Author Topic: Fairfax Africa  (Read 29189 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 »

wondering

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Re: Fairfax Africa
« Reply #115 on: October 29, 2020, 05:05:41 PM »
the information circular is on sedar.  sorry I couldn't attached it.

I am still digesting it, but I saw they are going to pay a 2% dividend yield.


elliott

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Re: Fairfax Africa
« Reply #117 on: October 30, 2020, 02:11:21 AM »
Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt

We only need for things not to change to see the company going further down.

Btw, thanks Thrifty3000 for your informative posts!

hobbit

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Re: Fairfax Africa
« Reply #118 on: October 31, 2020, 12:30:39 AM »
Michael Wilkerson in Annual Letter , Q1 investor call , ATMA earnings --

- Tangible book value of $2 ( June 2020 )
- UBN doing well even in COVID. NPAs stable
-"All operating banks maintained capital adequacy ratios above the regulatory minimum, reflecting stable balance sheets." ( june 2020 )

Michael Wilkerson in circular -

- happy to sell ATMA stake at 0.55 without ever trying to market it to a third party apart from Fairfax. And since its a related party transaction they need a majority of minority shareholder to approve this.
- The reason Fairfax is paying 40mil is because they cannot pay more than 25% of market value of FAH without a formal valuation , this being a related party transaction. Its hard to imagine a scenario where they try to sell their stake at a 50% discount to TBV and there are no takers . But they didn't even try.

"MI 61-101 provides that, unless exempted, an issuer proposing to carry out a related party transaction
described in paragraphs (a) through (g) of the definition of “related party transaction” is required to obtain
a formal valuation in respect of the transaction. Fairfax Africa is relying on the formal valuation exemption
in section 5.5(a) of MI 61-101 given that, at the time the Atlas Mara Transaction was agreed to, neither the
fair market value of the subject matter of, nor the fair market value of the consideration for the Atlas Mara
Transaction, exceeded 25% of Fairfax Africa’s market capitalization."

Moreover Michael Wilkerson/Prem has taken 'zero' responsibility for the destruction of shareholder capital. Not in one annual/interim report/call the mgmt has admitted that they made terrible investments one after the other. Until announcing this deal they have maintained ( until as recently as April 2020 call) that the prices are just depressed and provide no insight into the intrinsic value of businesses. I don't understand on what basis Mr Wilkerson is being retained as an executive chairman of the new entity.

As per the circular Helios brings the the depth and local connections including knowledge of french which is now apparently necessary for making good returns in Africa  ;D. Idk on what basis was the current mgmt investing in Africa if as per the circular they had such limited knowledge of African market .

This situation provides a good deal of insight into the muddled thinking at Fairfax group where they have been blaming market for being overvalued over the past decade while investing in gems like BB, ATMA, RFP, CIG etc . No wonder their shares are being sold at a 50% discount to BV across FFH, FIH and FAH. They have given market no reason to believe that they are trustworthy , transparent and will actually admit/learn from their mistakes going forward. Contrast this behavior with someone like Pabrai who has also had pretty underwhelming returns over the past 3 years but admits to his mistakes openly in letter and hopes to draw some lessons.
« Last Edit: October 31, 2020, 12:32:51 AM by hobbit »

petec

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Re: Fairfax Africa
« Reply #119 on: October 31, 2020, 12:49:10 AM »
What makes you think that, in the middle of a pandemic, they could have sold ATMA for 50% of book when it hasn’t 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?

They’ve made some huge errors here, so they have sold the whole entity (as opposed to stakes) and given operating control to a third party. That’s 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.
« Last Edit: October 31, 2020, 12:50:42 AM by petec »
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