Fairfax stock positions

[petec]

Just checked Bloomberg and it says 37.47%.

 

Resolute took the shares outstanding down from 87.1m to 81.5m in the second half of 2020 which is punchy!

[petec]

Can’t make any sense of the 28.8% number though. I thought they’d owned over 30% for a long time.

 

RFP is projected to make $240m of FCF over the next two years. Could make for a nice dividend.

[Viking]

Perhaps part of the challenge with the ownership numbers might also be where the shares are held? i.e. Riverstone and Brit? And what happens to the stockholdings held in Riverstone once it is sold in its entirety? Fairfax appears to have an agreement to transfer the equity holdings to Fairfax and until end of 2022 to execute fully.

[FairFacts]

https://finance.yahoo.com/news/fairfax-india-announces-filing-prospectus-124500982.html

 

IPO of Seven Islands Shipping. Fairfax India owns 48.5%

[drzola]

Fantastic Company kind of wish they would sell it all to ATCO instead but whadda I know here tho.

 

Stay Safe for another 6 months or so N USA and likely a full year to go of Lockdown in the Great White North.

Worth it as this analogy may help one understand " Sit on your Netflix gorged ass and maybe save a loved one's life" How hard is the too comprehend and understand folks Geesh.

[StubbleJumper]

https://finance.yahoo.com/news/fairfax-india-announces-filing-prospectus-124500982.html

 

IPO of Seven Islands Shipping. Fairfax India owns 48.5%

 

 

Has anybody done the arithmetic to figure out what value this might place on FFH India's 48.5% ownership?

 

 

SJ

[FairFacts]

https://finance.yahoo.com/news/fairfax-india-announces-filing-prospectus-124500982.html

 

IPO of Seven Islands Shipping. Fairfax India owns 48.5%

 

 

Has anybody done the arithmetic to figure out what value this might place on FFH India's 48.5% ownership?

 

The only hard number I could find is the initial press release in March 2019 announcing Fairfax India's initial purchase for INR 5bil (US $72.1mil at then current rates) for a 41.4% holding. Not sure how that holding grew to 48.5%

 

 

SJ

[hobbit]

https://finance.yahoo.com/news/fairfax-india-announces-filing-prospectus-124500982.html

 

IPO of Seven Islands Shipping. Fairfax India owns 48.5%

 

 

Has anybody done the arithmetic to figure out what value this might place on FFH India's 48.5% ownership?

 

 

SJ

 

This is the prospectus Seven islands shipping filed with SEBI. Numbers are on pg 58. Fairfax india invested at valuation ~170m. SIS should have annual PAT of 18mil growing at 30%+ which can conservatively translate to a multiple of 25+ , valuing the entire company at - 450m+ .

1613365652117.pdf

[Viking]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

[Viking]

As a reminder Fairfax has an interest in four current IPO’s:

1.) Farmers Edge

2.) Boat Rocker

3.) Seven Islands Shipping - via Fairfax India

4.) Altius Renewables - via Atius Minerals

 

$100 million here, $100 million there... pretty soon it all adds up to some real money :-)

 

And when these are completed my guess is Fairfax is not done monetizing/surfacing value from companies it owns/holds significant stakes in. Let’s hope the markets remain receptive to these sorts of deals...

[bearprowler6]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

 

[StubbleJumper]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

 

 

 

So, it's good if FFH can IPO these outfits and book a gain.  It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants.  It might even enable some of the insurance subs to increase their underwriting volume.  It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). 

 

However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021.  If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks.  While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number.  It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two.

 

 

SJ

[Daphne]

Farmers Edge Inc., a Winnipeg-based agricultural technology provider, is boosting the size of its initial public offering to $125-million on the back of heavy investor demand.

 

The company, which is controlled by Fairfax Financial Holdings Ltd., filed to go public in early February and hoped to raise $100-million. After marketing the deal for two weeks, the company has boosted the IPO size by 25 per cent and priced the shares at $17 each, which is at the top end of the deal’s marketing range.

