Fairfax Africa

[petec]

I’m not sure it was ever FAH’s crown jewel. They bought it distressed and fairly rapidly set about trying to dismantle it.

 

 

[SharperDingaan]

Hate to say it, but FFH really needs to rethink this entire thing.

After FX devaluation, the investments will have to be stellar performers - just to break even.

 

Until Covid-19 has run its course -simply put the cash into more robust entities (Barrick, Anglo-American, etc) doing acquisitions in the space. They will be the first to recover, and their shares are liquid - allowing easy exit at any time. Reassess later once the survivors are evident, and everyone is looking for recapitalization investment.

 

Africa is not a place where the wealth is made by owning the capital stock.

It is made by selling the annual production at a profit abroad, and returning only enough capital for maintenance capex & modest growth. Capital assets routinely get nationalized, and African countries routinely devalue.

 

SD

 

[Thrifty3000]

2016: Atlas Mara earned $9 million.

 

2017: FAH acquired 43% of Atlas Mara for $159 million. Atlas Mara earned $47 million. (Well played FAH.)

 

2018: Atlas Mara earned $42 million. FAH is looking pretty genius - despite Atlas Mara share price decline.

 

2019: Atlas Mara makes a strategic decision to focus on holdings with a dominant market position, and to divest several non-strategic banks in its portfolio. To do that it secures commitment from a buyer, and then has to reclassify the assets as held for sale, which requires a very large ($105.5 million) accounting write-down. The write-down flows through the P&L so it has to report a massive 2019 loss - but, Atlas Mara expected to sell the reclassified assets in early 2020.

 

2020: Covid = deal off. African securities lost more value than they did during the GFC. Atlas Mara is in Africa. Ouch.

 

Atlas Mara has $500 million of equity against $2 billion of liabilities. It can absorb a lot of losses.

 

It's largest asset, UBN (Nigeria), which shared $31 million of it's approximately $54 million of 2019 earnings with Atlas Mara, has been in business for over 100 years! So, it's at least some degree of proof banks can survive long term in Africa.

 

So, what if Atlas Mara goes bust and has to wipe out equity holders? FAH wouldn't walk away empty handed. It would likely recover at least some of its $36 million in Atlas Mara bonds. And, as a modest consolation prize, at the end of the first quarter 2020 FAH extended a $40 million debt facility to Atlas Mara collateralized by Atlas Mara's interest in it's second largest holding, Botswana Bank. Botswana Bank earned $14 million of pre-tax profit last year (ROE of 11.2%, ROA of 1.3%). So, FAH would likely still be in the banking business in Botswana (and also with a completely separate holding, Grobank).

 

Long story short. I'm not faulting FAH for this investment. If you have a mandate to invest in Africa, and you want to be a long term investor in the banking sector, then this looked like a flawlessly timed investment at a great price in 2017. And, I completely agree with the strategy they were pursuing to focus on their strongest assets.

 

I'm sure if Covid is damaging the well-capitalized Atlas Mara, then it is decimating Atlas Mara's competition. Hopefully Atlas Mara can capitalize on the opportunities, gain market share, and in a few years produce look through earnings of $25+ million for FAH. Hopefully FAH will still be selling then for less than $200 million. Haha.

 

Frankly, I'm more concerned about CIG than Atlas Mara, but that's a completely different story. And, all of CIG and Atlas Mara's risks appear to be priced into FAH.

[SharperDingaan]

There's is little doubt that over time, FAH could build a solid business in Africa.

But it is wealth in an isolated gilded cage, and only local - try to convert that wealth into hard currency, and most often - investors will be disappointed. Always a devaluation + liquidity discount, the size of which will vary according to money flow in/out of the MCSI index.

 

Colonialism has been much maligned across Africa, but the reality is that the business model was very successful. Colonialism 2.0, is even more effective - let the natives control the domestic assets (saving on upkeep), and control distribution/sale of the output instead (minerals, food, exports, etc.). China's Belt & Road initiative, in various african nations, a more recent example.

 

We may decry Colonialism 2.0 as a business model - but if you own a cottage/holiday property, you are practicing exactly that.

The municipality services the area as it sees fit, sets the taxes, you pay them. You take the benefits of the property/area, and sell/use them for as much you can get. If you don't believe - look at the seasonal towns, swamped by large numbers of long weekend 'outsiders' - some bearing covid-19. Who is doing the protesting? 

 

Point is, this might be an opportune time to rethink the approach.

