Fairfax 2021

[Dazel]

 

 

To Sanjeev’s point it may be Puts, short sales, writing calls and swaps. It think they were busy and likely over a variety of prices.

[doc75]

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign/default.aspx

 

They are experts in these type of transactions...I expect them to have done something in BB shares....as I keep bringing up! Lol

 

They disclosed the Ensign TRS purchase 5 days after the initial transaction, likely because they were a 10% holder of Ensign and obliged to do so.  I see no reason why the same disclosure rules wouldn't apply to direct or indirect actions with respect to BB.

 

I think we'll either see a disclosure in the next day or two, or we'll be hearing on Feb 11 about the long-term economic value of those BB shares. Along with Wade puking in the background. 

 

I really respect Prem and know he's orders of magnitude more financially astute than me, so my fingers are crossed for a surprise extra-dimensional chess move. But if there's no pending disclosure then Occam's razor points to a dementional lack of action.

 

 

 

 

 

 

[Dazel]

https://www.fairfax.ca/news/press-releases/press-release-details/2014/Fairfax-Exercises-Option-to-Acquire-Additional-BlackBerry-Convertible-Debentures/default.aspx

 

Fairfax was getting 6% on $1b before the 3.75% ($655m)...and now 1.75% hopefully redeemed...$60m x 2=$120m, $24.6m x 4 =$98m...$218m in interest. If they did hedge their shares...the return would be decent over 6 years and change. In other words,  what looked like a disaster would look very decent over the term of the investment and would be a major victory for Fairfax shareholders.

 

 

[Dazel]

Doc75,

 

They had to disclose it because it took them over the 10% early warning threshold of Ensign’s outstanding shares. I do not see any occasions of them announcing the sale of shares when they are above the 10% early warning unless they are shares of a company that are sold wholly or in an offering.

[Dazel]

 

Sorry for all the posts...but suffice to say Fairfax has never been in the position they were in last week. They had been preparing for it all their careers. Insiders sold Lace and Burton...$11 apart. They were Literally spending all of their time looking at it..as was all of the world!

[Dazel]

 

 

I know it’s just another $1b in gains but I think reputation wise it would solidify “The Warren Buffett of the North” is back and Fairfax needs something like this...discount to book and very little respect. Prem I hope you are smiling.

[Parsad]

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Announces-Entering-Into-Swap-Contracts-in-Respect-of-Common-Shares-of-Ensign/default.aspx

 

They are experts in these type of transactions...I expect them to have done something in BB shares....as I keep bringing up! Lol

 

They disclosed the Ensign TRS purchase 5 days after the initial transaction, likely because they were a 10% holder of Ensign and obliged to do so.  I see no reason why the same disclosure rules wouldn't apply to direct or indirect actions with respect to BB.

 

I think we'll either see a disclosure in the next day or two, or we'll be hearing on Feb 11 about the long-term economic value of those BB shares. Along with Wade puking in the background. 

 

I really respect Prem and know he's orders of magnitude more financially astute than me, so my fingers are crossed for a surprise extra-dimensional chess move. But if there's no pending disclosure then Occam's razor points to a dementional lack of action.

 

Wade is one of the core six now with Paul Rivett gone, Sam Mitchell and Francis leaving years ago.  The long-term health of the portfolio is in Wade and Lawrence's hands now.  If Wade had any opinion on selling Blackberry or buying puts, etc, to capitalize on it...it would be given significant weight in the room.  Also Wade is no light weight...he and Tim were Peter Cundill's main guys, and he essentially led the team when Mackenzie bought out Cundill...now he works with Prem and Brian, and they are expecting him to lead.  Cheers! 

[doc75]

 

 

I know it’s just another $1b in gains but I think reputation wise it would solidify “The Warren Buffett of the North” is back and Fairfax needs something like this...discount to book and very little respect. Prem I hope you are smiling.

 

I think this situation is a one-way street with respect to credit/reputation.

 

Prem et al didn't foresee the WSB crowd pumping BB shares.  Any gain was purely a gift and you don't get credit for accepting a gift.

