ATCO - Atlas Corp

[petec]

Seaspan enters the energy business, and possibly asset management business.  Diversifying into energy, with one of the best energy executives in the last 50 years and changing its name to Atlas Corp:

 

https://finance.yahoo.com/news/seaspan-announces-proposed-holding-company-120000393.html

 

Bing Chen will remain CEO and David will remain Chairman. 

 

I know that David was investing alot of his family capital through his family holding company, but I think this will be the main vessel (pardon the pun) now.

Imagine what Berkshire might have looked like if Sokol had been given the reins eventually instead of being terminated!  Cheers!

 

Perhaps this the proposed disposition that Paul Rivett was hinting at in the last few conference calls.

 

I have a question that will reveal my ignorance

 

The deal is that APR is purchased by Atlas in an "all-stock transaction valued at $750 million including the assumption of debt, for an expected equity value at closing of approximately $425 million"

 

According to the FFH 2018 annual report, in Prem's letter, APR had a cost of $340m.

 

Is Fairfax's gain on disposition of APR

 

a) $410m (750 - 340)

b) $85m (425 -340)

c) unknown or maybe no gain at all?

 

And since this is a non-cash transaction, I would imagine that the offsetting accounting entry would be that Fairfax's investment in Seaspan would increase by the capital gain.

 

B, I believe, and Fairfax’s investment in SSW will rise by $425m because that’s the value of the SSW shares they get as I read it (the rest of the value being SSW’s assumption of APR’s debt).

 

Edit - I may be wrong. APR was on the books for $298m at YE18 but I don’t think Fairfax owns all of APR equity so FFH may not get all the $425.

 

SSW is now a *huge* position for Fairfax.

[mranski]

Re Sokol/Berkshire Sanjeev, he was suspected of insider trading and misleading buffett, I’m glad he isn’t there.

[Parsad]

Re Sokol/Berkshire Sanjeev, he was suspected of insider trading and misleading buffett, I’m glad he isn’t there.

 

Two sides to every story.  For 15 years, Buffett also said that Ajit Jain and David Sokol were the two people who have done the most for Berkshire shareholders and most likely to lead the company.  Cheers!

[ValuePadawan]

Re Sokol/Berkshire Sanjeev, he was suspected of insider trading and misleading buffett, I’m glad he isn’t there.

 

Two sides to every story.  For 15 years, Buffett also said that Ajit Jain and David Sokol were the two people who have done the most for Berkshire shareholders and most likely to lead the company.  Cheers!

 

My understanding was that Sokol found a company, (I believe it was Lubrizol) that he knew would be the type of company Berkshire would want to own. He purchased some shares then a short time later mentioned the company to Buffett which as it turns out was exactly the type of company Buffett was interested in and Buffett proceeded to make an offer to buy the company delivering a great business to Berkshire and a quick tidy profit to Sokol.

 

Sokol had seen Munger buy BYD years earlier through Li Lu's fund and then Munger recommend that company to Buffett which they then invested in, so Sokol believed that this behaviour would not be seen as disreputable as he had seen Munger do what he thought was an analogous act.

 

The differences I guess were that Buffett only bought a piece of BYD so it did not do anything to change Munger's stake in the long term while it did for Lubrizol because he bought out all shareholders including Sokol.

 

The other difference was Charlie had owned BYD for years and years while Sokol had only recently bought his Lubrizol shares therefore giving the whiff of insider trading. The optics were not great.

 

Berkshire being the exemplar of corporate governance had no choice but to let Sokol go in order to keep that reputation.

 

Here's Munger describing what happened for those unfamiliar.

[gary17]

If Sokol had simply said to Buffett “by the way, just do you know and full disclosure... i own...”. then the problem would not have been there.  I just don’t see how someone in his role and level of intelligence did not clue into that. 

[Gregmal]

Well, just another example of Buffett arguably being a hypocrite(see the Munger BYD example) and worrying about things other than maximizing value for shareholders...

