Author Topic: Fairfax Africa  (Read 26052 times)

hobbit

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Re: Fairfax Africa
« Reply #110 on: October 16, 2020, 01:26:13 PM »
Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt


Thrifty3000

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Re: Fairfax Africa
« Reply #111 on: October 18, 2020, 06:50:09 PM »
Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

Regarding downside risk of a failed Helios deal I think you have to look at:

- liquidation value of the assets after a failed deal
- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)
- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

hobbit

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Re: Fairfax Africa
« Reply #112 on: October 18, 2020, 10:40:06 PM »
Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

Regarding downside risk of a failed Helios deal I think you have to look at:

- liquidation value of the assets after a failed deal
- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)
- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

one of the conditions of closing

"
As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at
least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the
Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid
for by any Buyer Entity prior to such calculation of Cash;

Thrifty3000

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Re: Fairfax Africa
« Reply #113 on: October 19, 2020, 07:49:18 AM »
Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve).

He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal.

He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control.

If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees.

Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital).

Regarding downside risk of a failed Helios deal I think you have to look at:

- liquidation value of the assets after a failed deal
- future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence)
- odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy.

If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less.

Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record?

Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)?

After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema.

(PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

one of the conditions of closing

"
As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at
least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the
Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid
for by any Buyer Entity prior to such calculation of Cash;

Hmm. In the Liquidity Risk and Subsequent Events sections of the recent quarterly report that statement is worded a bit differently:

"Furthermore, immediately   prior   to closing of the Transaction, the   company must hold at least $102,000 in cash and cash   equivalents, restricted cash   and marketable securities, less any Transaction expenses."

I guess it's not really specific enough to know whether they're falling short on that one. The $40 million Atlas Mara Facility has been fully drawn. No telling if they're able to pay some of it down.

hobbit

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Re: Fairfax Africa
« Reply #114 on: October 26, 2020, 12:34:34 PM »
« Last Edit: October 26, 2020, 12:37:26 PM by hobbit »