Fairfax India new issue

[Viking]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

 

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon.

 

Absolutely agree. That is, in part, why I was a buyer at $13, and $12, and $11. All I'm saying is this transaction is just an accounting entry - it's the same BIAL it was 2-days ago, but the shares are 10% higher and Fairfax can now charge fees again as this pushes NAV substantially higher.

 

I get why Fairfax did it. I just don't understand why this would pop the stock or why the people buying it today weren't aware of the value of BIAL two days ago.

 

For me, a better question is why investors sold the stock so low. At September 30, 2019 common shareholders' equity was $2,064.7 million, or book value per share of $13.53 (us). Add to that the $3.30 (us) for the current revaluation and we have book value $16.83 (us). So, if it's the same BIAL as it's always been, then the low was ~ 65% of book. With clarity on the financials coming, I think a retracement towards book value is in the cards. I'm not scratching my head as the stock recovers back up, I was scratching my head on the way down.

 

The stock is on sale again :-) trading today at under $12.50. With the second terminal at BIAL scheduled to open next year there is more near term upside for that asset to continue to grow much more in value.

 

Given the disconnect in where the stock is trading ($12.50) and likely reported Q4 book value ($16.50 to $17.00) it will be interesting to see how Fairfax India (and Fairfax) responds. I see in the past Fairfax India has bought back stock; perhaps they get more aggressive and use some of the proceeds from recent transactions to buy back a big chunk of stock. Or perhaps Fairfax increases its stake?

[DocSnowball]

are you able to purchase this in the US? I tried via Fidelity but wasn't able to complete the transaction. Thanks in advance for sharing your experience and a solution if there is one!

[Viking]

Have you tried FFXDF (OTC)? It is very thinly traded.

 

My issues is i would like to buy on the Canadian side (FIH.U) in a Can$ account but it is traded on the TSX as a US$ stock. So to avoid currency charges i have to buy in my US$ account which it picks up as FFXDF. Not sure why the company listed the stock on the TSX as a US$ stock.

[Viking]

Fairfax India reported yesterday. As expected, the increase in 'fair value' of BIAL increased BV to $16.89/share (from $13.86 at Sept 30).

 

Key development: "The net change in unrealized gains on BIAL of $751.5 million are supported by positive operational developments and the finalization of BIAL's real estate development plan."

 

The other piece of good news with Fairfax India is what is going on with its triplet investments in IIFL (Wealth, Finance and Securities) to start the new year. These three companies had been in a bear market for about 24 months (falling in value by more than 50%). However, they all look to have bottomed in price last Oct and have been moving higher since then. And so far in 2020 (6 weeks) they are up +45% or about $180 million. Fairfax India has 153 million shares outstanding so this increase (more than $1.00 per Fairfax India share) is significant. This will be worth monitoring moving forward. 

 

Shares are up a little today to $12.94

 

Attached is an Excel spreadsheet that can be used to track all of Fairfax India's publicly traded holdings (tab 2 of the spreadsheet is a tracker for FFH holdings). Let me know if you see any errors :-)

Fairfax_Equity_Holdings.xlsx

[Xerxes]

Viking

Thanks for the posting.

 

When i added up the gain on the IIFL family capital gains from close of the year through today, it comes to $187 million, which is what you have. But that gain belongs to all IIFL shareholders and not just FIH's 150 million shares.

 

Did you make that adjustment ?

Or is #shares shown on column Q is number of share owned entirely by FIH ?

 

[Xerxes]

BTW the FFH tab of your excel is a work of art

[Viking]

Viking

Thanks for the posting.

 

When i added up the gain on the IIFL family capital gains from close of the year through today, it comes to $187 million, which is what you have. But that gain belongs to all IIFL shareholders and not just FIH's 150 million shares.

 

Did you make that adjustment ?

Or is #shares shown on column Q is number of share owned entirely by FIH ?

 

Xerxes, nice to hear that you are finding the spreadsheets useful :-) The Fairfax information is much more 'hairy' and I plan on updating it when the Annual report comes out. The share count (for all companies) is shares owned by Fairfax India. If you are interested the Fairfax India quarterly reports do a great job of clearly laying out all investments they hold (with lots of different perspectives). I wish Fairfax would do the same. I have attached a screen shot of page 30 of the Q3 report as an example (hopefully it opens in a format you can see).