 

I guess when you get to his age its all about legacy and how people perceive you.

[gary17]

Well, just another example of Buffett arguably being a hypocrite(see the Munger BYD example) and worrying about things other than maximizing value for shareholders...

 

I guess when you get to his age its all about legacy and how people perceive you.

 

not the same IMO because Munger likely told Buffett he owned BYD.  Sokol didn’t disclose

[NBL0303]

Well, just another example of Buffett arguably being a hypocrite(see the Munger BYD example) and worrying about things other than maximizing value for shareholders...

 

I guess when you get to his age its all about legacy and how people perceive you.

 

not the same IMO because Munger likely told Buffett he owned BYD.  Sokol didn’t disclose

 

Sokol actually did disclose; it was the first thing he said to Buffett about this company. Sokol upon originally mentioning it to Buffett said "I own shares in this company, and you may find it an interesting acquisition target." That was what was so puzzling about that situation and why I personally agree that Sokol was unfairly maligned.

 

It was reported at the time, and Buffett confirmed, that upon originally mentioning Lubrizol to Buffett Sokol said, "I own shares in this company." That is why, to me, it was completely unfair what Buffett later did to Sokol. Buffett went on to say, that he didn't know that an investment banker had originally brought the idea to Sokol. Which Sokol says is true, but that investment bankers brought him many deals and he only recommended those that he thought were good ideas, so it doesn't really matter where the idea originated (that is Sokol's take). Sokol said something like the following: an investment banker from JP Morgan mentioned it, he liked the company so he bought shares, he also thought it was a good idea for Berkshire to acquire, and he frequently brought acquisition ideas to Buffett - and Buffett rejected almost all of them. But he brought this one to Buffett, just like he regularly did, and said "I own shares of this company and it may be a good acquisition for Buffett." For tax reasons, Sokol actually sold some of his Lubrizol after that but then also resumed buying shares again.

 

As Buffett acknowledges, the dollar amounts in question were very small in relation to Sokol's net worth. And in light of Sokol turning down sums from Berkshire that could have aggrandized his net worth further, I find it odd that Sokol was shown the undercarriage of the bus so thoroughly.

 

The article below doesn't say it, but it implies that Sokol told Buffett he owns shares, because Buffett says, "I should have pressed Sokol more on his share ownership." Other articles relate the facts above as I have outlaid them. Given all of that, I think the thought that Sokol was a "crook" who deceived Buffett to make a few thousand dollars and did something unethical and possibly illegal - which is how Buffett portrayed this - is ridiculous. He told Buffett he owned shares of a company that may be a good acquisition for Berkshire.

 

https://www.reuters.com/article/us-berkshire/buffett-admits-error-says-sokol-events-inexcusable-idUSTRE73T06920110430

[gfp]

The audit committee released a very detailed report at the time -

http://online.wsj.com/public/resources/documents/Berk_Board.pdf

 

Mr. Sokol mentioned that he owned the stock. He did not disclose:

 



the amounts and timing of his purchases;

the fact that he bought the shares after discussing Lubrizol with Citi and

after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol;

the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) had asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and

4

 the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board.

It did not cross Mr. Buffett’s mind at that time that Mr. Sokol might have bought Lubrizol shares after seeking through investment bankers to initiate discussions with Lubrizol concerning a possible Berkshire Hathaway acquisition of Lubrizol. Because Mr. Sokol’s comment about owning the shares was in response to Mr. Buffett’s question how Mr. Sokol had come to know the company, it implied that Mr. Sokol had been following Lubrizol as an owner of its shares, and in that way came to think of Lubrizol as a possible Berkshire Hathaway acquisition.

