yes the Fibrek case was neither fair nor friendly. But you don't have to take my word for it. Large shareholders sued Fairfax, took the matter to court and won. The Court found that the take over price was neither fair, nor friendly, nor legal. 

 

The Court also found that Prem's testimony was evasive and made no sense. If one reads the actual judgement I am putting the Judge's comments mildly. If memory serves me right, Fairfax appealed and also lost the appeal.

 

In the end, the Court found for the Plaintiffs (the large shareholders of Fibrek) and adjusted the sale price to double what Fairfax got away with paying.

 

 

Yes and no. The initial ruling did double the share price, from $1 to $1.99, and found much to criticize with Resolute and Fairfax. But the case was appealed, and much of the appeal was allowed, with sale price adjusted down closer to the original $1 offered, from $1.99 to $1.597. The appeal judge found that the judge of the appealed ruling had committed numerous errors, for instance not considering the fact that the $1 price already included a premium, and ignoring the fact that a large majority of minority shareholders had accepted the $1 offered. The appeal judge also found that much of the criticism of the purchaser (Resolute) and the shareholders with which it had signed lock-up agreements (Fairfax) was unfounded.

 

Ruling here: https://courdappelduquebec.ca/en/judgments/details/fixation-des-actions-de-fibrek-inc/

 

Excerpt: Appeal from a judgment of the Superior Court fixing the fair value of the shares under s. 190(15) of the Canada Business Corporations Act (R.S.C. 1985, c. C-44). Allowed in part.

 

In the context of a hostile take-over bid, the application was filed after certain shareholders exercised their right to dissent pursuant to s. 190 of the Canada Business Corporations Act. To determine the fair value of the shares, the trial judge used as a starting point the value of a bid competing with the accepted take-over bid ($1.40), to which he added $0.27 to account for synergies arising from the transaction and $0.40 representing the added value of a lucrative Hydro-Québec contract. The judge then subtracted $0.08 per share for environmental liabilities identified after the assets were taken over, for a final value of $1.99 per share. In addition to contesting this value on appeal, the purchaser of the majority of Fibrek Holding Inc.’s common shares argues that the judge erred in adding the additional indemnity under art. 1619 of the Civil Code of Québec (S.Q. 1991, c. 64) to the amount payable.

 

The judge committed certain palpable and overriding errors. First, he should not have disregarded the value of the purchaser’s offer as a starting point for the analysis. Without being the sole relevant factor, market value is a reliable indicator of the fair value of shares. The purchaser’s offer, however, included a premium over the price at which the shares were trading on the market. Further, a large majority of the shareholders, holding 115 million shares, had accepted it. Also, the judge’s criticism of the conduct of the purchaser and the shareholders with whom it had signed hard lock-up agreements for 46% of the outstanding shares was unfounded, although it is true that this made it practically impossible to put a competing bid over the 50% approval mark.

The judge also committed a reviewable error by using a competing bid as the starting price. Indeed, it was nearly impossible for such an offer to materialize, given the conditions attached to it. Moreover, in the context where both the purchaser’s offer and the competing bid included consideration payable in shares, he ought to have taken into account the significant drop in the value of those shares on the valuation date, which he failed to do. He also committed many errors by adding the value of the synergies arising from the transaction to the competing bid, namely because that led him to conduct a hypothetical auction rather than use objective evidence. Although the added premium for the Hydro-Québec contract was somewhat speculative, there is no reason to intervene in this respect on appeal. In conclusion, by updating the purchaser’s offer as at the valuation date, by adding the value of the Hydro-Québec contract and subtracting the environmental liabilities, the Court fixes the value at $1.5973 per share. 

 

 

It is a good thing for Fairfax shareholders that making 'fair and friendly' offers does not extend to offering a price so high that no minority shareholders object to it. 

[TheFranc]

Any business specific reason we are getting crushed today?

[Malmqky]

Just now, TheFranc said:

Any business specific reason we are getting crushed today?

 

No...go take a look at the rest of the market today

[cwericb]

34 minutes ago, dartmonkey said:

Yes the Fibrek case was neither fair nor friendly. But you don't have to take my word for it. Large shareholders sued Fairfax, took the matter to court and won. The Court found that the take over price was neither fair, nor friendly, nor legal. 

 

 

 

Yes and no. The initial ruling did double the share price, from $1 to $1.99, and found much to criticize with Resolute and Fairfax. But the case was appealed, and much of the appeal was allowed, with sale price adjusted down closer to the original $1 offered, from $1.99 to $1.597. The appeal judge found that the judge of the appealed ruling had committed numerous errors, for instance not considering the fact that the $1 price already included a premium, and ignoring the fact that a large majority of minority shareholders had accepted the $1 offered. The appeal judge also found that much of the criticism of the purchaser (Resolute) and the shareholders with which it had signed lock-up agreements (Fairfax) was unfounded.

 

Ruling here: https://courdappelduquebec.ca/en/judgments/details/fixation-des-actions-de-fibrek-inc/

 

Excerpt: Appeal from a judgment of the Superior Court fixing the fair value of the shares under s. 190(15) of the Canada Business Corporations Act (R.S.C. 1985, c. C-44). Allowed in part.