[bizaro86]

Thanks Viking! Super helpful for someone getting up to speed here. I have always had this one in the "too many fees" pile, but took a deeper look based on this thread.

 

The increase in reported book seems like an easy obvious catalyst here. I dont think the airport is overvalued now (although I couldn't find the full 2018 annual report, would appreciate a link if anyone has). Biggest risks there seem to be an unfavorable regulatory determination when their 5 year rate set period is up in 2021, and big inflation in India which would debase the value of their capital for regulatory purposes when converted to hard currency. The development land seems like upside as well.

 

I like the container port asset (infrastructure, probably barrier to entry). The other assets, (chemicals, banking) seem fine. Although between the airport and the banks if inflation breaks out in India a bunch of their assets would be directly denominated in rupees and wouldn't re-base.

 

I've taken a good sized starter position here.

[obtuse_investor]

I am wondering what the market sentiment for FIH is. As of this writing it is selling at 0.76 times year end book value. The assets are earning cash and are profitable. Whenever there is a relevant transaction they get marked to market. So the book value is likely a good approximation.

 

Why the discount? No faith in management? Fees do not justify the discount. Is the market thinking that Indian assets are overpriced on the books?

 

I am incredibly patient. Just wondering what the narrative is to justify the large discount to book.

[Xerxes]

I think it is just due to lack of inflows funds into EM with EM being out of fashion as whole; and nothing to do with FFH management.

i am very content with the discount. Have been buying since 2017.

 

i think it is one of those investment, that once inflows to EM picks up some years from now, the same folks that refuse to buy it at current depressed prices would willing to pay 1.5x book. 

 

And i like the fact that the volatility of IIFL (it being mark to market) creates discount opportunities in the stock, with the private holdings acting as a dampener or a floor, when FIH stock falls.

[bizaro86]

I am wondering what the market sentiment for FIH is. As of this writing it is selling at 0.76 times year end book value. The assets are earning cash and are profitable. Whenever there is a relevant transaction they get marked to market. So the book value is likely a good approximation.

 

Why the discount? No faith in management? Fees do not justify the discount. Is the market thinking that Indian assets are overpriced on the books?

 

I am incredibly patient. Just wondering what the narrative is to justify the large discount to book.

 

I think you can make a case that the fees justify a pretty significant discount. The fees are basically 1.5% plus 20% of returns over 5%. That is guaranteed to be more than 20% of total returns. If outside investors get under 80% of the returns, I can see the argument that it should trade under 80% of NAV.

 

The fees could also end up being larger if the price stays below book value. The fee is paid based on book value increases, but it is paid in shares at VWAP. So if the share price is below book when the fee is paid, they will get more shares (this works backward as well, up to 2x book when Fairfax can take cash instead).

 

I think the investment performance is likely to justify the fees here, especially considering the current discount, so I'm a buyer right now, but the fees are significant and do justify a discount to NAV imo.

[Viking]

Thanks Viking! Super helpful for someone getting up to speed here. I have always had this one in the "too many fees" pile, but took a deeper look based on this thread.

 

The increase in reported book seems like an easy obvious catalyst here. I dont think the airport is overvalued now (although I couldn't find the full 2018 annual report, would appreciate a link if anyone has). Biggest risks there seem to be an unfavorable regulatory determination when their 5 year rate set period is up in 2021, and big inflation in India which would debase the value of their capital for regulatory purposes when converted to hard currency. The development land seems like upside as well.

 

I like the container port asset (infrastructure, probably barrier to entry). The other assets, (chemicals, banking) seem fine. Although between the airport and the banks if inflation breaks out in India a bunch of their assets would be directly denominated in rupees and wouldn't re-base.

 

I've taken a good sized starter position here.

 

I found it useful to do a quick read of all 32 pages of posts on this thread. It provides a great look into the life of a stock. What a roller coaster ride! In the beginning there was such euphoria (and interest). And rightly so. Fairfax has a long history of investing well in Indian stocks. People were happy a few years ago to pay well above BV.

 

What happened? The past 2 years have not been kind.

- INR currency has depreciated about 10% versus the US$ (their reporting currency)

- banking crises in India caused IIFL stock price to drop 50% (all financials got wacked)

- Fairfax India ‘paid up’ to get control position of BIAL; looked like big overpay at the time

 

Where are we today?

