Fairfax India new issue

[petec]

So BIAL IPO at 3bn . I wonder if coronavirus will have an impact on the timing or valuation. If it goes through as planned at 3Bn , that would be a significant win for the shareholders.

 

Link?

 

annual letter just published

"

Fairfax India intends to complete an IPO of AIIHL, targeted to value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for 100% of AIIHL). A ‘‘ratchet’’ mechanism has been agreed with the investor whereby if the IPO is completed at a valuation of AIIHL below $1.3 billion, the investor will receive incremental shares of AIIHL to compensate for the difference between that actual valuation and $1.3 billion.

"

https://s1.q4cdn.com/293822657/files/doc_financials/annual_reports/2019/Website-Fairfax-India-2019-Shareholders-Letter.pdf

 

do not know what to make of the ratchet clause though, I have seen it in some VC deals before.

 

Thanks!

[bizaro86]

That takes a lot of probitive value away from the mark on the airport. They basically guaranteed the buyer a 10%+ capital gain on the investment. On those terms, it seems likely they could have sold a small minority stake at basically any price. I wouldn't care, except they're using that mark for the performance fee.

[Jurgis]

That takes a lot of probitive value away from the mark on the airport. They basically guaranteed the buyer a 10%+ capital gain on the investment. On those terms, it seems likely they could have sold a small minority stake at basically any price. I wouldn't care, except they're using that mark for the performance fee.

 

Yes.  :(

[bizaro86]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

[TwoCitiesCapital]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

 

Generally agree with this. Isn't egregious, but is distatseful

[StubbleJumper]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

 

 

You are correct, but I would add a bit of precision.  It's not management that benefits, its FFH that benefits via the performance fee.  That's might be trite, but I make that point because it is important to recognize where Prem's financial interest resides.  It resides in the performance of FFH shares, not FFH India.

 

I am certain that people are tired of me dredging up the ancient past, but this is nothing new.  When FFH bought out ORH, we did not really have a fully independent management cadre or board of directors to ensure that ORH shareholders received full value in that buyback.  Prem had access to a larger collection of ORH financial data than did minority shareholders, so we did not know at the time that he was effectively buying ORH at book value (although as Chairman of ORH, it is almost certain that Prem would have been aware of that).  Okay, it mostly worked out.  Most of us made good money on ORH, but I remain unconvinced that we received a fair price for our shares.  The lesson here is that if there is a divergence between Prem's personal financial interest and your personal financial interest, you would be well advised to consider measures to ensure that your interests are well aligned with his.

 

Do I need to dredge up Abitibi Bowater?  It's basically the same conclusion.  Understand where Prem's financial interests reside!

 

 

SJ

[petec]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

 

 

You are correct, but I would add a bit of precision.  It's not management that benefits, its FFH that benefits via the performance fee.  That's might be trite, but I make that point because it is important to recognize where Prem's financial interest resides.  It resides in the performance of FFH shares, not FFH India.

 

I am certain that people are tired of me dredging up the ancient past, but this is nothing new.  When FFH bought out ORH, we did not really have a fully independent management cadre or board of directors to ensure that ORH shareholders received full value in that buyback.  Prem had access to a larger collection of ORH financial data than did minority shareholders, so we did not know at the time that he was effectively buying ORH at book value (although as Chairman of ORH, it is almost certain that Prem would have been aware of that).  Okay, it mostly worked out.  Most of us made good money on ORH, but I remain unconvinced that we received a fair price for our shares.  The lesson here is that if there is a divergence between Prem's personal financial interest and your personal financial interest, you would be well advised to consider measures to ensure that your interests are well aligned with his.

 

Do I need to dredge up Abitibi Bowater?  It's basically the same conclusion.  Understand where Prem's financial interests reside!

 

 

SJ

 

Sensible advice for most investments tbh!

[bizaro86]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

[StubbleJumper]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

 

 

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

 

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

 

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

 

The moral of all of these stories is that Prem is very clever and very self-interested.

 

 

SJ

[Viking]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

 

 

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

 

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

 

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

 

The moral of all of these stories is that Prem is very clever and very self-interested.

 

 

SJ

 

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

[Cigarbutt]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

 

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

 

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

 

The moral of all of these stories is that Prem is very clever and very self-interested.

SJ

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

I just want to add that, even if this was a grey area, the tax consolidation move was both clever and appropriate. The context included a potential material write-down of tax assets, further credit downgrades and other subsequent reflexive and potentially firm-threatening spiral. One can question the way they obtained the IRS acquiescence but, for this specific 'deal', I came to the conclusion that this was the best and most appropriate course of action.