 

At Mr. Buffett’s request, Berkshire Hathaway CFO Marc Hamburg phoned Mr. Sokol on March 15. Mr. Hamburg asked Mr. Sokol for the details of his Lubrizol stockholdings. Mr. Sokol provided the dates and amounts of his Lubrizol purchases. Mr. Hamburg also asked about Citi’s role in introducing Mr. Sokol to Lubrizol. Mr. Sokol answered that he thought he had called a banker he knew at Citi to get Mr. Hambrick’s phone number. When Mr. Hamburg commented that it sounded as if the banker must have exaggerated his role when he spoke with his colleagues, Mr. Sokol did not contradict him.

 

The gist is that Sokol wanted to resign before it happened and did so once the story broke.  He didn't violate any actual insider trading laws, most likely, but did in fact violate Berkshire's company policy - which is more strict.  He was not forthcoming to Mr. Buffett and especially Mr. Hamburg and this caused Warren to make false statements publicly.  Warren does not like these types of surprises.  The entire report above is a decent read and is very thorough.

 

* here is Mr. Buffett's initial press release on Mr. Sokol's resignation: https://berkshirehathaway.com/news/mar3011.pdf

[Cigarbutt]

The audit committee released a very detailed report at the time -

http://online.wsj.com/public/resources/documents/Berk_Board.pdf

..

The gist is that Sokol wanted to resign before it happened and did so once the story broke.  He didn't violate any actual insider trading laws, most likely, but did in fact violate Berkshire's company policy - which is more strict.  He was not forthcoming to Mr. Buffett and especially Mr. Hamburg and this caused Warren to make false statements publicly.  Warren does not like these type of surprises.  The entire report above is a decent read and is very thorough.

Thanks. That's a very helpful input in forming a more definitive conclusion which is relevant for the Seaspan discussion.

I infer your opinion on the topic by your selective and differentiating use of first name, 'Mr.' and last name in the above paragraph and I come to a similar conclusion.

Making sure that one's conduct is appropriate requires that one stays away from legal limits and the margin of safety necessary implies ethical lines that should not be crossed. In business behavior and otherwise, it appears that the slope becomes slippery at some thresholds and non-linear changes can occur once the duty of candor is breached.

It must have been a tough decision and this ended up a lose-lose situation.

[sleepydragon]

Didn’t he sell immediately after convincing BRK to buy?

Or he bought shortly right before he made the pitch to Buffett.

 

That’s a clear violation of compliance rules at any asset management firm.

 

[sleepydragon]

If he did this at any investment bank, he will he fired immediately for cause and zero deferred payments.

[NBL0303]

The audit committee released a very detailed report at the time -

http://online.wsj.com/public/resources/documents/Berk_Board.pdf

..

The gist is that Sokol wanted to resign before it happened and did so once the story broke.  He didn't violate any actual insider trading laws, most likely, but did in fact violate Berkshire's company policy - which is more strict.  He was not forthcoming to Mr. Buffett and especially Mr. Hamburg and this caused Warren to make false statements publicly.  Warren does not like these type of surprises.  The entire report above is a decent read and is very thorough.

Thanks. That's a very helpful input in forming a more definitive conclusion which is relevant for the Seaspan discussion.

I infer your opinion on the topic by your selective and differentiating use of first name, 'Mr.' and last name in the above paragraph and I come to a similar conclusion.

Making sure that one's conduct is appropriate requires that one stays away from legal limits and the margin of safety necessary implies ethical lines that should not be crossed. In business behavior and otherwise, it appears that the slope becomes slippery at some thresholds and non-linear changes can occur once the duty of candor is breached.

It must have been a tough decision and this ended up a lose-lose situation.

 

It is worth noting the Sokol believes that this report was crafted simply to back up the view that Buffett eventually adopted that Sokol did something wrong. It is not an objective report, in this view, and materially angles the facts in a way that creates a misleading, poor impression of Sokol and his actions.

 

The only point is that, to me, it is far from clear that Sokol did anything wrong. Obviously, Buffett thinks he did, but I think there is a lot to show too that Sokol got a bad rap from this.