Hopefully, they do well, no matter the decision.

 

SD

 

 

 

[Thrifty3000]

Not sure why this wasn't posted in the press section of CIG's website. It's definitely material information (assuming it's true):

 

https://www.businesslive.co.za/bd/companies/industrials/2020-03-09-consolidated-infrastructure-group-restructures-debt/

 

I'm sure they discussed it during the AGM, but I wasn't looking at FAH back then so I didn't dial in (would love to see a transcript/notes).

 

From what I gather the situation at CIG isn't pretty. Odds of survival were zero without a debt restructure. And, even with the restructure I still think things are grim. (It seems Mr. Market has written off CIG anyway.)

 

CIG has several business lines. Half the revenue comes from large scale project management. The other half comes from diverse businesses that are on solid footing from a profitability standpoint, and a couple have especially exciting growth prospects.

 

The problem is CIG royally SUCKED at project management, for years, and lost insane amounts of money. FAH had no idea how bad things were when they invested. It was clearly WAY out of FAH's circle of competence, because the issues were in plain sight. The good news is FAH appears capable of leading a solid turnaround effort, as long as it's not too little too late. If covid hadn't come along it sounded like CIG had a decent shot of returning to profitability in 2020. Now, who knows? It comes down to whether they can right size the project business, and whether they can continue servicing the debt.

 

I'm rooting for FAH on this one. I think if CIG starts showing signs of life it will be at least a $50 million boost to FAH's valuation, with what should be plenty of opportunity for long term growth. Not holding my breath.

 

 

[SharperDingaan]

Just to give an indication of the FX headwind.

 

07/09/2019 the ZAR/CAD FX rate was 10.791:1. One year later, 07/09/2020 the ZAR/CAD FX rate was 12.4363:1.

ZAR had devalued by 15.25% ((12.4363-10.7910)/10.7910) x 100. The Atlas Mara and CIG investments were made when the ZAR/CAD was stronger. Their cumulative FX devaluation is a lot worse.

 

The FAH books are denominated in USD. Balance Sheet revalues every quarter-end, reducing equity.

To maintain the BS ratio's requires fresh capital every year, in addition to the maintenance capex. Not a problem while they are rolling in the investments, but after it's done?

 

Not to say that it cannot work, but it's a lot of work - just to break even.

Hopefully, it works out for them.

 

SD

 

 

https://www.bankofcanada.ca/rates/exchange/daily-exchange-rates-lookup/?series%5B%5D=FXZARCAD&lookupPage=lookup_daily_exchange_rates_2017.php&startRange=2010-07-09&rangeType=range&rangeValue=1.y&dFrom=&dTo=&submit_button=Submit

 

 

[elliott]

FAH enters into an strategic transaction with an African investment firm, Helios, "for the combination of their complementary businesses on one unified platform."

FAH will become HFP, and "Helios will be appointed sole investment adviser to HFP"

 

oh, and towards the end of the announcement... news about the "crown jewel"

acquisition by Fairfax Financial of Atlas Mara "for an aggregate purchase price of US$40 million"

 

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Proposed-Strategic-Transaction-Between-Helios-Holdings-Limited-and-Fairfax-Africa-Holdings-Corporation/default.aspx

 

 

[hobbit]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

[Thrifty3000]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

[hobbit]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

 

what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have  UBN and Botswana...

 

If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release

[Thrifty3000]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

 

what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have  UBN and Botswana...

 

If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release

 

I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.”

 

My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed.

 

My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.”

 

At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death.

 

On the other hand, we could be looking at a scenario where a decade from now:

 

- $450 million of existing assets doubles in value to $900 million

- Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million

- Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price.

 

I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed.

 

With that said, without more color on expected fees this is highly speculative.

[bizaro86]

 

I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.”

 

My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed.

 

 

I think at this point Fairfax companies are getting the valuation multiple they deserve based on the way minority shareholders are treated.

 

At the parent there is family control through unequal voting with a next generation of unknown quality poised to take over.

 

At India, they press released the sale of part of the Airport at a high price and then took a big huge incentive fee based on that mark. Then when the details come out it turns out they only got that price because they guaranteed the valuation to a cozy buyer.

 

At Africa, they sell their crown jewel asset to the parent with limited disclosure at a much lower price than previously agreed with a third party buyer. They bury that at the bottom of a press release about selling a chunk of the company for assets of unknown quality.