 

On the other hand, *not* pulling the trigger will certainly harm their reputation. 

 

In any case I truly hope you and Sanjeev are right that they've made a move.  God knows there could be a number of things like tax optimizations that could convolute what I'm viewing as a simple case of hitting "sell".

 

[doc75]

Doc75,

 

They had to disclose it because it took them over the 10% early warning threshold of Ensign’s outstanding shares. I do not see any occasions of them announcing the sale of shares when they are above the 10% early warning unless they are shares of a company that are sold wholly or in an offering.

 

 

I'm not so sure about that.  It seems they triggered the early warning requirements when they bought the debentures in 2018:

 

https://markets.businessinsider.com/news/stocks/ensign-closes-second-tranche-of-private-placement-of-unsecured-subordinated-convertible-debentures-1021343959?op=1

 

[Dazel]

 

Doc75,

 

You may be correct....I did a lot of digging after your post. It’s how you interpret the ruling. The swap that Fairfax bought was for all intensive  purposes a “substitute”  for common shares. Which effectively would give them economic

Benefit the same as common shares except they do not get voting rights or the shares as they have to be exercised for cash and cannot be redeemed for shares. The derivative meanings in early warning reports are different for lenders etc...and to be very honest I don’t know as I am not lawyer.

 

Lending shares and short sales are very grey in their interpretation in what has to be important. Hedging does not appear very often...in fact I have never seen it show up in an early warning report. The SEC certainly does not have it with their 13d disclosure. Stan drukenmiller would have lawyers working 24 hours a day....

 

The rules are made for take overs and that is why they are early warning...so the design is not let someone sneakily take control of a company and screw the minority shareholders because they do not have the votes....hedging is NOT part of this.

 

But you are correct a swap contract was not likely used.

 

Short sales can be performed without disclosure for number of days I think 3....as long as they are covered. Fairfax could have done this a number of times....there was a lot of action and volume to be able to do this...but as far as disclosure...they could have got around it...

[Dazel]

 

I agree with Viking. I miss the days when Prem and Fairfax were simple.

They likely shorted AMC, GME, Nok, Pltr, as hedge and got killed for awhile....as a hedge.

 

They can’t know what BB is worth over X...it was not worth $28 USD at this time....maybe the future...reaction you sell it as Wade Burton did.

 

It’s why I recommended SNC for them to buy...it’s now a service business which is quantifiable...not sexy but good returns...and you would not buy it without the 407 and royalty assets. Simple A+B =C/ future cash flow...how is that price compared to the market price. SNC trades at about 2X...their competitors trade at 15 to 20. Yep simple it’s a buy.

 

Blackberry cash flow? I understand A +B (royalties like SNC)=C/ future cash flow...trade at 100X SNC...

 

The answer is simple selll BB and buy SNC or X....everything else is emotion unless you think you can change that future cash flow number to bring the 100X closer to X or SNC. The future return probabilities of the two stocks in a value world are UNMIStAKAbLE...you could use the same comparison for Atlas but more importantly to me Fairfax. Keep the money in Blackberry at $25USD or buy back Fairfax shares with the proceeds? Simple answer. It’s likely the same answer at $11....and the market thinks Prem missed it (Fairfax shares dropped like a stone) so I guess that is what we have...time to move on.

[lessthaniv]

According to Shortdata, FFH shorts were busy through the end of January.

 

https://shortdata.ca/top-covered-shorts/

 

[DooDiligence]

According to Shortdata, FFH shorts were busy through the end of January.

 

https://shortdata.ca/top-covered-shorts/

 

Wow, BB increased a lot.

 

https://shortdata.ca/largest-short-positions/

[Dazel]

 

 

Short volumes....would fit a Fairfax hedge.

[Parsad]

 

 

Short volumes....would fit a Fairfax hedge.

 

Who else in the Fairfax sphere owns BB shares?  Some management, directors...Francis has some BB in the Chou Funds...maybe Vito Maida at Patient Capital...University of Waterloo's endowment...Huron University's endowment...OMERS?  The volumes seem to allow Fairfax's position to be covered...we'll have to wait till the conference call next week to see if they were able to take advantage of this juicy gift!  Cheers!

