I broadly agree. The share buyback doesn’t make me scratch my head because I always read that as a long term thing. Riverstone UK does a little - not sure why it’s better placed to grow with OMERS as a partner, which is what Prem says - but that negative is offset by my surprise at how much it’s worth and we have to consider the possibility that the motivation for the deal may simply have been to surface value and get the BV mark.
But what does really piss me off is that Prem keeps banging on about how well capitalized the subs are while not mentioning that they had to squirt equity into some of them during the year. Just feels like a lie.
My take is that they sold Riverstone because they needed the cash, and even when added to the divvies from the subs, the $560m that they are getting probably won't be enough to fund the holdco's activities for 2020. So, until they float a debt offering, they seem to be reliant on that revolver -- IMO, it is not a great idea to have your operations reliant on operating credit because usually it is accompanied by 25 pages of covenants which means that your operating credit can get pulled if something weird happens (ie, debt:equity soars due to stock market crash or asset write-downs, EBITDA drys up for some reason, etc). A large revolver is a nice tool to keep around for emergencies or to opportunistically exploit opportunities (ie, suddenly buy a $1B sub or buy $1B of convertible notes on short notice). But, once you draw on it, the preferred approach would be to replace it by floating a bond issue to obtain long term funds for which the indentures are less restrictive than the 25 pages of revolver covenants.
My point about the buybacks was about both tone and strategic direction. Pull up the annual letter from March 2018 and read it again. There's the usual rah-rah, we're awesome, and more than a few humble-brags. But the message was that the masterpiece was pretty much painted, the acquisitions were about done and buybacks would be the way forward -- heavens, Prem even had the temerity to trot out Henry Singleton's name, as if to suggest that FFH would initiate a long-term process to buy back ~90% of its shares! In that letter, he shared the usual "Financial Position" Table, but for the first time that I can recall he gave us the song and dance about dividing the insurance companies from the non-insurance companies and differentiating the debt by claiming that the non-insurance debt is non-recourse, so somehow that made it okay (more on that later). But, take a look at that same table from Friday night. Using Prem's mental accounts approach, compare the Net debt/Equity Ratio from two years ago to that from Friday. That ratio has risen from 16% to 25.5%. Seriously, pull up the those two letters and read them in succession and tell me that you are not left scratching your head.
So the announced strategy in 2018 was to temper growth through external acquisitions, solidify the balance sheet, and return capital to shareholders through buybacks, but what we instead saw was injections of capital into Toys R Us, Carillon, AGT, Stelco, Fairfax Africa, Seaspan, etc, in addition to the expected investment in Brit (at least the Brit injection was consistent with the announced direction). From the outside it is difficult to assess where they sourced the cash for those moves -- it could have been subsidiary cash or it could have been holdco cash, but it doesn't really matter. The fact of the matter is that Prem's behaviour as a serial acquirer does not seem to have changed one whit, and FFH has continued on a debt-financed growth spree for the past two years.
This is, unfortunately, a little reminiscent of the past. Debt-financed growth is great when it works and disastrous when it doesn't. Prem's protestations about non-insurance debt being non-recourse are not re-assuring. At least in '03 or '04 he postured-up and publicly declared that ORH debt was FFH debt and it would be managed and treated as such, irrespective of whether ORH and the other FFH subs were cross-collateralized. Now we have this strange weasle-ish notion that FFH would walk away from a troubled non-insurance sub, so we don't need to bother counting that debt. But, on that, I call bullshit. If FFH ever walks away from any debt, insurance or non-insurance, who the hell would ever trust them to honour an insurance policy? It's *all* FFH debt, irrespective of whether it is cross-collateralized, full-stop.
So, yes, I am just a little bit uncomfortable that quality of earnings has been dubious for the past two or three years, debt has grown, some of the subs seem to be capital constrained, a portion of Riverstone is being sold despite Prem's assertion from two years ago and this year that it is an excellent vehicle for organic growth, and FFH seems to be using operating credit at the holdco. Does this seem like well planned implementation of strategy to you? It strikes me as a bit of a chaotic and ad hoc approach to managing a $70B enterprise. We've been here before.
SJ