Fairfax 2020

[petec]

Quick scan of 2018 AR does not give price paid, but they said they paid 6x ev/ebitda and 5x FCF.

This deal values Dexterra at C$100m (using HN predeal price) and the release says it has no debt and generates $16.5m ebitda in 2019 and 23m in 2020. That suggests it has been sold for multiples of 6x and 4.3x. The release also says it has capex needs of only $3m and generates a lot of FCF, which is consistent with the FCF multiple claimed by FFH on acquisition.

Conclusions:
1) FFH have not made money from multiple expansion, but they could have made (or lost) money by growing (or shrinking) ebitda.
2) Even if EBITDA has been flat, they could have taken a 20% dividend out of it each year.

[StubbleJumper]

Quick scan of 2018 AR does not give price paid, but they said they paid 6x ev/ebitda and 5x FCF.

This deal values Dexterra at C$100m (using HN predeal price) and the release says it has no debt and generates $16.5m ebitda in 2019 and 23m in 2020. That suggests it has been sold for multiples of 6x and 4.3x. The release also says it has capex needs of only $3m and generates a lot of FCF, which is consistent with the FCF multiple claimed by FFH on acquisition.

Conclusions:
1) FFH have not made money from multiple expansion, but they could have made (or lost) money by growing (or shrinking) ebitda.
2) Even if EBITDA has been flat, they could have taken a 20% dividend out of it each year.

That makes sense.  If the FCF number is calculated properly and includes all of the maintenance capex, you are right that it could have kicked off a nice amount of cash.  If they paid $100m and it has a long term dividend capacity of even $10m, it's a nice little gem.


SJ

[petec]

Another more minor point is I believe private investments are more capital intensive to hold (from an insurance regulation/rating POV) than public.

EDIT: this would also apply to APR. I expect more.

[petec]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

[StubbleJumper]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash. 


SJ

[petec]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash. 


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.

[StubbleJumper]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash. 


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.

Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ

[petec]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash. 


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.

Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ

An entirely reasonable reply. I am a little more hopeful that BB's operational dip is temporary. I'd also point out that its equity value to FFH is not only $200m so if the dip is not temporary, FFH have a strong incentive to burn the $200m in order to ensure recovery of the $500m. My guess is a halfway solution is likely: roll 50% and massively improve the conversion ratio on the other 50%. Keeps all the upside while lowering the downside.

Revisit in November...

[StubbleJumper]

Just occurred to me: the Blackberry convert ($500m) matured in Jan 2020. I wonder if it got repaid, or rolled. Guess we will know at the end of the month.

You know the answer to that question.  We discussed that about 2 years ago.  It will be rolled because Blackberry doesn't have a surplus of cash and nobody other than FFH will lend them money.  It is an encumbered asset for FFH.  That is water under the bridge.


Edit: Did I read incorrectly, or is it not $605m, and matures Nov 2020?  It gets rolled in any case, but it just gives RIM a bit more time to burn through some cash. 


SJ

And as it was back then, BB is net cash and free cash positive. Specifically it has $880m on the BS and is projected to earn about $200m a year in FCF going forward, with positive FCF in every quarter.

I’m only guessing here, but in the easiest lending environment in human history I’m going to go out on a limb and suggest they could get some debt if they needed it, which they don’t.

I’m fairly sure it is $500m but less sure re Jan/Nov.

EDIT: it’s November. My bad - but more time for the convert to be in the money

And it was $605, but Fairfax didn’t take all of it - I’m pretty sure they have 500m.

Well, I must have been reading different financial statements than you.  What I saw for the first 9 months of BB's year is that they reported small negative cash from operations on their cashflow statement.  What is more, there is always a small amount of maintenance capex that is required, meaning they are burning cash by operating, and then burning a bit more just to allow themselves to continue to operate.  The burn rate on operations and capex appears like it was $40m over the 9 months.  It is well and good to project $200m FCF on a going-forward basis, but let's just say that I am from Missouri....

BB does have some cash on its BS, and theoretically, FFH could demand a cheque to settle those notes.  So where would that leave everybody?  Well, instead of the $880m cash on the BS, they would have $275m.  Effectively, BB would be operating with very little room to manoeuvre.  That would be all fine and good for FFH if the notes were FFH's only considerations -- if you just owned the notes, your answer would be "Tough shit.  Cut us a cheque."   But, FFH also owns a large slug of BB shares and Prem is on the BoD, so by insisting on re-payment of the notes you'd be kneecapping an equity investment that you cannot really divest in the short-term.

If you believe that BB could borrow money, your view of their reputation is a good deal more favourable than mine.  A lender would want to see a compelling prospect of BB generating meaningful FCF because if a lender were forced to petition BB into bankruptcy, there is much uncertainty about how much value could be recouped from an intellectual property firesale that would not be conducted until 2024 or 2025.  It's a stinker for a lender, which is why FFH is involved.


SJ

An entirely reasonable reply. I am a little more hopeful that BB's operational dip is temporary. I'd also point out that its equity value to FFH is not only $200m so if the dip is not temporary, FFH have a strong incentive to burn the $200m in order to ensure recovery of the $500m. My guess is a halfway solution is likely: roll 50% and massively improve the conversion ratio on the other 50%. Keeps all the upside while lowering the downside.

Revisit in November...

Well, that's a fascinating question in some respects.  You have a few broad options:

1) FFH could roll the notes and re-price the conversion privilege.  If the market is still in the crapper in November, the conversion privilege could be repriced considerably lower.  If BB executes and everything turns out to be roses, you convert the notes which results in owning a very large chunk of BB.  Somehow you exit from that equity position and you ride into the sunset....  If FFH does that, does the partner in the notes agree to do the same, or does FFH expand its note position to the full $605m?

2) Prem resigns his BoD seat, and FFH sells its BB shares for what the market will bring.  It then insists that BB write a cheque for the convertibles.  BB is screwed, but who cares?  FFH takes ~$500m for the notes and maybe ~$100m for the equity and walks away, chalking the whole thing up to "bad luck."  That ~$600m is redeployed into something that actually makes FFH some money....


So which is the more attractive option at this point?  I have always though that BB should have been tossed onto the "too hard" pile.  But, if you can use your muscle to force a low enough conversion price, is there a reasonable prospect of getting decent return out of rolling the converts?  Every instinct tells me to walk away and recuperate the capital that you can, but...


SJ

[petec]

Mes sentiments exactement.