 

Farmers Edge was able to upsize the IPO because investors put in orders for more than 10 times the original deal size, according to someone familiar with the transaction. The Globe is not disclosing the source because they are not authorized to speak publicly about the matter.

 

Farmers Edge was an early Canadian agricultural-technology leader, and uses data science and AI-powered software to help farmers improve yields. Like many of its technology-based peers, the company decided to go public because Canada is in the midst of an IPO craze.

 

Starting mid-way through 2020, a number of IPO issuers have seen their deals met with intense investor enthusiasm. Montreal-based online payments company Nuvei Corp., for one, set out to raise US$600-million in September but bumped its final haul to US$805-million.

 

Many issuers have also seen their shares soar once they started trading. Shares of Dye & Durham Ltd., a consolidator of software providers for legal and business professionals, have more than quadrupled since listing at $7.50 on the Toronto Stock Exchange last July.

 

The current deluge marks a major reversal. From 2009 to 2020, just 12 Canadian tech IPOs raised $50-million or more, and as of early last year Canadian tech companies were often avoiding or delaying going public because private backers were happy to invest at attractive valuations. That’s now flipped, and public markets are just as competitive, if not even more lucrative.

 

However, there is growing concern that public investors could quickly turn on growth stocks, especially if bond yields and interest rates start to rise in the United States. Many of the companies that are going public lose a lot of money, and Farmers Edge lost $68-million in the nine months ended Sept. 30, on top of a $118-million loss in 2019.

 

While the IPO craze is ongoing, some recent deals have seen more modest demand, suggesting the recent euphoria has some limits.. Both DRI Healthcare Trust and ABC Technologies Holdings Inc., an auto parts maker, were able to complete their offerings in the past few weeks, but DRI priced at the lower end of its marketing range and ABC had to slash its offering size by 60 per cent as well as price its shares below its marketing range.

 

Farmers Edge raised private capital in the mid-2010s from Silicon Valley-based Kleiner Perkins Caulfied & Byers and Toronto-based Osmington Inc., which is controlled by David Thomson. (Woodbridge Co. Ltd., the Thomson family holding company, owns The Globe and Mail.)

[Viking]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

Bearprowler, thanks for posting. It looks to me like the gain in BV that Fairfax will book on the close could be very large.

[TwoCitiesCapital]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

Bearprowler, thanks for posting. It looks to me like the gain in BV that Fairfax will book on the close could be very large.

 

All while trading at a 20% discount to BV as currently stated

[Viking]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

 

 

 

So, it's good if FFH can IPO these outfits and book a gain.  It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants.  It might even enable some of the insurance subs to increase their underwriting volume.  It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). 

 

However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021.  If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks.  While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number.  It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two.

 

 

SJ

 

Stubble, i like many things about what Fairfax is doing with the IPO process:

1.) additional disclosure provided on companies and their business models

2.) significant funds raised from IPO will help companies be successful in future

3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations

4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward.

5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do

6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV)

 

Seeing the value of these IPO’s i wonder what a company like AGT might be valued at should it go this route. The learning is there is significant value in the non-publicly traded companies Fairfax owns.

[petec]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

Are you sure you're capturing all of the investment?

 

The investment is via convertibles and warrants. From memory (I need to check the red herring) Fairfax has convertibles worth $220m. I don't think they were written down to $40m but could be wrong. I'm wondering if your figures represent the value of the convertibility feature plus the warrants (i.e. the equity) but not the debt? Is that possible?

 

I'd love to be wrong.

 

Edit: having checked the 2021 thread where this was discussed in detail, according to the prospectus Fairfax has $273m of convertible debentures ($225m principal plus accrued interest). It also has warrants.

 

Were these written down? If not then I don't think the carrying value of $40m can be right.

 

Edit 2: the final prospectus confirms that the consolidation ratio will be 7:1. This means that Fairfax's cost for most of thwir shares will be $2.40 (the conversion price of the debs) * 7 = $16.8. So Fairfax won't make much of a gain on the debentures at the IPO price.

 

They will record a gain on the warrants but they only have about 2.5m of them after the conversion (so a gain of about $40m).