[Santayana]

Maybe today's rise in BB is being caused by Fairfax covering the shorts they put on around $20.  Hey, a guy can dream!

[Xerxes]

That would probably be few hundreds million of realized gains on shorts and good amount of unrealized on the common and converts if the current price holds up till the end of March 31.

 

BB next quarterly result will be in March, so more actual data point then.

[Viking]

Removal of trading restrictions by Robin Hood and BB is moving higher again. It has been trading at elevated levels now (over US $10) for 3 weeks. Today it is back over $13. This is giving Fairfax lots of time to figure out and execute if they want to do anything.

 

As a reminder, BB closed at:

Sept 30 = $4.59

Dec 31 = $6.63

Today = $13.25

 

With 102 million shares (incl debs) Fairfax’s position is up about $670 million ($25/share) since Dec 31. The longer BB shares elevated (and go even higher) the greater the chances that Fairfax will do something.

 

My guess is Fairfax shares, trading at $363, are pricing in BB shares trading at $6.63 (or lower). Mr Market also appears to be missing the big move in the last 5 weeks in many of Fairfax’s large equity holdings like Fairfax India, Quess, IIFL Finance, Resolute, Atlas...

 

My math says Fairfax equity holdings are up US$2.65 billion (= $100/share) since Sept 30 ($1.45 billion Sept 30-Dec31 and another $1.2 billion Jan 1-Feb 5). At some point Mr Market will connect the dots :-)

[Parsad]

Removal of trading restrictions by Robin Hood and BB is moving higher again. It has been trading at elevated levels now (over US $10) for 3 weeks. Today it is back over $13. This is giving Fairfax lots of time to figure out and execute if they want to do anything.

 

As a reminder, BB closed at:

Sept 30 = $4.59

Dec 31 = $6.63

Today = $13.25

 

With 102 million shares (incl debs) Fairfax’s position is up about $670 million ($25/share) since Dec 31. The longer BB shares elevated (and go even higher) the greater the chances that Fairfax will do something.

 

My guess is Fairfax shares, trading at $363, are pricing in BB shares trading at $6.63 (or lower). Mr Market also appears to be missing the big move in the last 5 weeks in many of Fairfax’s large equity holdings like Fairfax India, Quess, IIFL Finance, Resolute, Atlas...

 

My math says Fairfax equity holdings are up US$2.65 billion (= $100/share) since Sept 30 ($1.45 billion Sept 30-Dec31 and another $1.2 billion Jan 1-Feb 5). At some point Mr Market will connect the dots :-)

 

Even if Fairfax doesn't do something directly, BB can do a raise of $1B or something and secure their balance sheet.  That would also help Fairfax indirectly.  Cheers!

[ourkid8]

Based on John Chen's compensation package, I doubt he will dilute shareholders as his goal is to get this stock in the USD$30 range.

 

Even if Fairfax doesn't do something directly, BB can do a raise of $1B or something and secure their balance sheet.  That would also help Fairfax indirectly.  Cheers!

[petec]

Removal of trading restrictions by Robin Hood and BB is moving higher again. It has been trading at elevated levels now (over US $10) for 3 weeks. Today it is back over $13. This is giving Fairfax lots of time to figure out and execute if they want to do anything.

 

As a reminder, BB closed at:

Sept 30 = $4.59

Dec 31 = $6.63

Today = $13.25

 

With 102 million shares (incl debs) Fairfax’s position is up about $670 million ($25/share) since Dec 31. The longer BB shares elevated (and go even higher) the greater the chances that Fairfax will do something.

 

My guess is Fairfax shares, trading at $363, are pricing in BB shares trading at $6.63 (or lower). Mr Market also appears to be missing the big move in the last 5 weeks in many of Fairfax’s large equity holdings like Fairfax India, Quess, IIFL Finance, Resolute, Atlas...