To tax consolidate without the economic interest is controversial but the intent of the transaction was a prelude to full consolidation. For those interested, the IRS continued to show discomfort with this type of transaction or perhaps that specific transaction:

https://www.irs.gov/pub/irs-utl/am2012007.pdf

 

---) Back to the Fairfax India issue

[StubbleJumper]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

 

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

 

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

 

The moral of all of these stories is that Prem is very clever and very self-interested.

SJ

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

I just want to add that, even if this was a grey area, the tax consolidation move was both clever and appropriate. The context included a potential material write-down of tax assets, further credit downgrades and other subsequent reflexive and potentially firm-threatening spiral. One can question the way they obtained the IRS acquiescence but, for this specific 'deal', I came to the conclusion that this was the best and most appropriate course of action.

To tax consolidate without the economic interest is controversial but the intent of the transaction was a prelude to full consolidation. For those interested, the IRS continued to show discomfort with this type of transaction or perhaps that specific transaction:

https://www.irs.gov/pub/irs-utl/am2012007.pdf

 

---) Back to the Fairfax India issue

 

 

No, don't get me wrong here.  The tax consolidation of ORH was definitely legal -- the IRS made that clear.  Just as the $1B finite reinsurance contract from Swiss Re which was used to facilitate the TIG/C&F acquisitions was legal.  They were both ingenious, but some people held the view that it was playing a little fast and loose from an ethical perspective.  People are free to hold the view that they prefer.  My only observation is that Prem has a long history of making very clever moves for the financial benefit of FFH, and sometimes that can be perceived as a financial dis-benefit for the people who took the other side of the arrangement (the short-sellers of the past, ORH shareholders, Abitibi shareholders, and possibly Fairfax India unit holders).  It's not new.

 

 

SJ

[Xerxes]

Wasn’t able to catch it when it opened 22% down.

But caught it I think as 10% down. 

[Tompety03]

I am not intimately familiar with the cap structure at the Bangalore airport, but a 6-12 month slowdown in air travel should not impact the value of the airport this significantly. With 1/2 of the BV in the airport this seems like a bargain.

 

India seems to be taking a very proactive approach to the CV - my friend in Pune has been under social distancing measures for a week or so and has a very young population. Obviously there are other challenges discussed in the thread on India/CV.

 

Would be curious to hear other thoughts in case I am not missing anything.

 

Chris 

[obtuse_investor]

Of all the things I own right now, FIH certainly looks the cheapest right now.

 

If the book value growth is about 6-8% per annum for next 10 years, with current discount to book you can lock in a very healthy rate of return even after fees. Book should grow at a higher rate than that.

[matts]

Of all the things I own right now, FIH certainly looks the cheapest right now.

 

If the book value growth is about 6-8% per annum for next 10 years, with current discount to book you can lock in a very healthy rate of return even after fees. Book should grow at a higher rate than that.

 

What's your estimate for the current book value though?

 

[bizaro86]

Of all the things I own right now, FIH certainly looks the cheapest right now.

 

If the book value growth is about 6-8% per annum for next 10 years, with current discount to book you can lock in a very healthy rate of return even after fees. Book should grow at a higher rate than that.

 

What's your estimate for the current book value though?

 

Yeah, I still own this (worst mistake this year) but given the shenanigans with the airport mark, makes it pretty tough to trust their mark on the other private positions. And if you can't trust the external manager in a reasonable way, then why wouldn't this trade for a 40% discount permanently? There are lots of permanent capital vehicles that do and have lower fees.

 

Frustrating, as I think the assets are great. But trust is hard to get back, imo.

 

 

[obtuse_investor]

Of all the things I own right now, FIH certainly looks the cheapest right now.

 

If the book value growth is about 6-8% per annum for next 10 years, with current discount to book you can lock in a very healthy rate of return even after fees. Book should grow at a higher rate than that.

 

What's your estimate for the current book value though?

 

I don't have any fancy models. Two of their biggest assets are the airport and IIFL (finance & banking). Both these are going to get hit severely due to COVID, but we also know that the impact would not be forever. People will fly again and use their financial institutions again.

 

Do a DCF of a sample company... even if first two years there is zero earnings, the value drops much less than 30%.

 

If I simply assume that their Q4 book value has dropped ~30% similar to overall Indian stock market, then it will be around 11.8/shr. As of this writing FIH is selling at P/B of 0.57. If the underlying businesses return nominal 10% p.a. then at current price buyer is earning ~18% p.a.

