Fairfax 2021

[racemize]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

[doc75]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

 

Sounds like Sanjeev.

 

Kidding!!!

[petec]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

 

Sounds like Sanjeev.

 

Kidding!!!

 

Ha ha!!

[StubbleJumper]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

 

 

I was surprised that the operator permitted the guy to make such a long and rambling speech.  Prem gave the best (and only) answer he could.

 

 

SJ

[Patient Investor]

Everyone knows how to coach the Toronto Maple Leafs better than the Coach of the Toronto Maple Leafs! While anyone is entitled their own opinion, the results were excellent. Period!

[doc75]

Is the call over?  I can't listen at the moment and am dying to know if anything at all was said about BB.

[StevieV]

I am not listening live.  If there is anything about BB or the short position, I would be interested.

 

As posted now pretty-far upthread, there was an outstanding unrealized short equity gain at the end of 2020.  I think that has to mean a short was still open.

[StubbleJumper]

BTW for amusement:

 

I think there are about 230m shares outstanding after the IPO. 80m now, plus 130m from conversion of the Fairfax and Osmington debs, plus 20 for warrants.

 

FDGE had a revenue run rate of $55m at YE20.

 

At $10, it's being valued on 42x revenues.

 

I haven't the heart to do the calculation at $17.

 

 

Petec,

 

I don't think you have the math quite right. There is going to be a consolidation of shares immediately prior to the IPO (see page 101 of the preliminary prospectus) While we don't yet know the exact ratio  we can back into it from the PowerPoint presentation on Sedar. Using the midpoint of the offer range, the company suggests that the IPO shareholders will own 16% and Fairfax will own 65%. Based on $100 million being raised at $13.50 per share implies that the IPO shareholders will own 7.41 million shares.  If the IPO shareholders own 16% this implies a total share count outstanding after the IPO of approximately 46.31 million shares outstanding (i.e. after the effects of the share consolidation immediately prior to the IPO). With 65% ownership post IPO, this suggests that Fairfax will own about 30.1 million shares. At $13.50 per share, it also implies that the market valuation will be about $625 million in total.

 

 

Ay ay ay how did I/we miss that?

 

I think your maths works out at about a 5:1 consolidation ratio, and if you search for "consolidation" in the prospectus the first hit gives an assumed ratio of 7:1.

 

That changes the picture totally: at a 7:1 ratio Fairfax's cost is $2.4*7=$16.8, which is at the high end of the IPO range. It is quite likely Fairfax will not book a gain. There won't be a loss either, because the debs convert at the lower of ($2.40 * the consolidation ratio) and the IPO price, and the Osmington transaction has this feature too. It also means there are fewer warrants than we thought.

 

Frankly strikes me as a mindlessly complex way to do an IPO. But the bottom line is that FFH won't be booking a profit. The main benefit is that FDGE will get $100m of funding that didn't come from Fairfax.

 

 

Good catch, Patient Investor!  We should all read the filings as thoroughly as you did!

 

A valuation of CAD$625m is less bat-shit crazy (but it still is bat-shit crazy!).

 

 

SJ

[petec]

I am not listening live.  If there is anything about BB or the short position, I would be interested.

 

As posted now pretty-far upthread, there was an outstanding unrealized short equity gain at the end of 2020.  I think that has to mean a short was still open.

 

No reason why they’d have shorted BB before year end though, so it’s not BB.

[StevieV]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

[racemize]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

 

Refused to comment on BB, several questions on it.

 

All shorts closed.

[petec]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

 

Noted, sorry!

[omagh]

13F is available.

https://www.sec.gov/Archives/edgar/data/915191/000110465921021076/xslForm13F_X01/a21-5468_6informationtable.xml

[doc75]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

 

Refused to comment on BB, several questions on it.

 

All shorts closed.

 

Doesn't this seem like a completely unreasonable stance?  I haven't heard the call but how can you refuse to comment on something so material to the company??

 

[Parsad]

wow, which one of you just went off on Prem on the call?