[petec]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

 

 

 

So, it's good if FFH can IPO these outfits and book a gain.  It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants.  It might even enable some of the insurance subs to increase their underwriting volume.  It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). 

 

However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021.  If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks.  While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number.  It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two.

 

 

SJ

 

Stubble, i like many things about what Fairfax is doing with the IPO process:

1.) additional disclosure provided on companies and their business models

2.) significant funds raised from IPO will help companies be successful in future

3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations

4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward.

5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do

6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV)

 

Absolutely right. The point about cash flows is huge. These things can now grow without imperilling Fairfax's ability to do the same.

 

It's true that earnings are overstated when there is a gain. But equally they are understated when there isn't one (hopefully). Personally I think it's wiser to value this using book value and a sense of what X% CR + Y% investment returns - holdco costs could yield on average over time.

 

I no longer worry about cash at the holdco. Prem has proven that whether it is outright (Riverstone UK) or via the discount window at his personal LOLR (OMERS) he can access cash by selling stakes pretty much whenever he wants. And crucially, he can do it well above BV, which "underwrites" the goodwill at the holdco.

 

 

[dartmonkey]

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

I don't get it: after closing, "Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised)."

 

So how does Fairfax go from owning 50.4% to owning 61.5% after the IPO?

[StubbleJumper]

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

I don't get it: after closing, "Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised)."

 

So how does Fairfax go from owning 50.4% to owning 61.5% after the IPO?

 

 

As part of the IPO, the convertible debentures are converted into shares.

 

 

SJ

[petec]

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

I don't get it: after closing, "Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised)."

 

So how does Fairfax go from owning 50.4% to owning 61.5% after the IPO?

 

 

As part of the IPO, the convertible debentures are converted into shares.

 

 

SJ

 

And the warrants are exercised, and Fairfax buys $24m worth from another investor.

[bearprowler6]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

Are you sure you're capturing all of the investment?

 

The investment is via convertibles and warrants. From memory (I need to check the red herring) Fairfax has convertibles worth $220m. I don't think they were written down to $40m but could be wrong. I'm wondering if your figures represent the value of the convertibility feature plus the warrants (i.e. the equity) but not the debt? Is that possible?

 

I'd love to be wrong.

 

Edit: having checked the 2021 thread where this was discussed in detail, according to the prospectus Fairfax has $273m of convertible debentures ($225m principal plus accrued interest). It also has warrants.

 

Were these written down? If not then I don't think the carrying value of $40m can be right.

 

Edit 2: the final prospectus confirms that the consolidation ratio will be 7:1. This means that Fairfax's cost for most of thwir shares will be $2.40 (the conversion price of the debs) * 7 = $16.8. So Fairfax won't make much of a gain on the debentures at the IPO price.

 

They will record a gain on the warrants but they only have about 2.5m of them after the conversion (so a gain of about $40m).

 

Here's another try...

 

Value of Farmers Edge shares held by Fairfax at IPO: US $340.3 million (25.023 shares x CAD$17 x .80 conversion to USD)

 

Investment into Shares:

 

Sept 30/20: Carrying Value of $41.0 million for 50.4% per Fairfax Q3 2020 financial statements

 

Plus another 9.5% acquired immediately prior to IPO from the following:

 

Conversion of Fairfax Debentures and Accrued Interest: US $219.5 million (from final prospectus CAD $274.4 x .80 conversion to USD)

 

Fairfax purchase of portion of shares held by Osmington prior to IPO: US $19.2 million (from final prospectus CAD $24.0 x .80 conversion to USD)

 

Total Investment by Fairfax into Farmers Edge shares prior to IPO: US $279.7 million ($41.0 +$219.5+19.2)

 

 

Accounting Gain to be Recognized by Fairfax Upon IPO of Farmers Edge: US $60.6 million ($340.3-$279.7)

 

 

[Xerxes]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

 

 

So, it's good if FFH can IPO these outfits and book a gain.  It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants.  It might even enable some of the insurance subs to increase their underwriting volume.  It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). 