[ValuePadawan]

Wow a 3.5 hour investor call today what an event. I particularly enjoyed the context that was given to how they are diversifying into an asset management company instead of pure container shipping.

 

Sounds like the bankruptcy process in Singapore for Swiber is still dragging along and that it may take some more time. Overall I really enjoyed hearing the Q&As and found the discussion enlightening.

 

Anyone else have any thoughts on the investor day?

[Viking]

Anyone else have any thoughts on the investor day?

 

I was a little surprised at how analysts appeared genuinely surprised/annoyed with the APR aquisition and the company reorganization (Atlas with two subs - Seaspan and APR) and rebranding (as infrastructure company). It appears to me analysts were getting comfortable with Seaspan’s transformation the past 2 years and they are now struggling to understand how to analyze the company moving forward. It will be interesting to see if shareholders decide to exit (sell shares) in the coming weeks or if they decide they like what the company is doing.

 

Atlas will be looking to add a third infrastructure type business in the next 12-24 months.

 

Sokol said post APR aquisition the ownership split on common shares with be as follows:

1.) Fairfax = 41%

2.) Washington Family = 22 or 23%

3.) management/board = 5%

 

APR was purchased by Seaspan at slightly under 5X 2020 EBITDA. EBITDA is expected to be about $150 million in 2020. It sounds to me that APR will do much better moving forward at Atlas than if it had remained at Fairfax. The senior people at Atlas will be able to help APR improve their balance sheet and also with strategy to drive business forward. Perhaps Fairfax also saw this benefit and that is why they were ok with the sale and taking shares in Atlas/Seaspan as payment (versus cash).

 

Bottom line, it will be interesting to follow Seaspan/Atlas moving forward. It has become Fairfax’s largest single investment.

[Viking]

Regarding APR Energy, here is some information from old Fairfax reports. Looks to me like a good decision to move to Seaspan at a fair price where it will get more support and have a much better chance to grow.

 

1.) from Fairfax 2018 AR: “APR Energy. APR, based in Jacksonville, Florida is the world’s largest provider of fast track mobile turbine power. Founded by John Campion in 2004, APR has installed and operated over 5GW of power plants, ranging from 15MW to 360MW in size, and has grown its fleet to 1.9GW. APR’s proposition is speed of execution and reliability of power. At one point during the recent crisis in Puerto Rico, APR was the only large scale source of power on the island, with full deployment in just over 30 days. Fairfax led the take private of APR in January 2016, investing a total of $340 million at a valuation of 0.5x net tangible assets. Since Q1 2016, APR’s fleet utilization has increased from 44% to 74% and net debt has been reduced from $600 million to $360 million. The sustainability of earnings has also improved, with 56% of fiscal 2019 budgeted EBITDA driven by a 350MW contract in Argentina and a 360MW contract in Bangladesh (these are both five-year contracts). Going forward APR will continue to position itself as a specialty turbine fast track power company.”

 

2.) From Q2 2017 Report: “On July 20, 2017, the company increased its indirect equity interest in APR Energy plc ("APR Energy") to 67.9% through the acquisition of an additional 22.9% indirect equity interest for purchase consideration of $109.0 million and commenced consolidating APR Energy in the Other reporting segment. APR Energy is a provider of mobile power generation solutions.”

 

[muscleman]

What's the multiple they paid for airplane leasing?

I did some rough research and it seems like some public air leasing companies are trading at 7-8x P/E.

Do they expect a lot of growth from this?

[petec]

What's the multiple they paid for airplane leasing?

I did some rough research and it seems like some public air leasing companies are trading at 7-8x P/E.

Do they expect a lot of growth from this?

 

Seaspan doesn’t do airplane leasing - who are you referring to?

