Author Topic: Fairfax Africa  (Read 31072 times)

elliott

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Re: Fairfax Africa
« Reply #120 on: November 01, 2020, 01:50:23 AM »
Did anyone actually say that?

As I see it, you dont sell something worth $1 for 50 cents it you really think it is worth $1.
I have not followed this drama that  much, but if Helios was "forcing" FAH to sell Atma to close the deal, they you have to think why. Why would they force selling something worth $1 for 50 cents. Well, yes, because they do NOT agree with that valuation.
Another reason FAH may do such a sale is because they think they can turn the 50 cents back into $1. Good luck Wilkerson! Good luck Mr. Watsa!



petec

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Re: Fairfax Africa
« Reply #121 on: November 01, 2020, 02:28:25 AM »
Did anyone actually say that?

This is what I was responding to:

ďIts hard to imagine a scenario where they try to sell their stake at a 50% discount to TBV and there are no takers .Ē

And if it was not clear (tone does not always come across well) my question was a genuine one not an aggressive/rhetorical one. Iím genuinely interested to know why anyone thinks ATMA could have fetched more right now.

It might be worth more later, which might be why FFH remain bullish on its value, but there is room to disagree, which might be why Helios isnít. 
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jfan

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Re: Fairfax Africa
« Reply #122 on: November 04, 2020, 11:13:08 AM »
Did a brief scan over the management circular for the upcoming transaction with Helios. Petec summarized the transaction in a prior post quite succinctly. Thought I would add a few rough details and a bit of math.

Helios generated ~ $3.6 million in base management fees (aka excess fees) on 3.6 billion of AUM. Their net profit margin margin was ~ 14% with a ~$5 million after expenses (they paid no tax).

Of the 4 fund vintages (I, II, III, IV), they have closed out I completely on Sept 2020, and sold 2/8 positions from II. Fund I, had an initial value of $303M. Fund II, had an initial value of $908M.

The carried interest on Helios Holdings Limited (HHL)was $11M. This amounts to 50% of total carried interest generated from the funds of which the other 50% is earned by the investment team. The hurdle rate was 8% and the performance fee was 20%. The exited positions (by my rough approximation) probably had an original capital contribution from investors at an amount of $532 M ($303M + 2/8*$908M). By my math, their achieved CAGR over a ~12 year period was 8.7%.

For Helio Fairfax Partners (HFP), they will pay a base management fee of 1.5% of NAV for deployed capital and 0.5% on undeployed capital. They will have a 5% hurdle rate with a 20% performance fee.

Assumptions:
- if Helio's AUM stays at 3.6 Billion, running ~ 3 x $1 billion funds at any point in time
- tax rate of 26% for HFP
- current price of FAH being $3.50/share on 59 M shares
- 9% dilution with the deal spread over 10 years

1) Total fee generation after-tax will be ~ $7.4 M (at current market price --> gives a 3.6% return)
2) With the $391 M of current FAH equity in Helios' hands compounding at 8.7% into the future, the 10-year future value after carried interest payout will be $847 M. (at current market price gives a 15% return from NAV growth)
3) 1.5% drag due to base management fee
4) 1% stock dilution drag due to one-time stock dilution over 10 years
5) African inflation ranging from 3-12%

Total personal return will be 3.6% + 15% - 1.5% - 1% - (3 to 12%) =

4 - 13% annual return.

« Last Edit: November 04, 2020, 02:55:55 PM by jfan »

Thrifty3000

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Re: Fairfax Africa
« Reply #123 on: November 05, 2020, 02:45:43 PM »
Did a brief scan over the management circular for the upcoming transaction with Helios. Petec summarized the transaction in a prior post quite succinctly. Thought I would add a few rough details and a bit of math.

Helios generated ~ $3.6 million in base management fees (aka excess fees) on 3.6 billion of AUM. Their net profit margin margin was ~ 14% with a ~$5 million after expenses (they paid no tax).

Of the 4 fund vintages (I, II, III, IV), they have closed out I completely on Sept 2020, and sold 2/8 positions from II. Fund I, had an initial value of $303M. Fund II, had an initial value of $908M.

The carried interest on Helios Holdings Limited (HHL)was $11M. This amounts to 50% of total carried interest generated from the funds of which the other 50% is earned by the investment team. The hurdle rate was 8% and the performance fee was 20%. The exited positions (by my rough approximation) probably had an original capital contribution from investors at an amount of $532 M ($303M + 2/8*$908M). By my math, their achieved CAGR over a ~12 year period was 8.7%.