 

However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021.  If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks.  While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number.  It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two.

 

 

SJ

 

Stubble, i like many things about what Fairfax is doing with the IPO process:

1.) additional disclosure provided on companies and their business models

2.) significant funds raised from IPO will help companies be successful in future

3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations

4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward.

5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do

6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV)

 

Absolutely right. The point about cash flows is huge. These things can now grow without imperilling Fairfax's ability to do the same.

 

It's true that earnings are overstated when there is a gain. But equally they are understated when there isn't one (hopefully). Personally I think it's wiser to value this using book value and a sense of what X% CR + Y% investment returns - holdco costs could yield on average over time.

 

I no longer worry about cash at the holdco. Prem has proven that whether it is outright (Riverstone UK) or via the discount window at his personal LOLR (OMERS) he can access cash by selling stakes pretty much whenever he wants. And crucially, he can do it well above BV, which "underwrites" the goodwill at the holdco.

 

Disagree on #4.

Prem had mentioned during the depth of the Covid crisis that holding company had no need to fund/finance non-insurance operations and businesses. If those assets didnt need funding in the worse of time, surely they dont need funding from FFH's balance sheet in the best of time. So, based on this, i don't think there is significant saving on cash flow usage because of the IPOs. The most signifcant operational use of cash flow at holding company level was the capitalization of the insurance company, which Prem declared it to be compelete in the Q4 call few weeks ago.

 

That said, the IPO will allow these companies to fund their growth from a new avenue (capital market) than just internally.

 

As far as book value one-time gain in Q1, so be it. It is an insurance/investment firm, the lumpiness will always be there even if it is paper gain.

[petec]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

————————-

Fairfax Financial Holdings backed Farmers Edge prices $125M IPO

https://privatecapitaljournal.com/fairfax-financial-holdings-backed-farmers-edge-prices-125m-ipo/

 

CPE News (2/24/2021) – Farmers Edge Inc., a company majority owned by Fairfax Financial Holdings Limited (TSX: FFH and FFH.U) and backed by Osmington Inc. and Mitsui & Co. Ltd., has filed a final prospectus in respect of its initial public offering (IPO) of common shares.

 

Farmers Edge will issue 7,353,000 common shares at a price of $17.00 per share for gross proceeds of $125,001,000, or $143,751,150 if the over-allotment option is exercised in full.

 

Farmers Edge will have 40,678,719 common shares outstanding or 41,781,669 common shares if the over-allotment option is fully exercised.

 

Fairfax will own 25,023,193 common shares representing 61.5% of the outstanding shares (59.9% if over-allotment option is fully exercised).

————————-

The closing of the Offering is expected to occur on or about March 3, 2021 (the “Closing Date”) and is subject to customary closing conditions, including the receipt of all necessary regulatory approvals.

 

Brief history of the Farmers Edge investment:

 

Dec 31/17: 46.1% owned with a Fair Value (FV) of $ 95 million and a Carrying Value (CV) of $88.1 million (the 46.1% interest acquired for $95 million on March 1/17)

 

Dec 31/18: 49.2% owned with a FV of $66.6 million and a CV of $66.9 million

 

Dec 31/19: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Sept 30/20: 50.4% owned with a FV of $43.8 million and a CV of $41.0 million

 

Note: All amounts in USD.

 

Are you sure you're capturing all of the investment?

 

The investment is via convertibles and warrants. From memory (I need to check the red herring) Fairfax has convertibles worth $220m. I don't think they were written down to $40m but could be wrong. I'm wondering if your figures represent the value of the convertibility feature plus the warrants (i.e. the equity) but not the debt? Is that possible?

 

I'd love to be wrong.

 

Edit: having checked the 2021 thread where this was discussed in detail, according to the prospectus Fairfax has $273m of convertible debentures ($225m principal plus accrued interest). It also has warrants.

 

Were these written down? If not then I don't think the carrying value of $40m can be right.