 

[Scunny Bunny]

Bit of reverse engineering here with no adjustments for future management fees and costs. Main interest to me is BIAL.  So take the market capitalisation, deduct value of publicly listed stocks, deduct value of unlisteds using 30% discount, adjust for debt/liquids. At 31 December, at share price of $12.82, doing this calculation gave you an implied value of FIH share of BIAL at $962million, or a 33% discount to stated book - harsh but fair IMHO.  At 14 April, at $7.08, taking the market value of listeds (down 32% in US$ terms), reducing unlisted exposures by 30% and still use a 30% discount - which values them at half BV - and adjusting for debt/liquids gives me an implied value of $520m for the stake in BIAL or a 64% discount to last stated BV, and a 46% reduction from the reverse engineered $962m at 31 December. Something like Sydney Airport has a share price off 36% from its high price ever in February - it's still open but one of its major airlines (Virgin) needs a Government bailout of will fail.  Obvious fear that the "parent" is wobbling given its draw down of revolver (I would have done the same!) Starting to be worth putting on the watchlist perhaps.   

[petec]

Bit of reverse engineering here with no adjustments for future management fees and costs. Main interest to me is BIAL.  So take the market capitalisation, deduct value of publicly listed stocks, deduct value of unlisteds using 30% discount, adjust for debt/liquids. At 31 December, at share price of $12.82, doing this calculation gave you an implied value of FIH share of BIAL at $962million, or a 33% discount to stated book - harsh but fair IMHO.  At 14 April, at $7.08, taking the market value of listeds (down 32% in US$ terms), reducing unlisted exposures by 30% and still use a 30% discount - which values them at half BV - and adjusting for debt/liquids gives me an implied value of $520m for the stake in BIAL or a 64% discount to last stated BV, and a 46% reduction from the reverse engineered $962m at 31 December. Something like Sydney Airport has a share price off 36% from its high price ever in February - it's still open but one of its major airlines (Virgin) needs a Government bailout of will fail.  Obvious fear that the "parent" is wobbling given its draw down of revolver (I would have done the same!) Starting to be worth putting on the watchlist perhaps. 

 

I don’t think this sold off because anyone’s scared the parent drew the revolver. It sold off because it’s an small illiquid closed end fund invested in illiquid/private foreign companies in the biggest recession ever.

 

I bought my holding back for half the price - superb value.

[Scunny Bunny]

Certainly agree the reason for the sell off plus India COVID fears I suspect. We agree it's excellent long term value. I do worry about the parent sometimes - I'm usually OK at dissecting complex structures but in the past these guys do so many post balance date things to put you off the scent. 

[petec]

Certainly agree the reason for the sell off plus India COVID fears I suspect. We agree it's excellent long term value. I do worry about the parent sometimes - I'm usually OK at dissecting complex structures but in the past these guys do so many post balance date things to put you off the scent.

 

How do you mean?

[Xerxes]

Bit of reverse engineering here with no adjustments for future management fees and costs. Main interest to me is BIAL.  So take the market capitalisation, deduct value of publicly listed stocks, deduct value of unlisteds using 30% discount, adjust for debt/liquids. At 31 December, at share price of $12.82, doing this calculation gave you an implied value of FIH share of BIAL at $962million, or a 33% discount to stated book - harsh but fair IMHO.  At 14 April, at $7.08, taking the market value of listeds (down 32% in US$ terms), reducing unlisted exposures by 30% and still use a 30% discount - which values them at half BV - and adjusting for debt/liquids gives me an implied value of $520m for the stake in BIAL or a 64% discount to last stated BV, and a 46% reduction from the reverse engineered $962m at 31 December. Something like Sydney Airport has a share price off 36% from its high price ever in February - it's still open but one of its major airlines (Virgin) needs a Government bailout of will fail.  Obvious fear that the "parent" is wobbling given its draw down of revolver (I would have done the same!) Starting to be worth putting on the watchlist perhaps. 

 

I don’t think this sold off because anyone’s scared the parent drew the revolver. It sold off because it’s an small illiquid closed end fund invested in illiquid/private foreign companies in the biggest recession ever.

 

I bought my holding back for half the price - superb value.

 

The illiquidity air pocket are also aggravated by the very high US dollar.

 

[Xerxes]

unless I heard wrong what was said on AGM, OMERS is the minority buyer of the airport.

[petec]

unless I heard wrong what was said on AGM, OMERS is the minority buyer of the airport.

 

You heard right. But I think someone had identified that up-thread.