- currency looks to have stabilized at current levels (we will see)

- banking crises in India has forced financials to fix a few things (which is good for shareholders) and the IIFL triplets are once again coming back into favour (stock prices up 45% in the last 6 weeks)

- BIAL continues to execute its business plan with 2nd runway opening in 2019, 2nd terminal on track to open next year (2021) and progress being made on monetizing the land around the airport. Bottom line, value of the airport asset is up significantly and the glide path for future growth is happening.

 

I agree the fee structure for Fairfax India is not good. The fact the stock is listed in Canada but trades in US$ is problematic. I also do not like how illiquid the shares are.

 

Do i believe current BV is $16.89? The problem with stocks in general and especially Indian stocks is it is tough to know. So it really comes down to do you trust management. And i do but not blindly. Is there some promotion in the current price of BIAL? Probably. Will the airport be increasing in value in the coming years? Yes. So even if the current value attached to BIAL is a little stretched the business will get there over time.

 

With shares trading at $12.85 (my average price is about $12.45) BIAL is still being valued below the old valuation. I think there is a large margin of safety at the current stock price. Investor sentiment in Fairfax India is at its low. And with IIFL triplets on fire the margin of safety is only getting larger as we start the new year.

 

One thing i really do appreciate is all the disclosure that Fairfax India does. It is very easy to understand what they own, when they bought it, what it cost and what they think it is worth at each quarter end.

[Viking]

I am wondering what the market sentiment for FIH is. As of this writing it is selling at 0.76 times year end book value. The assets are earning cash and are profitable. Whenever there is a relevant transaction they get marked to market. So the book value is likely a good approximation.

 

Why the discount? No faith in management? Fees do not justify the discount. Is the market thinking that Indian assets are overpriced on the books?

 

I am incredibly patient. Just wondering what the narrative is to justify the large discount to book.

 

I think it is safe to say sentiment in FIH is at an all time low. Same for FFH (the two are linked at the hip). My guess is a lot of the initial investors in FIH were big FFH supporters (at the time).

 

Although i would say i think the issues at FFH were internal; they made some bad decisions. Fortunately, i think FFH has learned some important lessons and have been moving in a better direction for about 2 years. But it will take time to right the ship and get BV growth into double digits on a consistent basis.

 

I think the issues with FIH are more external. INR devaluation hurt. The Indian banking crises was not their doing; however, it crushed the value of IIFL. Until recently, book value for BIAL was near cost.

 

Bottom line, investors were too optimistic a couple of years ago. And now they are too pessimistic. Company (FIH) has not really changed that much :-)

[Viking]

I think it is just due to lack of inflows funds into EM with EM being out of fashion as whole; and nothing to do with FFH management.

i am very content with the discount. Have been buying since 2017.

 

i think it is one of those investment, that once inflows to EM picks up some years from now, the same folks that refuse to buy it at current depressed prices would willing to pay 1.5x book. 

 

And i like the fact that the volatility of IIFL (it being mark to market) creates discount opportunities in the stock, with the private holdings acting as a dampener or a floor, when FIH stock falls.

 

Agreed. I missed this in my previous point. It looks to me like EM and India in particular was starting to come back into favour the end of Q4 and start of 2020 (before Caronavirus hit). I think this trade may come back into favour in another month or two which would help investments like FIH.

[Viking]

Thanks Viking! Super helpful for someone getting up to speed here. I have always had this one in the "too many fees" pile, but took a deeper look based on this thread.

 

The increase in reported book seems like an easy obvious catalyst here. I dont think the airport is overvalued now (although I couldn't find the full 2018 annual report, would appreciate a link if anyone has). Biggest risks there seem to be an unfavorable regulatory determination when their 5 year rate set period is up in 2021, and big inflation in India which would debase the value of their capital for regulatory purposes when converted to hard currency. The development land seems like upside as well.

 

I like the container port asset (infrastructure, probably barrier to entry). The other assets, (chemicals, banking) seem fine. Although between the airport and the banks if inflation breaks out in India a bunch of their assets would be directly denominated in rupees and wouldn't re-base.

 

I've taken a good sized starter position here.

 

Attached below is the 2017-18 BIAL AR (PDF).

