Fairfax 2020

[NormR]

Keep in mind that Paul will likely have to do many unpalatable things at Torstar to have a chance of stopping the red ink. A bunch of them, like firing workers, will eat cash. The required repair job would likely have significant negative publicity value if FFH bought it instead - and the results probably wouldn't move the needle at FFH. There is a reason why Buffett got out of the liquidation business.

I wish Paul the best of luck in his new endeavor.

         

[Pedro]

I'm expecting the ongoing monetization of smaller investments/non core/non insurance assets to be at losses. Hope I'm wrong and there's a multi-bagger in there.

I hope they use the $18M to buyback shares.

[bearprowler6]

Keep in mind that Paul will likely have to do many unpalatable things at Torstar to have a chance of stopping the red ink. A bunch of them, like firing workers, will eat cash. The required repair job would likely have significant negative publicity value if FFH bought it instead - and the results probably wouldn't move the needle at FFH. There is a reason why Buffett got out of the liquidation business.

I wish Paul the best of luck in his new endeavor.

       

Norm, none of that justifies accepting, on behalf of Fairfax shareholders, the $0.63 takeover price. Fairfax is in the liquidation business. You don't suddenly get cold feet and give away considerable value (that will take some work to unlock) within Torstar to a former executive of Fairfax who supposedly retired. Please stop defending Prem....he needs be held accountable for yet another one of his Fair and Friendly deals.

[cwericb]

Thanks for the input Norm, but the optics are not good here with the numbers and the story surrounding Rivett leaving Fairfax. I doubt many shareholders would be impressed with what looks like a ‘sweetheart deal’.

[StubbleJumper]

https://www.torstar.com/images/Torstar_press_release_-_May_26_2020.pdf

Paul Rivett comes out of “retirement”!

Paul Rivett joins Jordan Bitove in taking Torstar private at $0.63 per share or approx $52 million in total.

Fairfax Financial fully supports the take private transaction and will vote its 28.9 million class B Torstar shares in favour of the transaction. Fairfax will realize proceeds of $18.2 million on the sale of its shares.

So let me get this straight....Rivett retires from Fairfax 3 months ago in order to spend time with his family and now comes out of retirement 3 months later in order to take Torstar private which results in a massive realized loss for Fairfax on its Torstar investment?

How massive a loss? Well Fairfax acquired its 28.9 million Torstar Class B shares over several years including in the following transactions:

-   Nov 6/17 ---- 9.4 million shares @ $1.25 per share
-   Aug 25/16 --- 2.6 million shares @ $1.40 per share
-   June 3/16 --- 939,400 shares @ $1.77 per share
-   Mar 14/14 --- 2.4 million shares @ $5.35 per share
-       Earlier purchases were done at much higher per share values

BTW at March 31, 2020 Torstar had more than $78 million in cash on its books and no debt!

Thoughts or comments?

Optics is not good on this one. I don't like it. In Feb 2020 Prem commented, “Paul told me recently that for family reasons, he wanted to retire as President of Fairfax. It was with great sadness that I accepted his decision".

I've been a big proponent of Prem and hold a lot of shares. Going forward, I'll have to approach any such comments with greater skepticism.

Yes optics are terrible.....moving on is not a bad thing...but getting robbed by a former executive of the company who was apparently in retirement is quite something else.

Why the hell would Fairfax agree to a buyout of Torstar at $0.63....the cash balance (and no debt) alone is worth more.

The rest of the what Torstar owns....newspapers, several media properties (Torstar paid $190 million for their investment in Vertical Scope only 4 years ago and own 15% of Blue Ant Media etc) are worth considerable more than zero.

Fairfax shareholders (and Torstar shareholders but who cares about them) should be outraged....but all we have here is largely silence from Fairfax shareholders....

I agree with Sanjeev on this one.....good for Paul Rivett....but this should not be allowed to happen....

As for the tax loss carryforwards this sale will create for Fairfax....these are only of value if you have investment gains to offset them which is not something that has been in abundance at Fairfax recently.

BP6

Bearprowler,

If this is truly a sweetheart deal, should we not expect to see additional suitors appear on the market?  I understand your concerns about the fact that Torstar is being bought at far below book -- and in fact as you said, below cash.  But, if it's an obvious steal, we should expect other offers, right?

I expect no other offer because Torstar appears fundamentally broken.  Newspapers are a dying industry and Torstar is competing in a market that is shared with the Toronto Sun, the Globe and Mail and the National Post.  The only worse newspaper market in Canada is Montreal!  So are Torstar shareholders getting screwed?  I guess there's a couple of ways to try to measure that:

1) Discount the cash from operations - when you look back 3 or 4 years, it seems pretty evident that Torstar has generated essentially no cash from operations, and that's ignoring the need for maintenance capex.  From a basic discounted cash flow sniff-test, how much cash from operations would Torstar need to be worth $100m?  Maybe they'd need about $15m cash from ops (maybe even $20m), understanding that maintenance capex is unavoidable?  Is there any reasonable prospect of getting that kind of cash from ops?  The trend has been really unfavourable, and were it not for a cash infusion from the federal government, would Torstar still even be in business?  I am having trouble seeing any prospect that a future owner could extract annual cashflows from Torstar, but hey, maybe they have some excellent management plan that will turn things around?  From a discounted cashflow perspective, it looks roughly like a zero.