For Helio Fairfax Partners (HFP), they will pay a base management fee of 1.5% of NAV for deployed capital and 0.5% on undeployed capital. They will have a 5% hurdle rate with a 20% performance fee.

Assumptions:
- if Helio's AUM stays at 3.6 Billion, running ~ 3 x $1 billion funds at any point in time
- tax rate of 26% for HFP
- current price of FAH being $3.50/share on 59 M shares
- 9% dilution with the deal spread over 10 years

1) Total fee generation after-tax will be ~ $7.4 M (at current market price --> gives a 3.6% return)
2) With the $391 M of current FAH equity in Helios' hands compounding at 8.7% into the future, the 10-year future value after carried interest payout will be $847 M. (at current market price gives a 15% return from NAV growth)
3) 1.5% drag due to base management fee
4) 1% stock dilution drag due to one-time stock dilution over 10 years
5) African inflation ranging from 3-12%

Total personal return will be 3.6% + 15% - 1.5% - 1% - (3 to 12%) =

4 - 13% annual return.

jfan, thanks for breaking it down. I think one of the main reasons Helios did a deal with Prem was to boost their brand and get a seat at the "Value Investor Legends Club" table - similar to what Charlie Munger did for Li Liu. I'm assuming much of the appeal of associating with Prem is an ability to at least triple or quadruple AUM over the next few years. To be honest I don't know why they'd give up half their future earnings stream in exchange for a group of somewhat crappy, illiquid, assets, if they didn't think associating with Prem would pretty much guarantee at least $12 billion AUM in 10 years (they could have probably pretty easily grown to $6 billion AUM on their own).

I know the payout ratios for future funds will be more favorable for Fairfax Helios. What would the returns look like 10 years out if Helios grows AUM to $10 or $15 billion?

jfan

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Re: Fairfax Africa
« Reply #124 on: November 06, 2020, 08:11:45 AM »
Assuming that they don't achieve scale economics on their current roster of specialists, and other profitability measures staying the same, the fees should increase proportionally to AUM growth.

So from a 3.6B fund --> 10B-15B AUM, the approximate additional growth --> ~ 10-15% on top of the 4-13% that I estimated, for a total of return of 14%-28%. Lots of assumptions obviously, with future fund performance, AUM size, and their skill in managing inflation risk.

It makes sense for Fairfax to salvage their mistake and gives Helios a brand boost.


Xerxes

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Re: Fairfax Africa
« Reply #125 on: November 28, 2020, 08:39:21 PM »
Here is an interview with Mike Wilkerson for the FAH die hard fans.
You directly watch on YouTube as well.

https://www.google.ca/amp/s/seekingalpha.com/amp/article/4391791-michael-wilkerson-ceo-of-fairfax-africa-holdings-america-in-danger

petec

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Re: Fairfax Africa
« Reply #126 on: November 30, 2020, 10:17:59 PM »
Here is an interview with Mike Wilkerson for the FAH die hard fans.
You directly watch on YouTube as well.

https://www.google.ca/amp/s/seekingalpha.com/amp/article/4391791-michael-wilkerson-ceo-of-fairfax-africa-holdings-america-in-danger

I canít help but think he should have focussed on running the company rather than writing this book.
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Xerxes

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Re: Fairfax Africa
« Reply #127 on: December 01, 2020, 01:32:32 PM »
Here is an interview with Mike Wilkerson for the FAH die hard fans.
You directly watch on YouTube as well.

https://www.google.ca/amp/s/seekingalpha.com/amp/article/4391791-michael-wilkerson-ceo-of-fairfax-africa-holdings-america-in-danger

I canít help but think he should have focussed on running the company rather than writing this book.

100% agreed.
i was excited to listen to him, but then 1/4 through I realized it was more about his book.

hobbit

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Re: Fairfax Africa
« Reply #128 on: December 04, 2020, 09:43:41 AM »
What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasnít traded that high in years and there are plenty of FAR better banks available at or below that price (Wells, Lloyds, even Eurobank)?

And even if they could, what makes you think they could have done it fast enough to satisfy Helios and get this deal done?