 

At some point it's reasonable to assume Fairfax management is willfully mistreating minorities.

 

[hobbit]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

 

what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have  UBN and Botswana...

 

If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release

 

I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.”

 

My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed.

 

My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.”

 

At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death.

 

On the other hand, we could be looking at a scenario where a decade from now:

 

- $450 million of existing assets doubles in value to $900 million

- Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million

- Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price.

 

I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed.

 

With that said, without more color on expected fees this is highly speculative.

 

at 3$ per share the market cap is around 180mil out of which 140 is cash( minus 40 mil they lent to ATMA which Fairfax is now guaranteeing) . Even after this deal the fair value is probably around 5.50 assuming no new impact on investmetns from COVID-19 since Mar 31. What really bothers me is the sale of ATMA for 40mil when UBN stake alone is worth north of 100mil and UBN itself is on much firmer footing now than a couple of years ago. This is likely going to open up FAH mgmt to potential litigation if there is isn't more to the deal. As it is it seems like Fairfax Financial is trying to make up for its loss in FAH by getting ATMA for pennies.

[Thrifty3000]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

 

what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have  UBN and Botswana...

 

If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release

 

I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.”

 

My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed.

 

My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.”

 

At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death.

 

On the other hand, we could be looking at a scenario where a decade from now:

 

- $450 million of existing assets doubles in value to $900 million

- Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million

- Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price.

 

I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed.

 

With that said, without more color on expected fees this is highly speculative.

 

at 3$ per share the market cap is around 180mil out of which 140 is cash( minus 40 mil they lent to ATMA which Fairfax is now guaranteeing) . Even after this deal the fair value is probably around 5.50 assuming no new impact on investmetns from COVID-19 since Mar 31. What really bothers me is the sale of ATMA for 40mil when UBN stake alone is worth north of 100mil and UBN itself is on much firmer footing now than a couple of years ago. This is likely going to open up FAH mgmt to potential litigation if there is isn't more to the deal. As it is it seems like Fairfax Financial is trying to make up for its loss in FAH by getting ATMA for pennies.

 

I suspect Helios needs/wants US dollars. And, I think ATMA was probably too risky for Helios. Helios already has a focus on financials, so they probably didn’t want any more in the portfolio.

 

UBN is in Nigeria. Nigeria is extremely oil dependent. It costs $23 per barrel to extract oil in Nigeria. There’s much cheaper oil in nearby regions (aka Middle East). So, with reduced global demand Nigeria isn’t exporting as much, which means their US dollar supply is running low. They already had to devalue their currency once to slow the USD depletion. And, when they did it hit the value of UBN hard. Also, approx 30% of UBN loans are to the oil & gas industry. Additionally, ATMA’s other major bank is in Botswana, which is heavily dependent on the travel and leisure industry. Ouch. Another one of their banks is in a hyperinflation country. And, they’re still stuck holding the non-strategic banks, which aren’t profitable. So, there’s plenty of pain at ATMA. Between the loan losses, currency devaluation, and interest rate fluctuations, it’s next to impossible to forecast what will remain of ATMA post Covid.

[SharperDingaan]

It is useful to think in stages. During Covid, Covid Recovery, Post Recovery.

 

Africa doesn't have the medical infrastructure that a NA or Europe has. Hence, most would estimate how long until there is a working vaccine in wide distribution within a NA/Europe, and triple it for Africa (3rd world will be last in line). The reality is that Africa will be achieving herd immunity primarily by contracting Covid, and surviving it - a very difficult business environment for quite some time. If the average devaluation over the next 5 years, is 8%/yr (conservative), a $ invested today is worth 68c. 

 

CB's in NA/Europe are dong 'whatever it takes', with current/forecast spending at war time levels in many places. The traditional hedge against unavoidable currency devaluation is precious metals; either bullion itself, or the miners producing it. Africa is home to some of the most productive gold/platinum mines in the world - and the shares of all the bigger miners trade on unrestricted global exchanges, outside of Africa (liquid, enforceable rights, no capital controls). Pretty clear where a foreign investor, wishing to invest in Africa, needs to be.

 

The equation changes if the investor intends to consume the production, as either a tourist, or to make/distribute some other product. Buy that second property in Cape Town ;) not Florida, and visit for 3-4 weeks every year. Use the minerals (China), or resell to others (Glencore, etc.).

 

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

Then, do you really see that changing? while Covid does its thing, around the world?

 

Hence, maybe it's time to rethink the execution. WEB did it with the airline stocks.