 

Edit 2: the final prospectus confirms that the consolidation ratio will be 7:1. This means that Fairfax's cost for most of thwir shares will be $2.40 (the conversion price of the debs) * 7 = $16.8. So Fairfax won't make much of a gain on the debentures at the IPO price.

 

They will record a gain on the warrants but they only have about 2.5m of them after the conversion (so a gain of about $40m).

 

Here's another try...

 

Value of Farmers Edge shares held by Fairfax at IPO: US $340.3 million (25.023 shares x CAD$17 x .80 conversion to USD)

 

Investment into Shares:

 

Sept 30/20: Carrying Value of $41.0 million for 50.4% per Fairfax Q3 2020 financial statements

 

Plus another 9.5% acquired immediately prior to IPO from the following:

 

Conversion of Fairfax Debentures and Accrued Interest: US $219.5 million (from final prospectus CAD $274.4 x .80 conversion to USD)

 

Fairfax purchase of portion of shares held by Osmington prior to IPO: US $19.2 million (from final prospectus CAD $24.0 x .80 conversion to USD)

 

Total Investment by Fairfax into Farmers Edge shares prior to IPO: US $279.7 million ($41.0 +$219.5+19.2)

 

 

Accounting Gain to be Recognized by Fairfax Upon IPO of Farmers Edge: US $60.6 million ($340.3-$279.7)

 

Ok. So the equity and the debentures are carried separately on Fairfax’s BS?

 

Because if not (ie if the debs got written down and are included in the $41m) then the gain is much bigger.

[petec]

So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)

 

 

So, it's good if FFH can IPO these outfits and book a gain.  It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants.  It might even enable some of the insurance subs to increase their underwriting volume.  It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). 

 

However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021.  If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks.  While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number.  It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two.

 

 

SJ

 

Stubble, i like many things about what Fairfax is doing with the IPO process:

1.) additional disclosure provided on companies and their business models

2.) significant funds raised from IPO will help companies be successful in future

3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations

4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward.

5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do

6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV)

 

Absolutely right. The point about cash flows is huge. These things can now grow without imperilling Fairfax's ability to do the same.

 

It's true that earnings are overstated when there is a gain. But equally they are understated when there isn't one (hopefully). Personally I think it's wiser to value this using book value and a sense of what X% CR + Y% investment returns - holdco costs could yield on average over time.

 

I no longer worry about cash at the holdco. Prem has proven that whether it is outright (Riverstone UK) or via the discount window at his personal LOLR (OMERS) he can access cash by selling stakes pretty much whenever he wants. And crucially, he can do it well above BV, which "underwrites" the goodwill at the holdco.

 

Disagree on #4.

Prem had mentioned during the depth of the Covid crisis that holding company had no need to fund/finance non-insurance operations and businesses. If those assets didnt need funding in the worse of time, surely they dont need funding from FFH's balance sheet in the best of time. So, based on this, i don't think there is significant saving on cash flow usage because of the IPOs. The most signifcant operational use of cash flow at holding company level was the capitalization of the insurance company, which Prem declared it to be compelete in the Q4 call few weeks ago.

 

That said, the IPO will allow these companies to fund their growth from a new avenue (capital market) than just internally.

 

As far as book value one-time gain in Q1, so be it. It is an insurance/investment firm, the lumpiness will always be there even if it is paper gain.

 

I’d take that statement from Prem with a pinch of salt. Apart from anything else you don’t know how long it was meant to stand for. Did he mean they didn’t need funding for a few months? Years? Ever? I mean, looking at FarmersEdge it seems clear that they needed cash last year and need more now.

 

Plus, you don’t know what he meant by “need”. “Don’t need more cash to survive” is very different from “can take full advantage of their opportunities without any more cash”.

 

Finally, for years Prem has been making statements about how well capitalised the insurance subs are and how they could grow premiums/surplus in a hard market. Come the hard market, and we find they have to pump capital into the subs. I fundamentally trust the man but it’s hard to square that circle.

 

I’m fairly confident Fairfax was a cash constrained home and at least some of these non-insurance subs may find they do better on the outside. So I absolutely agree with #4.