Theyíve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. Thatís a fairly clear admission of failure in my book and actions speak louder than words so I value it more than even the most groveling apology.
https://ca.finance.yahoo.com/news/atlas-mara-limited-announces-strategic-155000677.html

The transaction will include upfront cash consideration payable at closing equal to approximately 0.8 times book value as of 30 June 2020, plus additional cash consideration payable 24 months after closing of the transaction, subject to certain conditions.


https://www.benzinga.com/pressreleases/20/11/ac18543273/atlas-mara-limited-announces-strategic-transaction-with-kcb-group-plc

As part of the Transaction, KCB will acquire Atlas Mara's 62.06% shareholding in Banque Populaire du Rwanda Plc ("BPR") for cash consideration representing approximately 1.09 times book value and, through the Company's subsidiary ABC Holdings Limited, all of Atlas Mara's indirect interests in African Banking Corporation Tanzania Limited ("BancABC Tanzania") for cash consideration representing approximately 0.42 times book value. The actual cash consideration payable by KCB will be determined based on the final book value of the two banks at completion of the transactions. The transactions are expected to close during the first half of 2021, assuming regulatory approvals are received by then.

https://www.bnnbloomberg.ca/nigeria-s-biggest-bank-in-talks-to-buy-atlas-mara-assets-1.1530545

Do not be surprised if this happens close to BV as well which leaves them with UBN and following are the latest results for the same

https://thenationonlineng.net/union-bank-grosses-n118-8b-in-q3/

Chief Financial Officer, Union Bank of Nigeria (UBN) Plc, Joe Mbulu noted that the bankís asset quality has continued to improve with non-performing loans (NPLs) down to 3.6 per cent from 5.8 per cent as at December 2019, supported by ongoing efforts to diversify loan book to include viable businesses and households.

ďOur Capital Adequacy Ratio remains robust at 19.5 per cent, well above the regulatory threshold. With the $40 million financing secured from the International Finance Corporation for on-lending to trade finance customers, we are continuing to expand our funding engagements with DFIs to support our strategic business initiatives.

Again not surprised with zero transparency from FFH and FAH mgmt on why ATMA was sold to FFH for 0.25*BV except saying helios did not want it . FAH is  leaving close to 100 mil on the table by doing this deal with Helios which brings only 5 mil to bottom line for now on annual basis. If Helios was so keen on partnering with FFH , they could have done this deal with Helios and kept ATMA at the same time . They can sell it for 40 mil whenever they want or much more if they market it properly. And moreover FFH is only paying 20mil upfront. What a joke. I do not know why helios did not want it , may be they got the jitters after the deal with Equity group fell through. The only explanation is that FFH benefits at the expense of FAH shareholders and no one seems to care since there is no 'smart' money in FAH to seek an explanation from FFH.


« Last Edit: December 04, 2020, 03:08:46 PM by hobbit »

petec

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Re: Fairfax Africa
« Reply #129 on: Today at 01:15:28 AM »
What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasnít traded that high in years and there are plenty of FAR better banks available at or below that price (Wells, Lloyds, even Eurobank)?

And even if they could, what makes you think they could have done it fast enough to satisfy Helios and get this deal done?

Theyíve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. Thatís a fairly clear admission of failure in my book and actions speak louder than words so I value it more than even the most groveling apology.
https://ca.finance.yahoo.com/news/atlas-mara-limited-announces-strategic-155000677.html

The transaction will include upfront cash consideration payable at closing equal to approximately 0.8 times book value as of 30 June 2020, plus additional cash consideration payable 24 months after closing of the transaction, subject to certain conditions.


https://www.benzinga.com/pressreleases/20/11/ac18543273/atlas-mara-limited-announces-strategic-transaction-with-kcb-group-plc

As part of the Transaction, KCB will acquire Atlas Mara's 62.06% shareholding in Banque Populaire du Rwanda Plc ("BPR") for cash consideration representing approximately 1.09 times book value and, through the Company's subsidiary ABC Holdings Limited, all of Atlas Mara's indirect interests in African Banking Corporation Tanzania Limited ("BancABC Tanzania") for cash consideration representing approximately 0.42 times book value. The actual cash consideration payable by KCB will be determined based on the final book value of the two banks at completion of the transactions. The transactions are expected to close during the first half of 2021, assuming regulatory approvals are received by then.

https://www.bnnbloomberg.ca/nigeria-s-biggest-bank-in-talks-to-buy-atlas-mara-assets-1.1530545

Do not be surprised if this happens close to BV as well which leaves them with UBN and following are the latest results for the same

https://thenationonlineng.net/union-bank-grosses-n118-8b-in-q3/

Chief Financial Officer, Union Bank of Nigeria (UBN) Plc, Joe Mbulu noted that the bankís asset quality has continued to improve with non-performing loans (NPLs) down to 3.6 per cent from 5.8 per cent as at December 2019, supported by ongoing efforts to diversify loan book to include viable businesses and households.

ďOur Capital Adequacy Ratio remains robust at 19.5 per cent, well above the regulatory threshold. With the $40 million financing secured from the International Finance Corporation for on-lending to trade finance customers, we are continuing to expand our funding engagements with DFIs to support our strategic business initiatives.