 

My math says Fairfax equity holdings are up US$2.65 billion (= $100/share) since Sept 30 ($1.45 billion Sept 30-Dec31 and another $1.2 billion Jan 1-Feb 5). At some point Mr Market will connect the dots :-)

 

Fairfax is up about $70 since Sept 30th so Mr. Market might not be all that asleep at the switch.

[lessthaniv]

Removal of trading restrictions by Robin Hood and BB is moving higher again. It has been trading at elevated levels now (over US $10) for 3 weeks. Today it is back over $13. This is giving Fairfax lots of time to figure out and execute if they want to do anything.

 

As a reminder, BB closed at:

Sept 30 = $4.59

Dec 31 = $6.63

Today = $13.25

 

With 102 million shares (incl debs) Fairfax’s position is up about $670 million ($25/share) since Dec 31. The longer BB shares elevated (and go even higher) the greater the chances that Fairfax will do something.

 

My guess is Fairfax shares, trading at $363, are pricing in BB shares trading at $6.63 (or lower). Mr Market also appears to be missing the big move in the last 5 weeks in many of Fairfax’s large equity holdings like Fairfax India, Quess, IIFL Finance, Resolute, Atlas...

 

My math says Fairfax equity holdings are up US$2.65 billion (= $100/share) since Sept 30 ($1.45 billion Sept 30-Dec31 and another $1.2 billion Jan 1-Feb 5). At some point Mr Market will connect the dots :-)

 

Fairfax is up about $70 since Sept 30th so Mr. Market might not be all that asleep at the switch.

 

True, but BV @ Sept 30,2020 was @ US$442. The move you cite lifted the share price to today's close of US$365 which is still US$77 below Sept 30,2020 book value.  I'm with Viking. I see a disconnect and expect the dots will soon be connected.

[Viking]

Removal of trading restrictions by Robin Hood and BB is moving higher again. It has been trading at elevated levels now (over US $10) for 3 weeks. Today it is back over $13. This is giving Fairfax lots of time to figure out and execute if they want to do anything.

 

As a reminder, BB closed at:

Sept 30 = $4.59

Dec 31 = $6.63

Today = $13.25

 

With 102 million shares (incl debs) Fairfax’s position is up about $670 million ($25/share) since Dec 31. The longer BB shares elevated (and go even higher) the greater the chances that Fairfax will do something.

 

My guess is Fairfax shares, trading at $363, are pricing in BB shares trading at $6.63 (or lower). Mr Market also appears to be missing the big move in the last 5 weeks in many of Fairfax’s large equity holdings like Fairfax India, Quess, IIFL Finance, Resolute, Atlas...

 

My math says Fairfax equity holdings are up US$2.65 billion (= $100/share) since Sept 30 ($1.45 billion Sept 30-Dec31 and another $1.2 billion Jan 1-Feb 5). At some point Mr Market will connect the dots :-)

 

Fairfax is up about $70 since Sept 30th so Mr. Market might not be all that asleep at the switch.

 

I am surprised Fairfax continues to trade 20% lower than where it was trading 12 months ago. But i looked at a couple of other insurance stocks (Markel and WRB) and they continue to trade +15% below where they were trading 12 months ago.

 

7 days ago Markel was trading 25% below year ago levels; it is up 10% since releasing results.

 

Perhaps we are at the ‘show me’ stage. Where Fairfax goes from here may primarily be driven by earnings (and book value growth). Given the strength in equity markets in Q4 Fairfax should be able to deliver solid earnings and a nice increase in BV. I am guessing $10-$15 per share.

 

The key for 2021 will be how their equity portfolio performs (i am including in this bucket the wholly owned business like Farmers Edge, AGT, Performance Sports - Bauer, Toys R Us - real estate etc).

 

Most importantly Fairfax needs to start to generate free cash flow across each of its verticals. The insurance operations should post solid operating income in 2021 (dividend and interest income will be challenged but should more than be offset by improvement in underwriting - hard market). The equity portfolio needs to start spitting out cash/increasing BV instead of soaking it up (like the write off at Fairfax Africa and the mystery short position did in 2020).