 

In the context of a hostile take-over bid, the application was filed after certain shareholders exercised their right to dissent pursuant to s. 190 of the Canada Business Corporations Act. To determine the fair value of the shares, the trial judge used as a starting point the value of a bid competing with the accepted take-over bid ($1.40), to which he added $0.27 to account for synergies arising from the transaction and $0.40 representing the added value of a lucrative Hydro-Québec contract. The judge then subtracted $0.08 per share for environmental liabilities identified after the assets were taken over, for a final value of $1.99 per share. In addition to contesting this value on appeal, the purchaser of the majority of Fibrek Holding Inc.’s common shares argues that the judge erred in adding the additional indemnity under art. 1619 of the Civil Code of Québec (S.Q. 1991, c. 64) to the amount payable.

 

The judge committed certain palpable and overriding errors. First, he should not have disregarded the value of the purchaser’s offer as a starting point for the analysis. Without being the sole relevant factor, market value is a reliable indicator of the fair value of shares. The purchaser’s offer, however, included a premium over the price at which the shares were trading on the market. Further, a large majority of the shareholders, holding 115 million shares, had accepted it. Also, the judge’s criticism of the conduct of the purchaser and the shareholders with whom it had signed hard lock-up agreements for 46% of the outstanding shares was unfounded, although it is true that this made it practically impossible to put a competing bid over the 50% approval mark.

The judge also committed a reviewable error by using a competing bid as the starting price. Indeed, it was nearly impossible for such an offer to materialize, given the conditions attached to it. Moreover, in the context where both the purchaser’s offer and the competing bid included consideration payable in shares, he ought to have taken into account the significant drop in the value of those shares on the valuation date, which he failed to do. He also committed many errors by adding the value of the synergies arising from the transaction to the competing bid, namely because that led him to conduct a hypothetical auction rather than use objective evidence. Although the added premium for the Hydro-Québec contract was somewhat speculative, there is no reason to intervene in this respect on appeal. In conclusion, by updating the purchaser’s offer as at the valuation date, by adding the value of the Hydro-Québec contract and subtracting the environmental liabilities, the Court fixes the value at $1.5973 per share. 

 

 

It is a good thing for Fairfax shareholders that making 'fair and friendly' offers does not extend to offering a price so high that no minority shareholders object to it. 

 

 

So bottom line, the Court found that the price paid by Fairfax should have been only 60% higher rather than double?

[Viking]

Looks like volatility in Fairfax's share price is back. Love it. 

 

Fairfax's stock is currently trading at US$1,070.

 

Book value at June 30 was $980/share.

 

At June 30, Fairfax is sitting on non-insurance companies gains= $68/share pre tax

They also will book a nice gain (incremental $300 million pre-tax?) when the Stelco sale is approved in Q4.

 

Let's round the above two items to $60 after-tax. That puts adjusted book value at about $1,040. 

 

Fairfax's stock is trading today at a hair over 'adjusted' book value. 

 

The company is firing on all cylinders. They just released a great earnings report. They are positioned to do very well in the coming years.

 

And they just told us that with the hard market slowing the insurance subs are generating excess capital that is being returned to Fairfax. They also just told us they think their shares are cheap and they will continue to buy them back. 

 

That is called shooting fish in a barrel.

 

PS: Long term Fairfax shareholders are the big winners. From a capital allocation perspective, Fairfax has prioritized stock buybacks. The lower the share price the better. 

Edited August 2 by Viking

[MungerWunger]

Shooting fish in a barrel with the water drained out

[Hamburg Investor]

26 minutes ago, Viking said:

Looks like volatility in Fairfax's share price is back. Love it. 

 

Fairfax's stock is currently trading at US$1,070.

 

Book value at June 30 was $980/share.

 

At June 30, Fairfax is sitting on non-insurance companies gains= $68/share pre tax

They also will book a nice gain (incremental $300 million pre-tax?) when the Stelco sale is approved in Q4.

 

Let's round the above two items to $60 after-tax. That puts adjusted book value at about $1,040. 

 

Fairfax's stock is trading today at a hair over 'adjusted' book value. 

 

The company is firing on all cylinders. They just released a great earnings report. They are positioned to do very well in the coming years.

 

And they just told us that with the hard market slowing the insurance subs are generating excess capital that is being returned to Fairfax. They also just told us they think their shares are cheap and they will continue to buy them back. 

 

That is called shooting fish in a barrel.

 

PS: Long term Fairfax shareholders are the big winners. From a capital allocation perspective, Fairfax has prioritized stock buybacks. The lower the share price the better. 

couldn‘t agree more! Just posted something similar @ seekingalpha a few minutes ago. 
 

cheers!

[Junior R]

if they where buying back around $1500 ish CAD..they probably will buy back like crazy next week

[Crip1]

Just over $1K shares traded today on the US OTC market, total amount of those trades at current prices is under $1.2M. 

 

6% share price decline applied against $26B market cap means a decline of roughly $1.6B if market cap.

 

So, $1.2M of trades resulted in 1.6B of "lost" market cap.

 

Yawn.

 

-Crip

[gfp]

3 minutes ago, Crip1 said:

Just over $1K shares traded today on the US OTC market, total amount of those trades at current prices is under $1.2M. 

 

6% share price decline applied against $26B market cap means a decline of roughly $1.6B if market cap.

 

So, $1.2M of trades resulted in 1.6B of "lost" market cap.

 

Yawn.

 

-Crip

 

What?  I don't understand any of that.  Volume is approaching 60,000 shares for Fairfax at mid-day.  There is a buyer like me for every seller.  Far more than $1.2 million worth of stock is changing hands