2) Sum of the parts - your point about selling Torstar for less than its cash is spot on.  But, is it feasible for a management team to sell the assets, settle the debts and walk away with more than $52m?  Most of the assets appear to be worth nothing.  If you were to shut down Torstar, under Ontario law you would be on the hook for severance costs of probably 6 months to a year of pay for each of Torstar's hundreds of employees.  My guess is that alone would eat down that cash balance to below the $52m purchase price, and then the employees would go to court to try to have the rest of that cash seized to satisfy the pension plan deficit.  If you liquidate, it's likely a zero, or close to it.


Torstar is a stinker and has been for a long time.  The other one on FFH's books that is also likely a stinker is Toys R Us, but we don't ever see enough disclosure to know for sure.  FFH bought Toys with the notion that the real estate alone was enough to underpin the purchase price, but I am guessing that Toys is losing money from an accounting perspective and I question whether it too is cash flow positive.  And once again, to extract any value out of Toys, FFH has to either find a greater fool, make it profitable enough to pay divvies to FFH, or liquidate it.  And, just like Torstar, it's really tough to liquidate Toys and extract much value from the assets.

The first best option would have been to have never bought crappy assets like these in the first place.  The second best option is to recognize your mistake, try to salvage whatever value you can and move on.

Perversely, I don't view this development as a bad thing.


SJ

[petec]

A few things that jump out at me.

1) We do not have the evidence to justify the claim that Rivett has "come out of retirement". A company he jointly controls has made an acquisition. Perhaps he will be heavily involved in the management of this acquisition, or perhaps he will be no more heavily involved than he is at (say) Fairfax, where I believe he remains on more than one board.

2) Fairfax support this deal. This gives rise to two possibilities: a) Fairfax are deeply corrupt and are giving a freebie to a friend, against their own best interests and those of their controlling shareholder, or b) Fairfax (like the broader market) have come to disagree with BP6 on the intrinsic value of Torstar shares (or the likelihood of realising that intrinsic value in a reasonable timeframe) and have decided to move on. I know which I think is more likely.

3) A board which believes Prem cannot admit mistakes, and which has been calling for Prem to crystallise losses and move on, even in stocks which are highly likely to be worth more than their current trading prices, is now horrified that Prem has admitted a mistake/crystallised a loss/moved on at a 67% premium to the current trading price (of the B shares, admittedly).

[mcliu]

Not sure about optics with Paul Rivett, it is a little perplexing.

But the deal itself is not a "sweetheart deal". If anything, Torstar's fairly/overvalued at these prices. There's cash, but also a lot of liabilities, AP, provisions, pension liabilties.
FCF in 2019 was ($9M) and ($20M) after capex. There's no indication that'll stop. They'll probably have to inject more working capital if the bleeding continues or accelerates, especially with this whole COVID situation. VerticalScope made $18M in 2019, maybe less this year, but has close to $145M in net debt, so equity is probably not worth very much. It's nowhere near the $100M that they're carrying it at on the books. If you adjust the balance sheets and net out liabilities, there's really not much equity left.

Also, advertising $ is going to take a big hit. Very few newspapers will survive and this is the Toronto Star, not NYT or WSJ.
It was a stupid investment to begin with, so they're lucky to get some money out.

[petec]

Not sure about optics with Paul Rivett, it is a little perplexing.

It really isn't that perplexing. At Fairfax, Rivett had a reputation for working extremely hard. People like that don't just stop.

[cwericb]

None of us here has a better insight into the value of Torstar than Paul Rivett. If Torstar is such a dud, why would Rivett want to have anything to do with it at the risk of his personal funds?
 
On the other hand if he has a plan to reinvent Torstar, why didn’t he put it in place while Fairfax was still paying him for his expertise?

[bearprowler6]

Were other bidders even given a chance? Seems they have been prevented from bidding on Torstar because the Bitove/Rivett offer was accepted and a break up fee agreed to without testing the market.

The pension issue at Torstar was dealt with. The pension liability was moved off the books in late 2019. Non-issue here.

Sure the newspapers are a dying business however Torstar is much more than its newspapers.....its investments in Veritical Scope and Blue Ant are surely worth something. The 40% of Veritical Scope was bought 5 years ago for $190 million and has grown (albeit with a lot of debt) since than and as for Blue Ant....well Fairfax owns a large chunk of this directly as well so lets hope its not a zero.

If the value of all the other assets of Torstar net to a negative value please explain how the auditors signed off on the BV of the company only a few months ago. Covid has not changed things that much.

Back to the other bidders.....why not Fairfax itself. Sure turnarounds and liquidations are terrible but why give away any potential value that such actions could surface to Bitove/Rivett.

Enough said. I am pleased that Fairfax has dealt with its Torstar mistake but in my view the price is too low. Others disagree. As for the optics around Rivett's involvement. I will leave that to each of you to decide on for yourselves.

BP6