[NoCalledStrikes]

A little late to the Lubrizol subthread... What I always thought was the final straw for Sokol  was his disastrous CNBC interview after the disclosure that he bought 100,000 shares just days before pitching this the stock to Warren and then telling Citibank that Warren was interested.  The transcript is at https://www.cnbc.com/id/42365586  Sokol started off ok, but the longer he talked the deeper the hole he dug. He just refused to admit that maybe he should have done things differently.  Sokol's inability to see that Munger's BYD ownership (size clearly known to all, and a personal purchase date years before BRK's buy) vs Sokol's one week ownership are apples and oranges.  Sokol was just massively tone-death.  I've heard Sokol speak at Fairfax and I find him to be a good communicator and smart guy which makes his ill-fated CNBC interview all the more perplexing.

[Parsad]

A little late to the Lubrizol subthread... What I always thought was the final straw for Sokol  was his disastrous CNBC interview after the disclosure that he bought 100,000 shares just days before pitching this the stock to Warren and then telling Citibank that Warren was interested.  The transcript is at https://www.cnbc.com/id/42365586  Sokol started off ok, but the longer he talked the deeper the hole he dug. He just refused to admit that maybe he should have done things differently.  Sokol's inability to see that Munger's BYD ownership (size clearly known to all, and a personal purchase date years before BRK's buy) vs Sokol's one week ownership are apples and oranges.  Sokol was just massively tone-death.  I've heard Sokol speak at Fairfax and I find him to be a good communicator and smart guy which makes his ill-fated CNBC interview all the more perplexing.

 

People can speculate all they want, but only the truth is known to a handful of people.  I think the flogging that Sokol received for a transgression that was relatively benign was overkill.  Not dissimilar to the public banishment of Alice Schroeder after the access and public support Buffett gave her.

 

Personally, if you don't think any purchases should overlap Berkshire's or any other employers acquisition targets...have your employees put their assets in a blind trust to avoid this conflict.  Cheers!

[Spekulatius]

A little late to the Lubrizol subthread... What I always thought was the final straw for Sokol  was his disastrous CNBC interview after the disclosure that he bought 100,000 shares just days before pitching this the stock to Warren and then telling Citibank that Warren was interested.  The transcript is at https://www.cnbc.com/id/42365586  Sokol started off ok, but the longer he talked the deeper the hole he dug. He just refused to admit that maybe he should have done things differently.  Sokol's inability to see that Munger's BYD ownership (size clearly known to all, and a personal purchase date years before BRK's buy) vs Sokol's one week ownership are apples and oranges.  Sokol was just massively tone-death.  I've heard Sokol speak at Fairfax and I find him to be a good communicator and smart guy which makes his ill-fated CNBC interview all the more perplexing.

 

People can speculate all they want, but only the truth is known to a handful of people.  I think the flogging that Sokol received for a transgression that was relatively benign was overkill.  Not dissimilar to the public banishment of Alice Schroeder after the access and public support Buffett gave her.

 

Personally, if you don't think any purchases should overlap Berkshire's or any other employers acquisition targets...have your employees put their assets in a blind trust to avoid this conflict.  Cheers!

 

Berkshire doesn’t have good internal controls in place, it’s more build on trust than on strict rules. This is pretty clear in this case  and in my opinion Sokol did a grave mistake here, imo not disclosing his conflict of interest very clearly. In my opinion, Warren should also have asked since Sokol mentioned that he owned shares in Lubrizol, but I guess at point he wasn’t interested enough to bother.

 

Anyways, I think the level of controls  when WEB success takes over. headquarter staff will dramatically increase when the CEO cannot draw on the same spider Webforum personal relations and trust build impoverished decades any more.

 

Regarding Sokol, he hopefully learned from this and I think he is an excellent operator. ingress he never could build the mini Berkshire he wanted to build, but as a CEO of Seaspan, he seems to be doing an excellent job.

[NBL0303]

 

People can speculate all they want, but only the truth is known to a handful of people.  I think the flogging that Sokol received for a transgression that was relatively benign was overkill.  Not dissimilar to the public banishment of Alice Schroeder after the access and public support Buffett gave her.