BIAL_AR_2017-18.pdf

[bizaro86]

Thanks Viking! Super helpful for someone getting up to speed here. I have always had this one in the "too many fees" pile, but took a deeper look based on this thread.

 

The increase in reported book seems like an easy obvious catalyst here. I dont think the airport is overvalued now (although I couldn't find the full 2018 annual report, would appreciate a link if anyone has). Biggest risks there seem to be an unfavorable regulatory determination when their 5 year rate set period is up in 2021, and big inflation in India which would debase the value of their capital for regulatory purposes when converted to hard currency. The development land seems like upside as well.

 

I like the container port asset (infrastructure, probably barrier to entry). The other assets, (chemicals, banking) seem fine. Although between the airport and the banks if inflation breaks out in India a bunch of their assets would be directly denominated in rupees and wouldn't re-base.

 

I've taken a good sized starter position here.

 

I found it useful to do a quick read of all 32 pages of posts on this thread. It provides a great look into the life of a stock. What a roller coaster ride! In the beginning there was such euphoria (and interest). And rightly so. Fairfax has a long history of investing well in Indian stocks. People were happy a few years ago to pay well above BV.

 

What happened? The past 2 years have not been kind.

- INR currency has depreciated about 10% versus the US$ (their reporting currency)

- banking crises in India caused IIFL stock price to drop 50% (all financials got wacked)

- Fairfax India ‘paid up’ to get control position of BIAL; looked like big overpay at the time

 

Where are we today?

- currency looks to have stabilized at current levels (we will see)

- banking crises in India has forced financials to fix a few things (which is good for shareholders) and the IIFL triplets are once again coming back into favour (stock prices up 45% in the last 6 weeks)

- BIAL continues to execute its business plan with 2nd runway opening in 2019, 2nd terminal on track to open next year (2021) and progress being made on monetizing the land around the airport. Bottom line, value of the airport asset is up significantly and the glide path for future growth is happening.

 

I agree the fee structure for Fairfax India is not good. The fact the stock is listed in Canada but trades in US$ is problematic. I also do not like how illiquid the shares are.

 

Do i believe current BV is $16.89? The problem with stocks in general and especially Indian stocks is it is tough to know. So it really comes down to do you trust management. And i do but not blindly. Is there some promotion in the current price of BIAL? Probably. Will the airport be increasing in value in the coming years? Yes. So even if the current value attached to BIAL is a little stretched the business will get there over time.

 

With shares trading at $12.85 (my average price is about $12.45) BIAL is still being valued below the old valuation. I think there is a large margin of safety at the current stock price. Investor sentiment in Fairfax India is at its low. And with IIFL triplets on fire the margin of safety is only getting larger as we start the new year.

 

One thing i really do appreciate is all the disclosure that Fairfax India does. It is very easy to understand what they own, when they bought it, what it cost and what they think it is worth at each quarter end.

 

Thanks for the pdf! I had read the entire thread, and that was a key part of my decision process. Getting a feel for what the market sentiment among value investors (who are the target share buyers for anything Fairfax related) when this traded for >$18 was important to me. While I think the fees probably justify a discount to NAV, I can also easily see how the market could justify a premium to NAV for relationships/deal flow/private equity style returns.

[petec]

Where did you get the BIAL AR and is there a more recent one? Great find!

[Viking]

Where did you get the BIAL AR and is there a more recent one? Great find!

 

I found the old BIAL AR doing a search on the internet. I think it was released in Dec. So my guess is the 'new' 2018-2019 report should be out shortly. BIAL has a spot for it on their web site but the link is not active.

[Viking]

The key to Fairfax India is BIAL. It is the 800 pound gorilla in the BV calculation. Are there some other ways we can get a fix on some other measures that might help us understand what might be fair value for that asset?

 

How about looking at all the historical sales since 1999 (when BIAL was born)? There have not been many transactions as stakes in trophy assets like this do not come up for sale often.

 

- 2009 GVK purchases 2 stakes for 12% and 17%; implied value for BIAL = $800 million.

- 2011 GVK purchased 14% (total ownership to 43%); implied value for BIAL = $964 million.