Africa is a tough place to invest, and we wish them the best of luck.

 

SD

 

 

 

[hobbit]

Can fairfax africa sell ATMA to fairfax as a related party transaction without independently marketing it?  what is the valuation helios paid for 46% stake or FAH paid for helios in shares? no color on helios revenue either...Fairfax really struggles with IR

 

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds.

 

I haven't found any info on Helios's historical fee earnings yet.

 

Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward.

 

Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax.

 

FAH will benefit from being managed by leading, proven, investors in Africa.

 

what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have  UBN and Botswana...

 

If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release

 

I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.”

 

My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed.

 

My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.”

 

At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death.

 

On the other hand, we could be looking at a scenario where a decade from now:

 

- $450 million of existing assets doubles in value to $900 million

- Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million

- Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price.

 

I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed.

 

With that said, without more color on expected fees this is highly speculative.

 

at 3$ per share the market cap is around 180mil out of which 140 is cash( minus 40 mil they lent to ATMA which Fairfax is now guaranteeing) . Even after this deal the fair value is probably around 5.50 assuming no new impact on investmetns from COVID-19 since Mar 31. What really bothers me is the sale of ATMA for 40mil when UBN stake alone is worth north of 100mil and UBN itself is on much firmer footing now than a couple of years ago. This is likely going to open up FAH mgmt to potential litigation if there is isn't more to the deal. As it is it seems like Fairfax Financial is trying to make up for its loss in FAH by getting ATMA for pennies.

 

I suspect Helios needs/wants US dollars. And, I think ATMA was probably too risky for Helios. Helios already has a focus on financials, so they probably didn’t want any more in the portfolio.

 

UBN is in Nigeria. Nigeria is extremely oil dependent. It costs $23 per barrel to extract oil in Nigeria. There’s much cheaper oil in nearby regions (aka Middle East). So, with reduced global demand Nigeria isn’t exporting as much, which means their US dollar supply is running low. They already had to devalue their currency once to slow the USD depletion. And, when they did it hit the value of UBN hard. Also, approx 30% of UBN loans are to the oil & gas industry. Additionally, ATMA’s other major bank is in Botswana, which is heavily dependent on the travel and leisure industry. Ouch. Another one of their banks is in a hyperinflation country. And, they’re still stuck holding the non-strategic banks, which aren’t profitable. So, there’s plenty of pain at ATMA. Between the loan losses, currency devaluation, and interest rate fluctuations, it’s next to impossible to forecast what will remain of ATMA post Covid.

 

The issue is they were trying to sell stakes in 4 countries ex botswanaand Nigeria to equity group for 105mil until a month ago. Do you think the deal would have gone through if ATMA dropped that price to 40mil..i think it probably would have...who knows though...plus they have been emphatically stating in their Annual letters, AGM 2020 call regarding how undervalued ATMA is and what a brilliant turnaround is going on at UBN ..UBN issued dividend for the first time in years and kept it on post COVID too. Oil is essentially trading at a 30% discount to last year despite the volatility and is above the Nigeria break even price for extracting it ...that UBN stake is always going to be worth atleast 100mil under most circumstances ....plus they have 150 mil in cash ( and no debt ) which they can use to tide over any situation...they even gave ATMA an extra 40mil and stated on the AGM 2020 call that all their businessmen are well capitalized for COVID after they had run their internal stress tests...if they had sold for the entire ATMA stake for 100mil , it would still be wrong but you could justify it as a firesale to close this deal... 40mil is criminal and if there isn't more to the deal ...then Prem + rest of mgmt can give up the charade of being honest and ethical because they just royally screwed the minority shareholders.

 

Moreover, OMERS proabably has access to financials of helios and other shareholders dont, so OMERS can make a more informed decision which is another -ve for minority shareholders

[Xerxes]

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

 

perhaps neither ABX nor FAH,

lets go with Jumia with a $600 million market cap. :-)

Fire and forget. See you in 2030.

 

 

i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

 

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.

- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.

- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.

- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

 

 

 

[Thrifty3000]

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

 

perhaps neither ABX nor FAH,

lets go with Jumia with a $600 million market cap. :-)

Fire and forget. See you in 2030.

 

 

i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

 

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.

- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.

- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.

- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

 

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

 

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

 

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

 

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

 

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

 

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

 

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

 

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

 

Prem says “where do I sign the check?”

