I think the valuation of the sale of a noncontrol stake to a third party validates even the most expensive of the FFH transactions.
That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play.
I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser?
One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders.
Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind.
SJ
https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan
OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value
Okay, that makes me yet a little more uncomfortable. I had been holding out hope that it was a completely new player to the FFH world. FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff. I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets. There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half.
SJ
The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH.
Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions. We have no actual knowledge of any wrong-doing or any other nefarious behaviour. But, the math is pretty basic and that's what creates the risk: The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10. The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark. So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself. There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm. A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact.
So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time. If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure. And once again, to my knowledge, there is no evidence that anything like this has actually occurred.
SJ
Stubble, i think you are going down the rabbit hole on this one. Fairfax has a long, mutually beneficial history of partnering with OMERS on many large deals. It also looks to be doing more deals with Mitsui Sumitomo. Both of these two organizations look to be quality, well run organizations. Neither organization is going to do anything that is not in its own interests (including maximizing returns for their owners).
1.) Yes, Fairfax is in the process of completing a deal to sell 40% of Riverstone UK to OMERS for $600 million. My guess is if someone on this investment board proposed this exact deal (before it was announced) they would have been laughed at; few would have said that the Riverstone UK runoff business was worth $1.5 billion.
The cash will likely be used by Fairfax to grow the business at the insurance subs that need $; we are in a hard market that may only last a year or two. Some of the cash may also be used to buy out minority partners (sounds like the timing is contractual). The deal will result in an increase in BV for Fairfax of $10/share. It sounds like the new Riverstone UK will have better access to capital needed to be able to grow their business more aggressively moving forward (likely due to OMERS involvement). This looks to me to be a very good deal for Fairfax and also a very good deal for OMERS. Nothing nefarious.
2.) Yes, Fairfax India is also in the process of creating a new subsidiary (Anchorage) to invest in the airport sector in India. This makes alot of sense as infrastructure investments are big money and it is good to have partners with deep pockets. Their investments in BIAL was $650 million, which is a massive number and not repeatable for Fairfax on their own. If they see other airport opportunities they will need to spend big money and will likely need partners to come up with the high price tag. And it sounds like there might be some big opportunities in India (see rohitc99’s comments).
They have sold an 11.5% stake in Anchorage to someone for $134 million. This transaction will decrease Fairfax India’s ownership of BIAL from 54% to 49%. These is lots we do not know and when Fairfax India releases its annual report (March 6? Same as Fairfax?) i am sure we will know more.
Is the new purchaser OMERS? I hope so as that would be a huge positive as they are a known entity and the perfect partner on this sort of transaction: a quality company with a long term focus (just like Fairfax) and they have deep pockets (access to capital). And it looks like OMERS is looking to grow their investments in Asia and they want to grow their exposure to infrastructure projects (in a low interest rate world with stock markets shrinking in size more money is moving to private markets).
With OMERS as the partner i see nice growth opportunities with Anchorage, especially if they are able to bring another partner or two over time. This will be a big win for Fairfax India shareholders as they will slowly be able to monetize BIAL at a very good price and also grow in a new direction.
Part of all the lack of communication currently may have to do with getting all the ducks lined up. Selling a chunk of BIAL may not be simple... current owners might have first right of refusal. Setting up Anchorage may require local government approval. I have no idea; but this is India so my guess is they have some hoops to jump through. The fact a buyer was not named in the press release (or would not be confirmed by Prem on the conference call) does not suggest anything untoward to me. We will know more when they can tell us.
Regarding the price, perhaps the high price paid for 11.5% of Anchorage reflects the value the purchaser sees in not only the BIAL asset (which is all everyone is focussed on right now) but also the value of partnering with Fairfax in India and the value that will be created in the coming decade. Fairfax has a long successful history in India: ICICI Lombard, IIFL, Thomas Cook, Quess and more recently Digit and BIAL (just off the top of my head). Fairfax is very plugged in to India (understand the region and have the contacts) and it would be very rational for someone like OMERS to want to partner with them there (especially if they are not already well established in the region). It is also very encouraging to see the speed with which Fairfax is moving to develop BIAL; This shows a deep understanding of how to do business in India and also having the contacts to fill important positions with quality people. This will be a major drawing card for Anchorage as it expands.
The sale of 11.5% of Anchorage might be an example of Fairfax actually earning its high fee from Fairfax India. If BIAL is worth anything close to $2.6 billion then Fairfax India shareholders are going to make out like bandits (and it looks like it just might be :-)