 

Personally, if you don't think any purchases should overlap Berkshire's or any other employers acquisition targets...have your employees put their assets in a blind trust to avoid this conflict.  Cheers!

 

I was actually going to mention the Alice thing too. There have been these people in Warren's life, that when he cuts them off for a perceived transgression - he sort of turns on them completely. Maybe this is a good quality in some sense, a version of the bath tub memory with people. He completely cuts people off and tarnishes them to others, publicly or privately, for a perceived transgression - which may be relatively minor or in Alice's case, seems to be for being unhappy with Alice for doing what he told her to do (including even the unflattering stuff). While Sokol and Alice are probably the highest profile examples of this phenomenon, there are some other examples of this phenomenon too.

 

Of course, Warren is my hero and I'm sort of just saying that he even Warren isn't a perfect or uncomplicated human being. It is sometimes easy to forget that because he truly does operate at an unusually high level of personal and ethical conduct. Its kind of like a hockey player just reminding oneself that even Wayne Gretzky missed shots and occasionally turned the puck over (even in the Oilers years).

[ValuePadawan]

Does anyone know if by naming the holdco Atlas Corporation they are paying homage to this guy?

 

https://macro-ops.com/the-greatest-value-investor-youve-never-heard/

[Cigarbutt]

Does anyone know if by naming the holdco Atlas Corporation they are paying homage to this guy?

 

https://macro-ops.com/the-greatest-value-investor-youve-never-heard/

I believe you are correct. You may find a common denominator with the Horatio Alger theme (Mr. Watsa, Mr. Sokol and Mr. Odlum)

Floyd Odlum's story is fascinating. Always challenging to assess people who can combine extreme ruthlessness with extreme kindness. Mr. Odlum's specialties were opportunism and special situations. He was a low key person in a way and his record appears perfect on the surface but I've always wondered about the way he went about to buy and liquidate various investment trusts in the 30s using a technique, apparently, of paying a relative premium to insiders in order to facilitate the takeover of minority holders. I guess it was OK to do that, then.

https://horatioalger.org/members/member-detail/?id=003j000000f216rAAA

[petec]

Valuation update at $14.

 

Seaspan is a long term hold for me (basically a bet on Sokol and capital allocation) but it will be a volatile stock and I like to think I can add value by trading around the position. I tend to use cash flow from operations as my main value metric, partly because I like simple and partly because CFOPS is what management target. CFOPS is after maintenance capex so it represents the cash available to management for debt paydown and growth, although you have to subtract pref dividends in order to arrive at CFOPs to common.

 

Mcap $3.9bn. Current shares out 216. Fairfax have 25m warrants at $8.05. Another 38m comes from the APR deal ($425m/$11.10). So SHO 280m.

 

Debt $3.9bn. Includes prefs, APR, debt for 6 of the recently acquired ships, and cash in from the conversion of FFH warrants (but not the lease liabilities). 

 

CFOPS available to common shareholders c.$600m:

- Just over $500m from existing assets.

- Add 7% for 7 new ships acquired (slightly less than TEU growth).

- APR does $150m in ebitda and has $425m in debt; assuming 6% interest, 25% tax, and a few million for maintenance capex, APR could add $80-90m to CFOPS.

 

Implies FCF/mcap = 15% and FCF/EV = 7.7%.

 

I regard this as a very attractive valuation if shipping rates rise; attractive if they stay flat; potentially worrying if they fall. On balance my confidence that rates will be stable to up is higher than it was due to supply discipline, but this is a levered cyclical and caution is warranted. One thing worth considering is that the duration of contracts is shortening slowly, giving increased exposure to both upside and downside.

 

I reduced slightly at $11.50 (d'oh) and am considering another slight reduction here, which would be made with the intention of adding if the stock falls.