[hobbit]

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

 

perhaps neither ABX nor FAH,

lets go with Jumia with a $600 million market cap. :-)

Fire and forget. See you in 2030.

 

 

i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

 

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.

- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.

- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.

- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

 

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

 

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

 

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

 

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

 

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

 

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

 

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

 

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

 

Prem says “where do I sign the check?”

 

I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke .

 

They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil .

[SharperDingaan]

The reality is that the reputational damage to the Watsa family, is far more damaging than the $ lost.

Good intentions are great, but they are well out of their depth in these 2nd/3rd world ventures. If this is truly going to be a long-term thing - at least one family member needs to apprentice on site, under skilled expertise, for an extended period of time. A great opportunity!

 

We wish them luck.

 

SD

 

[Xerxes]

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

 

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

 

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

 

 

i don't know which extreme is worse:

- buying non profitable technology story companies (don't mean big tech) knowing that a greater fool will be buy it from you at a higher price and then the music stops, and you are left holding the bag

- worshipping at the alter of Deep Value; buying stuff 50 cent on the dollar and selling out at 25 cents on the dollar b/c the market forces your hand.

 

what's wrong with finding something in between these styles.

 

On Wilkerson, i was at the 2018 AGM in Toronto; seem like a nice guy. At the end of the Q&A session, two of the older gentlemen (who i believe were FFH shareholders from he crowd) give him a copy of what i believe was Buffet AGM letters in a book form. Hopefully he is reading those.

 

[Thrifty3000]

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

 

perhaps neither ABX nor FAH,

lets go with Jumia with a $600 million market cap. :-)

Fire and forget. See you in 2030.

 

 

i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

 

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.

- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.

- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.

- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

 

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

 

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

 

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

 

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

 

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

 

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

 

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

 

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

 

Prem says “where do I sign the check?”

 

I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke .

 

They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil .

 

I hear what you're saying on ATMA. I think if the ATMA transaction was done in isolation (not as part of a broader deal with Helios), without additional explanation, it would raise red flags - and maybe even spark some legal activity.

 

But, it's clearly a deal concession. Fairfax and Helios both well know the importance of speed when it comes to doing deals.

 

I suspect that during the diligence process Helios couldn't pinpoint the value of ATMA (especially with recent devaluations, and with so much of the equity stakes collateralizing debt). Helios probably considered selling it post-transaction, and realized it could be a nightmare, especially since the recent deal had collapsed. I have a hunch Helios had conversations with the parties involved in the prior deal that fell through (I feel like Fairfax would allow those types of discussions), and probably with other potential buyers, none of which alleviated concerns related to ATMA.

 

My guess is Helios raised ATMA as a deal breaker. Fairfax wanted to salvage the deal, had to think quickly, probably considered multiple solutions, and proposed taking most of the ATMA risk off the balance sheet by buying it at ATMA's public market value. There were alternative solutions;

 

- Fairfax could have offered to infuse more cash by buying more shares of FAH at around $3.00 per share

- they could have offered to loan FAH money

- they could have offered Helios more equity in the deal, etc.

 

I think Fairfax recognized the value of a partnership with Helios, knew they needed a quick solution specific to ATMA, and probably did the right thing to salvage the deal.

 

I think this deal de-risks FAH big time. I think it's win win for Fairfax and Helios.

 

I think Helios will leverage this relationship to launch a few $3 to $5 billion funds over the next decade, which will gush cash into the new FAH (Helios Fairfax Partners - HFP). I think HFP will provide a lot of visibility into how Helios performs, which will be reviewed by potential investors in their PE deals, so Helios will have plenty of incentive to assure HFP performs very well.

 

Assuming Helios can continue drumming up value in Africa for years to come this deal should create a virtuous cycle for HFP owners and for Helios's partners.

 

If it turns out Helios is more skilled at raising funds than investing profitably, then at some point HFP will languish. If that happens Fairfax still has control.

 

So, at the current price, over the next decade, I see this as landing somewhere between an investment that languishes (but, doesn't go to zero unless we see crazy leverage introduced), and maaaaybe a 10 bagger if Helios rides a wave of strong African economic growth, strong investment performance, and strong fund raising.

[hobbit]

Point is - there has to be a flexible and intelligent LONG TERM plan

If you had a $ today, to put into either a FAH or an ABX, where would you put it?

 

perhaps neither ABX nor FAH,

lets go with Jumia with a $600 million market cap. :-)

Fire and forget. See you in 2030.