Again not surprised with zero transparency from FFH and FAH mgmt on why ATMA was sold to FFH for 0.25*BV except saying helios did not want it . FAH is  leaving close to 100 mil on the table by doing this deal with Helios which brings only 5 mil to bottom line for now on annual basis. If Helios was so keen on partnering with FFH , they could have done this deal with Helios and kept ATMA at the same time . They can sell it for 40 mil whenever they want or much more if they market it properly. And moreover FFH is only paying 20mil upfront. What a joke. I do not know why helios did not want it , may be they got the jitters after the deal with Equity group fell through. The only explanation is that FFH benefits at the expense of FAH shareholders and no one seems to care since there is no 'smart' money in FAH to seek an explanation from FFH.

The Access/Mozambique and KCB transactions are certainly positive, although small. It would be a very positive sign if Access buys the rest, and I think you're right that that could go at around or above 1x bv since the major asset there is ABC Botswana which has a stub trading at 1.3x book on the local exchange. A control stake would presumably go for more.

The only thing you neglect to mention wrt the valuation of ATMA is that UBN trades for 0.6x bv and is a melting ice cube in real terms (ROE<inflation) in a market where the downside risk is meaningful (e.g. Central Bank sets a floor for the loan/deposit ratio, which has the potential to be very scary). The benchmark asset in this space is Guaranty Trust Bank, which has nearly 3x UBN's ROE. I think UBN is probably a very valuable asset in the long term but I am not totally sure it is there yet. (Idle speculation: I wonder whether FFH's UBN stake might end up in CIB.)

But even allowing for that, it is clear that ATMA trades (and the FFH deal was done) below SOTP value. I don't dispute that, and in fact I think I have made that case at various points upthread. I've certainly pointed out that if ATMA ever gets >50% of UBN (not sure why that is taking so long) the optics of its financial statements will change overnight.

I just don't think the undervaluation is relevant in the way you do. To my mind there are three key points:

1. Helios don't want ATMA. They don't see the value. (That alone tells you something, given their record. In fact, they saw so much risk that they wanted FFH to guarantee FAH's loan to ATMA.) This leaves Fairfax with a choice:
    a) Walk away from the deal.

    b) Put the deal at risk by delaying it until ATMA's SOTP value is realised either via a sale or a breakup. There is absolutely no evidence that either of these can be done fast. Sale? There are no obvious strategic buyers for the whole. You might find a value buyer, but they'd want a low price and they'd need to do extensive due diligence. This is 1H20, and a global pandemic is getting started. This makes future value highly uncertain and makes getting on a plane to do due diligence impossible. Breakup? Given enough months you can probably find strategic buyers for each of the subsidiaries, but selling subsidiaries requires regulatory approval which takes many more months. Fairfax have been trying to break ATMA up for 2 years now and know very well how hard it is. Conclusion? Ask any major asset manager: to sell fast you have to sell cheap. To get a good price for ATMA is going to take 1-3 years. Helios might be long gone by then.

    c) Buy ATMA from FAH and get the deal done.

2. FFH cannot pay much more than market for ATMA. Even ignoring the fact that a pandemic is just getting started which could erode significant book value, the fact is that FFH board's key responsibility is to FFH shareholders. ATMA trades on a recognised stock exchange. There is a market price at which FFH can buy if they want to. Accepted, the stock is not liquid, so perhaps a block premium is justified. If so, it is nearer 20% than 100%. If you were complaining that the price should have been $0.45, or $0.50, I wouldn't be arguing with you. But you think FAH left $100m on the table. If FFH had paid that full of a price, I guarantee you that this board would be full of the Prem haters saying that he'd used the FFH balance sheet to save face by bailing out FAH to get a deal done, and couldn't be trusted. And they'd be right.

3. The Helios deal is transformational and may well create more future value for FAH minorities than has been "lost" on the ATMA trade. Last week FAH was a failed holding company, with no track record of creating value and a number of very challenged subsidiaries. Next week, when the deal closes, it will become a more diversified, more cash generative, better run company with the ability to leverage 3rd party capital to grow in an asset-light manner. Unfortunately there is no amount of disclosure that will help you figure out how much value the deal creates, because what you need to know is how much 3P capital the new company will raise and the IRR on its future deals. Only time will tell.

Bottom line is that I just don't think FFH had many choices here, and I think they deserve some credit for getting a potentially superb deal over the line.[/list]
« Last Edit: Today at 01:24:38 AM by petec »
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