- 2016 Fairfax purchased 33% for $336 million; implied value for BIAL = $1,018 million

- 2016 Fairfax purchased 5% for $49 million; implied value for BIAL = $980 million

- 2017 Fairfax purchased 10% for $200 million; implied value for BIAL = $2,000 million (this purchase is the outlier of recent transactions; it gave Fairfax control and they subsequently made management changes)

- March 2018 Fairfax purchased 6% (total stake = 54%) for $67 million; implied value for BIAL = $1,117 million

- Dec 2019 Fairfax sell 5% for $134 million; implied value for BIAL = $2,680 million

 

Based off what GVK paid back in 2009 and 2011 it looks like FFH may have gotten a steal of a deal on 3 of its purchases (time value of money, plus the actual asset is much more valuable given all the improvements made over 5 years). Perhaps the one higher purchase ($200 million for 10%) was closer to what Fairfax felt was actual fair value for BIAL (still worth doing to get management control of the asset). Interesting :-)

 

In the attachment below I constructed a timeline for BIAL from 1999 to today with all transactions entered. 

_____________________________

It is interesting to see that L&T IDPL was part of the original consortium when BIAL was birthed back in 2001. I think they were awarded the contract to build the 2nd runway (recently opened) and also the new terminal. 

_____________________________

Another thing to understand would be how BIAL's value compares to the other big airports in India, like Mumbai. when it made its purchases of BIAL back in 2009 and 2011, GVK also was majority owner of the Mumbai airport. Here is a quote from an article (Aug 2011) commenting on its 14% purchase:

 

"Aviation experts say GVK must have exercised its right reluctantly considering the money involved, but BIAL was too important an asset to let go. "In the long term, BIAL will be a stronger asset for GVK even better than the Mumbai airport. The revenue share of the government in Mumbai airport with GVK is 37% whereas in BIAL it is only 4%," said Kapil Kaul, CEO, India and Middle-East, Centre for Asia Pacific Aviation, an aviation research and advisory firm.

 

"Also, Mumbai has structural issues and is a locked airport whereas BIAL has a lot of scope of expansion and development," he added.

 

https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/gvk-power-and-infrastructure-buys-bial-stake-for-rs-614-crore-threat-from-changi-tatas-forces-co-to-pay-premium-for-siemens-14/articleshow/9700380.cms

Fairfax_Equity_Holdings.xlsx

[petec]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

[StubbleJumper]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

 

[rohitc99]

The key to Fairfax India is BIAL. It is the 800 pound gorilla in the BV calculation. Are there some other ways we can get a fix on some other measures that might help us understand what might be fair value for that asset?

 

How about looking at all the historical sales since 1999 (when BIAL was born)? There have not been many transactions as stakes in trophy assets like this do not come up for sale often.

 

- 2009 GVK purchases 2 stakes for 12% and 17%; implied value for BIAL = $800 million.

- 2011 GVK purchased 14% (total ownership to 43%); implied value for BIAL = $964 million.

- 2016 Fairfax purchased 33% for $336 million; implied value for BIAL = $1,018 million

- 2016 Fairfax purchased 5% for $49 million; implied value for BIAL = $980 million

- 2017 Fairfax purchased 10% for $200 million; implied value for BIAL = $2,000 million (this purchase is the outlier of recent transactions; it gave Fairfax control and they subsequently made management changes)

- March 2018 Fairfax purchased 6% (total stake = 54%) for $67 million; implied value for BIAL = $1,117 million

- Dec 2019 Fairfax sell 5% for $134 million; implied value for BIAL = $2,680 million

 

Based off what GVK paid back in 2009 and 2011 it looks like FFH may have gotten a steal of a deal on 3 of its purchases (time value of money, plus the actual asset is much more valuable given all the improvements made over 5 years). Perhaps the one higher purchase ($200 million for 10%) was closer to what Fairfax felt was actual fair value for BIAL (still worth doing to get management control of the asset). Interesting :-)

 

In the attachment below I constructed a timeline for BIAL from 1999 to today with all transactions entered. 

_____________________________

It is interesting to see that L&T IDPL was part of the original consortium when BIAL was birthed back in 2001. I think they were awarded the contract to build the 2nd runway (recently opened) and also the new terminal. 