 

 

i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse:

 

- FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle.

- it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle.

- there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer.

- i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either.

 

FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.)

 

I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time.

 

Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat.

 

No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days.

 

But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out.

 

From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.)

 

My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.)

 

I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.”

 

Prem says “where do I sign the check?”

 

I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke .

 

They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil .

 

I hear what you're saying on ATMA. I think if the ATMA transaction was done in isolation (not as part of a broader deal with Helios), without additional explanation, it would raise red flags - and maybe even spark some legal activity.

 

But, it's clearly a deal concession. Fairfax and Helios both well know the importance of speed when it comes to doing deals.

 

I suspect that during the diligence process Helios couldn't pinpoint the value of ATMA (especially with recent devaluations, and with so much of the equity stakes collateralizing debt). Helios probably considered selling it post-transaction, and realized it could be a nightmare, especially since the recent deal had collapsed. I have a hunch Helios had conversations with the parties involved in the prior deal that fell through (I feel like Fairfax would allow those types of discussions), and probably with other potential buyers, none of which alleviated concerns related to ATMA.

 

My guess is Helios raised ATMA as a deal breaker. Fairfax wanted to salvage the deal, had to think quickly, probably considered multiple solutions, and proposed taking most of the ATMA risk off the balance sheet by buying it at ATMA's public market value. There were alternative solutions;

 

- Fairfax could have offered to infuse more cash by buying more shares of FAH at around $3.00 per share

- they could have offered to loan FAH money

- they could have offered Helios more equity in the deal, etc.

 

I think Fairfax recognized the value of a partnership with Helios, knew they needed a quick solution specific to ATMA, and probably did the right thing to salvage the deal.

 

I think this deal de-risks FAH big time. I think it's win win for Fairfax and Helios.

 

I think Helios will leverage this relationship to launch a few $3 to $5 billion funds over the next decade, which will gush cash into the new FAH (Helios Fairfax Partners - HFP). I think HFP will provide a lot of visibility into how Helios performs, which will be reviewed by potential investors in their PE deals, so Helios will have plenty of incentive to assure HFP performs very well.

 

Assuming Helios can continue drumming up value in Africa for years to come this deal should create a virtuous cycle for HFP owners and for Helios's partners.

 

If it turns out Helios is more skilled at raising funds than investing profitably, then at some point HFP will languish. If that happens Fairfax still has control.

 

So, at the current price, over the next decade, I see this as landing somewhere between an investment that languishes (but, doesn't go to zero unless we see crazy leverage introduced), and maaaaybe a 10 bagger if Helios rides a wave of strong African economic growth, strong investment performance, and strong fund raising.

I agree with you broadly and things could have very well gone down that way. But the least FAH mgmt could have done is explain why they couldn't liquidate their stake in a public company(UBN) worth 180 million dollars for even 100mil. Were there no takers at a 50% discount to the current share price? and top of that no color on the financials of helios makes it very hard to give them the benefit of doubt.

 

Michael Wilkerson is incharge both at ATMA and FAH and gives a sweetheart deal( based on the info they shared) to the people who hired him without any explanation does not the pass the smell test at all.

[Xerxes]

They owe it to their minority investors to have a separate conference call walking through the merits of this transaction with Q&A session. That would be a right thing to do.

The related Q&A cannot be 5 min of the Q2 main FFH conference call that is couple of weeks or so.

[SharperDingaan]

Treat it as a learning experience in investment strategy.

Master it, if you intend to invest in the 2nd/3rd world. 

 

Three main takeaways.

 

1. A minority shareholder has no place investing in a FAH. He/she has to trust the majority shareholder, believe in their 'vision', and accept that the entire information structure of the new arrangement - puts them at a severe disadvantage. Lot more 'real' to just write a cheque to Oxfam, or invest in an african gold/platinum miner.

 

2. FFH sucks at this.  Sure, they should do better under the new management going forward - but they are still neophytes. Given how hard it is to outrun devaluation/corruption, and how easy it is to screw up; most would expect more fails than successes. Implies that FAH is worth more as a short, and that there is a bias towards taking the minority out altogether - at a discount.

 

3. If you want to invest in Africa, use an index fund - & bet against the MCSI Index. Diversifies the risk, buy at a deep liquidity discount when there is a rush for the exits (today), sell at inflated prices when there is a rush back in .... Helios reporting outsized profits, triggering a gold rush  ;)

 

We live in interesting times.

 

SD