 

Monetizations/actual realized gains driving BV growth will be key. On the Q3 call Prem said there was significant value and monetizations would happen ‘soon’. Hopefully Mr Market cooperates and they are able to realize some significant realized gains on sales. If we can get BV growing then the shares will follow. And i would expect the discount to BV will also shrink (as Mr Market is happy to pay a higher multiple for the shares).

[Xerxes]

Based on John Chen's compensation package, I doubt he will dilute shareholders as his goal is to get this stock in the USD$30 range.

 

Even if Fairfax doesn't do something directly, BB can do a raise of $1B or something and secure their balance sheet.  That would also help Fairfax indirectly.  Cheers!

 

Chen has a fiduciary duty to do what is right for his shareholders.

 

Doing a giant stock offering is not in those interest, agreed, but i think there is happy medium where he can re-fuel his capital allocation tank and that would serve his shareholder and himself just fine. And that would greatly benefit Blackberry, its sets of optionality, and by extension its long term holder. At current valuation of $7 billion, he can raise $1 billion or less at current price. That would ~60 or so million shares.

 

I think BB outstanding shares is 562 million. So 622 million post offering. 10% dilution for additional optionality is worth it.

 

Money needs to be raised when you don't need it (And i think BB needs it) and when cost of equity is lower, ... not when you really need it and desperate for it. If the latter, than Prem Watsa is going to get more good deal with more convertibles. That would make me, a FFH shareholder and no longer a BB shareholder, happy, but at the same time there is limits to that, given that Prem is also a long term owner of the common shares as well. And if he really believes in that, his intention shouldn't be extracting more cash flow in interest payment to the detriment of Blackberry. There is a point i think, the long term ownership comes into conflict with short term ownership. And I think we saw that when the convertibles were re-priced/re-structured in 2020.

 

Long point made short, and quoting Buffet (perhaps butchering a great quote}: "[bB] should be so well capitalized that it shouldn't even rely on generosity of friends [FFH], let alone strangers [sharks] in times of need"

 

PS: I think the current support on BB shares are encouraging in the market, assuming it is not a short covering.

 

 

 

[Parsad]

Based on John Chen's compensation package, I doubt he will dilute shareholders as his goal is to get this stock in the USD$30 range.

 

Even if Fairfax doesn't do something directly, BB can do a raise of $1B or something and secure their balance sheet.  That would also help Fairfax indirectly.  Cheers!

 

Chen has a fiduciary duty to do what is right for his shareholders.

 

Doing a giant stock offering is not in those interest, agreed, but i think there is happy medium where he can re-fuel his capital allocation tank and that would serve his shareholder and himself just fine. And that would greatly benefit Blackberry, its sets of optionality, and by extension its long term holder. At current valuation of $7 billion, he can raise $1 billion or less at current price. That would ~60 or so million shares.

 

I think BB outstanding shares is 562 million. So 622 million post offering. 10% dilution for additional optionality is worth it.

 

Money needs to be raised when you don't need it (And i think BB needs it) and when cost of equity is lower, ... not when you really need it and desperate for it. If the latter, than Prem Watsa is going to get more good deal with more convertibles. That would make me, a FFH shareholder and no longer a BB shareholder, happy, but at the same time there is limits to that, given that Prem is also a long term owner of the common shares as well. And if he really believes in that, his intention shouldn't be extracting more cash flow in interest payment to the detriment of Blackberry. There is a point i think, the long term ownership comes into conflict with short term ownership. And I think we saw that when the convertibles were re-priced/re-structured in 2020.

 

Long point made short, and quoting Buffet (perhaps butchering a great quote}: "[bB] should be so well capitalized that it shouldn't even rely on generosity of friends [FFH], let alone strangers [sharks] in times of need"

 

PS: I think the current support on BB shares are encouraging in the market, assuming it is not a short covering.

 

+1!  Whether they raise capital at BB or Fairfax monetizes the asset in some way...certainly a better position for Fairfax than 3-4 months ago, let alone back in March of 2020.  Cheers!