 

What was said?

 

Rough version:

Called in and told him he needed to step away, he wasn't paying attention anymore, and had lost his touch.  Continued by saying that Prem didn't understand any of the companies he was investing in and wasn't doing any detailed analysis on microeconomics, his partners agreed but were Canadian so too nice to tell him, and the bankers were cowards not asking hard questions because Canada doesn't have enough good companies.

 

Sounds like Sanjeev.

 

Kidding!!!

 

Ha ha!!

 

I'm listening to the call now.  Let me see who this twat was!  Cheers!

[Parsad]

13F is available.

https://www.sec.gov/Archives/edgar/data/915191/000110465921021076/xslForm13F_X01/a21-5468_6informationtable.xml

 

While they have concentrated positions, that is one of the broadest 13F's I've ever seen Fairfax report.  Closer to Markel's portfolio in number of holdings and structure...other than the huge concentrated holdings like ATCO, BB, etc.  Cheers!

[StubbleJumper]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

 

Refused to comment on BB, several questions on it.

 

All shorts closed.

 

Doesn't this seem like a completely unreasonable stance?  I haven't heard the call but how can you refuse to comment on something so material to the company??

 

 

The worst was that Prem seemed to be playing dumb when one of the questioners asked how it was that Roger Lace and Wade Burton were able to dump their personal BB shares, but FFH was seemingly unable (or unwilling).  To a large extent, that furnishes Wade Burton's opinion of the BB valuation.  So, we know what Wade likely wanted to do with FFH's BB position, so who made the decision to stand pat?  <==rhetorical question!

 

 

SJ

[Santayana]

If he wanted to say anything publicly about BB it would have been mentioned in the results, so I'm not surprised it's not something he's talking about in the call.  I haven't listened yet, but it sounds like he not saying anything, which doesn't mean they necessarily stood pat, or aren't in the middle of something right now.

[bluedevil]

My interpretation on BB:

 

They are an insider and they haven’t filed anything.

 

But they did SOMETHING.

 

Otherwise he wouldn’t be so careful and would have just said something like “We like the stock” and didn’t sell.

 

Obviously, I am speculating.

 

 

 

[petec]

My interpretation on BB:

 

They are an insider and they haven’t filed anything.

 

But they did SOMETHING.

 

Otherwise he wouldn’t be so careful and would have just said something like “We like the stock” and didn’t sell.

 

Obviously, I am speculating.

 

I agree, but I am also speculating!

[bearprowler6]

Didn't mean to imply the short would be BB.  I am interested in BB.  Also, separately, interested in any short equity.

 

Refused to comment on BB, several questions on it.

 

All shorts closed.

 

Doesn't this seem like a completely unreasonable stance?  I haven't heard the call but how can you refuse to comment on something so material to the company??

 

 

The worst was that Prem seemed to be playing dumb when one of the questioners asked how it was that Roger Lace and Wade Burton were able to dump their personal BB shares, but FFH was seemingly unable (or unwilling).  To a large extent, that furnishes Wade Burton's opinion of the BB valuation.  So, we know what Wade likely wanted to do with FFH's BB position, so who made the decision to stand pat?  <==rhetorical question!

 

 

SJ

 

+1

[bearprowler6]

As for the quarter....yes the underwriting results were strong which is always welcome however the interest/dividends earned was down from prior periods reflecting the lower yields available overall in the market. This is a concern that has been expressed on here many times.

Prem's style of responding simply does not work in today's modern investing world. At best he comes across as evasive and secretive. The guy who went off on him was clearly frustrated and expressed his opinion. I give Prem credit for letting him finish what he was saying. Having said that... I can't say that I disagree with everything the man said. The answers on Blackberry were simply inadequate. Others may disagree but that is my view. I personally was also frustrated by Prem seeming to imply that taking some private investments public was the same as monetizing them. The response concerning Lace/Burton selling vs Fairfax inself sitting still was also maddening. Their sales may pass all the legal scrutiny but it doesn't pass my personal smell test. Furthermore,  if Fairfax is truly constrained by insider rules which prevent them from selling even a portion of Blackberry in these circumstances than we really need to understand what the exit strategy is and how it will be executed. On this point all we have is crickets from the maestro at the top on all these points which simply does not fly.

