The Stench of Sleaze is Wafting from Fremont

[Myth465]

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My main point is that book value cannot be determined just by taking Assets - Liabilities.  You need to focus on the accuracy of the estimates of liabilities.

 

As for time, if you win, it's worth it, if you don't, it's not :)

 

Very true regarding both statements. I will be watching and rooting for you and BH :D, I may also jump in at the last minute should things look profitable  ;D.

[Tim Eriksen]

I have followed and owned Fremont on and off for a few years.  All the characteristics Harry mentioned are important.  To that I would add this analysis.  Fremont has averaged a 90% combined ratio since 2005 and a 95% ratio since 2007 (due to a few bad quarters).  Ignoring the investments for the moment, they would have after tax earnings of $1.10 per year with a 95% combined ratio and $2.20 at a 90% combined ratio. 

 

There are nearly $39 per share in investments.  It currently earns about 3 to 3.5% before tax.  A better allocator of capital should be able to increase that.  At 3% after tax, it adds $1.17 to the insurance earnings (assumed 30% tax rate).  Every 1% increase in after tax returns adds 40 cents annually to EPS.   

 

Thus you are looking at $2.27 to $3.37 in total earnings, assuming just a 3% after tax return on investments. And they have the potential for even higher annual earnings if capital is better allocated or if we move into a higher interest rate environment.

 

[benhacker]

Harry,

 

If you do know of any public insurers with the above attributes

 

Unico American (UNAM)... I'm not up to speed on it, but I think it meets your criteria (I owned a few years ago)... and the discount to TBV is *much* more substantial... and I would argue management has a history of doing well (maybe not as well) but also of exhibiting unusual integrity, and they have a massive ownership stake.

 

I find it unlikely it is the only one that meets your criteria, but I may be wrong.

 

Ben

[Ballinvarosig Investors]

The bill has now been passed by the House with a provision that it only applies until May 2012. It pnly needs to be rubber-stamped now.

 

http://www.legislature.mi.gov/documents/2009-2010/billengrossed/Senate/htm/2010-SEBH-1174.htm

 

[scorpioncapital]

Let me get this straight, this guy Biglari wants to pay $24.50 which is below the book value of the company. What management or shareholders in their right mind would agree to this?

 

This whole legal issue is missing the point, you make a ridiculous low-ball offer and you expect people to say Yes? I'd say the acquirer in this case is way more deluded than the target. For practical purposes, a 2/3majority versus a simple majority is what is in reality needed for most hostile bids anyway which is what this bill would create.

 

My opinion - too much focus on what's wrong with the target and not enough with what's wrong with the acquirer's offer.

 

 

[Ballinvarosig Investors]

My opinion - too much focus on what's wrong with the target and not enough with what's wrong with the acquirer's offer.

Isn't that irrelevant though?

 

Surely it's up to shareholders to decide on any takeover offer. If they want to accept a silly price, so be it.

[scorpioncapital]

Right, and surely getting a 2/3rds majority to agree shouldn't be a problem if the offer were fair right?

[Crip1]

Right, and surely getting a 2/3rds majority to agree shouldn't be a problem if the offer were fair right?

 

Scorpion,

 

I respectfully disagree with you. The story for me is the use of politics. The offer is what it is and it should be allowed to stand on its own merits. If more than half of the voting shares are OK with it, then so be it, that's how it works. But management is not talking ab out the offer, they are not arguing that it is inadequate, they are bypassing the shareholders and are looking to have it LEGISLATED!! They have effectively told the the shareholders that "If 60% of you want to accept this deal, that's not good enough". I'm appalled. (And...the Michigan General Assembly is talking about this to save, what, 70 jobs? They've got bigger fish to fry, but I digress) It is akin to an incumbent elected official attempting to have a law passed mandating a super-majority for any incumbent to be voted out of office. Insane.

 

Whether the offer is fair or not is subject to debate, certainly. But I strongly feel that the actions of the management are deplorable.

 

-Crip

[Guest Bronco]

Not sure the price would have been silly if made in BH stock.  It has performed much better since the offer than FMMH stock.  I wonder how many shareholders at National Indemnity would have considered Buffett's offer "silly" if made in stock and for the equivalent of book value.

 

[Tim Eriksen]

Maybe someone can enlighten me.  The legislation changes the approval of sale from majority to to 2/3 in case of a hostile bid.  I disagree with doing that, but I understand it.  What I don't understand is that the legislation also states that if a group runs two rival directors for election to the Board, that they must receive 2/3 of the vote to get elected.  What happens if they get 60% and management's candidates get 40%?  Are they going to seat the candidates that received 40%?  Wouldn't that violate the company's bylaws and other state statutes?

 

I do agree that Biglari made a low-ball offer.  I am not sure why he did that.  By doing it he did not get shareholder support, thus no pressure on management.  It seems like a tactical error.  The offer never even gave any details.  It was a combination of stock and cash, yet the stock component was never specified as either a fixed number of shares at the time of offer, or a dollar value of stock. 

 

Lastly, as for the legislation protecting 70 jobs.  I think it is clear that it is only protecting one - the CEO's. 

 

 

[Hawk4value]

The bottom line is that there is absolutely no reason for the government to stick its nose into this process, other then for political reasons. When this happens you can be assured that the process will become corrupted. These politicians don't give a damn about saving anyones jobs except their own. This is being done to "look good" in front of their constituents----pre-election. These are "Banana Republic" tactics, and its sickening.

[Dorsia1]

I look at what Dunning has done in regards to saving himself as an act of desperation and cowardice. This move certainly bolsters the insight of some people that Dunning is out for himself and not his shareholders.

Sardar started to put him in a corner and he immediately turned into a rat.

[Guest Bronco]

Let's discuss why this was a "low ball" and "silly" offer.  I don't remember, but I thought part of the original deal was for shares in BH.

 

Someone with more time (and more intelligence, for sure!) can probably do an analysis - share price of FMMH at time of offer vs. share price of FMMH now vs. FMV of offer in today's terms (cash + FMV of BH stock).

 

 

[Guest Bronco]

I'll answer my own question.  FMMH appears to have done nothing since the proposed takeover.  It may be down.

 

1/2 of the deal would have been cash.

 

1/2 would have been BH stock, which appears to have gone up 30% or more.

 

 

In hindsight (which is always 20/20), only Jerry Yang would find this kind of offer unacceptable (or silly, or low ball).

[Tim Eriksen]

Let's discuss why this was a "low ball" and "silly" offer.  I don't remember, but I thought part of the original deal was for shares in BH.

 

Someone with more time (and more intelligence, for sure!) can probably do an analysis - share price of FMMH at time of offer vs. share price of FMMH now vs. FMV of offer in today's terms (cash + FMV of BH stock).

 

 

 

IMO, it was a low ball offer in terms of valuation (discount to book value and 10 times trailing earnings).  In addition there was essentially no premium offered.  The share price closed at $21 before the announcement; however, the shares had traded around $24 for most of the month prior to the offer, only to fall a dollar or two before the announcement.    As I said before, Biglari never made it clear whether shareholders would get a fixed number of shares or fixed dollar value at closing, rather it was just presented as half cash and half stock.  It makes a difference.  Fixed dollar value has no upside, if BH goes up you get less shares and vice versa.  A fixed number of shares would have allowed shareholders to share in the upside BH has enjoyed.