_____________________________

Another thing to understand would be how BIAL's value compares to the other big airports in India, like Mumbai. when it made its purchases of BIAL back in 2009 and 2011, GVK also was majority owner of the Mumbai airport. Here is a quote from an article (Aug 2011) commenting on its 14% purchase:

 

"Aviation experts say GVK must have exercised its right reluctantly considering the money involved, but BIAL was too important an asset to let go. "In the long term, BIAL will be a stronger asset for GVK even better than the Mumbai airport. The revenue share of the government in Mumbai airport with GVK is 37% whereas in BIAL it is only 4%," said Kapil Kaul, CEO, India and Middle-East, Centre for Asia Pacific Aviation, an aviation research and advisory firm.

 

"Also, Mumbai has structural issues and is a locked airport whereas BIAL has a lot of scope of expansion and development," he added.

 

https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/gvk-power-and-infrastructure-buys-bial-stake-for-rs-614-crore-threat-from-changi-tatas-forces-co-to-pay-premium-for-siemens-14/articleshow/9700380.cms

 

One point to keep in mind is to look at the history of infrastructure development in India. From 2003-2008, there was big boom in this (and real estate). a lot of capital flowed into airports, roads, power plants etc. There was a lot of optimism in these sectors. Since 2008, it has been a complete bust. A lot of these projects got stalled due to regulatory reasons, land not being available, coal linkage issues and so on. A lot of companies including GVK have been under financial distress and the whole banking sector has been hit badly. The NPA from all these infra projects have hit close to 10% of GDP and are still being worked through.

 

If you go to a bank and suggest an infra project, they wont even talk to you. there is absolutely no capital flowing into these sectors and the only capital is from the likes of fairfax, Blackstone etc. So it is not surprising that Fairfax got a good deal in 2011. GVK was a distressed seller.

 

If you look at the projections for BAIL, they have taken 3-4% as volume growth in their DCF in the past. I have lived in bangalore in the past ...nothing grows at 3% :) ...the city is growing rapidly and the area around the airport is becoming more valuable by the day even if it doesnt show up on the balance sheet.

[petec]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

Agreed - I’d be happier not having to take the validation at face value.

[hobbit]

I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.

 

 

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. 

 

I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold.  So, why did Fairfax sell it?  Did they need to drop their stake to 49% to keep the nationalists at bay?  Were they desperate for an infusion of $134m of cash?  Did they find a partner with specific expertise that they wanted to bring aboard?  Was there some other strategic motivation that was not articulated in the presser?

 

One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books.  Fairfax India will book a gain of $500m based on a transaction of only $134m.  And then what happens?  Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020.  So, how much wealth will be extracted from Fairfax India unit holders from that little transaction?  I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.

 

 

Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure?  For now, I am wary, but keeping an open mind.

 

 

SJ

 

https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan

 

OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value

[Viking]

 

One point to keep in mind is to look at the history of infrastructure development in India. From 2003-2008, there was big boom in this (and real estate). a lot of capital flowed into airports, roads, power plants etc. There was a lot of optimism in these sectors. Since 2008, it has been a complete bust. A lot of these projects got stalled due to regulatory reasons, land not being available, coal linkage issues and so on. A lot of companies including GVK have been under financial distress and the whole banking sector has been hit badly. The NPA from all these infra projects have hit close to 10% of GDP and are still being worked through.

 

If you go to a bank and suggest an infra project, they wont even talk to you. there is absolutely no capital flowing into these sectors and the only capital is from the likes of fairfax, Blackstone etc. So it is not surprising that Fairfax got a good deal in 2011. GVK was a distressed seller.

 

If you look at the projections for BAIL, they have taken 3-4% as volume growth in their DCF in the past. I have lived in bangalore in the past ...nothing grows at 3% :) ...the city is growing rapidly and the area around the airport is becoming more valuable by the day even if it doesnt show up on the balance sheet.

 

Thanks for commenting. Very helpful to understand the GVK purchases in 2009 and 2011 and the bigger picture.

 

The growth of the airport the past 10 years has been impressive. Phase 1 (Terminal A1) expansion was completed in 2013 increasing passenger capacity to 25 million. The second runway was just completed in Dec 2019. And the new terminal (phase 1) is scheduled to open March of next year (2021) and when fully completed will add passenger capacity of 25 million. And they already have plans to add a third runway. Bottom line, the development of the airport is in the early innings of another growth phase.

 

Link to article discussing plans for the new terminal:

- https://www.trbusiness.com/regional-news/asia-pacific/bial-outlines-commercial-vision-ahead-of-t2-opening/170859