 

[lessthaniv]

I'm interested as to understanding the terms of the TRS contract they've initiated. In praticular, when/how it can be terminated.

 

Taking into account the comment about price ~ $443cdn and the following quote;  "Throughout much of last year, I made public statements that Fairfax shares were trading at a ridiculously cheap price. Since the latter part of 2020 we have purchased total return swaps of 1,407,864 shares of Fairfax" (5.4% of shares)"

 

The stock hit ~$443cdn in later Nov, so I'd guess the contract is only a couple of months old. Hopefully it can only be closed on the termination date so they can book the rest of their gains first!

 

Doesn’t matter when it closes. The point is (I think) they’ve locked in that price for a future buyback of 1.4m shares.

 

Edit: what I mean is that when it closes doesn’t affect the profitability of the eventual buyback.

 

If the TRS contract allows the parties to close out quarterly for example, FFH may be limited to a short term window where they can accrue gains on the reference asset (1.4m shares) less the cost paid (LIBOR + spread) for the period. On the other hand, if the counter party can't close out until a specific termination date set in the future, say 1 year from initiation, then FFH has more time to capture upside on the reference asset which is exciting knowing all the tailwinds occurring at the moment (Farm Edg, BB etc, CR's etc ). Paying LIBOR + spread  vs. getting upside on 1.4M shares from $443cdn for a few more quarters is a pretty attractive risk/reward with all these tailwinds in mind.

 

I'm by no means a SWAP expert - but that's how I'm understanding this at the moment. Correct me if I'm missing something.

 

If it’s just a financial bet then you’re right.

 

I don’t think it’s a financial bet. I think it’s a buyback.

 

I think once they have the cash to pay 1.4m * USD344, they close out the TRS and buy 1.4m shares, using gains on the TRS to pay for any amount by which the share price exceeds USD344.

 

Thought about that way, it doesn’t matter whether the transaction happens tomorrow or in a decade.

 

I could easily be wrong!

 

Actually, the way it works is that Fairfax pays a fee...usually Libor plus a negotiated rate.  As Fairfax trades higher, the counterparty pays the difference between the strike price and market price.  At the end of the swap time period, Fairfax gets the counterparty payments minus the Libor plus negotiated rate.  It's not a buyback, but they benefit from it as if they bought those shares, paid a fee and reaped the gains.  If Fairfax stock falls, then Fairfax pays the difference between the strike price and market price into the swap.  Cheers!

 

Yes I realise this.

 

I think the debate we are having is over whether the benefit is:

1) locking in a profit on the appreciation of their own shares, in which case the longer the TRS lasts the better, and

2) locking in a price at which to buy back shares, in which case it doesn't matter how long the TRS lasts so long as it lasts long enough for them to collect $344*1.4m = $480m of cash to complete the buyback.

 

Confirmed on CC this morning that the TRS was bought for investment purposes as I expected and they were a 1 year agreements from initiation. Felt FFH valuation was among the best they could see. Also mentioned historically they have been able to extend these as long as they’d like.

[petec]

Fair value of associates is now above carrying value by $712m or $27/share. So adjusted BVPS is $505, before any share price moves in January.

 

Digit will not be revalued to reflect the financing announced in Jan.

[Parsad]

My interpretation on BB:

 

They are an insider and they haven’t filed anything.

 

But they did SOMETHING.

 

Otherwise he wouldn’t be so careful and would have just said something like “We like the stock” and didn’t sell.

 

Obviously, I am speculating.

 

Yeah, pretty clear on his position on BB and talking about it.  He said they are insiders and don't discuss securities they are buying or selling.  The spike happened in Q1 as well, so I suspect if they did anything it will be disclosed in the Q1 report.  Cheers!