Via the Financial Post, an interesting article on Prem Watsa and Fairfax Financial Holdings:
Fairfax Financial Holdings Ltd. has climbed to the highest level since 1999 after investments in Irish banking and Canadian cattle feed surged, more than offsetting any potential loss from a US$4.7 billion bid for smartphone maker BlackBerry Ltd.
Fairfax, which has a portfolio worth US$24.1 billion, has gained 31% this year, compared with a 7.8% rise in the Standard & Poor’s/TSX Composite Index. The investment firm has returned 13% annually over the past 20 years, mirroring the rise of Warren Buffett’s Berkshire Hathaway Inc., according to data compiled by Bloomberg.
“Like Berkshire Hathaway, they tend to focus on the long term,” Colin Stewart, Toronto-based chief executive officer of JC Clark Advisor Ltd., said in a phone interview Oct. 22. “There have been some headlines recently on some of their more high-profile investments like BlackBerry. But it’s just one investment in a large portfolio. It’s not something I worry about or focus on.”
Fairfax CEO Prem Watsa, 63, who founded the Toronto-based insurer in 1985, makes contrarian bets that often pay off, including a stake in the Bank of Ireland that has risen 141% since Fairfax invested in July 2011. The offer to buy Waterloo, Ontario-based BlackBerry, which has lost more than 90% of its value since 2008, is his biggest publicly disclosed deal yet.
Fairfax, which announced Sept. 23 its offer to take BlackBerry private with a group of investors, hasn’t made public its partners or financing details for the bid. BlackBerry co- founders Mike Lazaridis and Douglas Fregin said this month they’re also considering a bid. Cerberus Capital Management LP, a New York-based private equity firm, is said to be weighing an offer, a person with knowledge of the situation said earlier this month.
Breakup Fee
Fairfax said it wants to reach a definitive agreement on BlackBerry by Nov. 4, and one element of support for its shares may be the unusually high breakup fee it has devised.
BlackBerry will pay Fairfax US$157 million if the smartphone maker strikes a better deal with another buyer during the due diligence period. If a higher rival bid comes in after the Fairfax group has agreed to a deal, the fee rises to about US$262 million. Fairfax is BlackBerry’s biggest shareholder with about a 9.9% stake, according to data compiled by Bloomberg.
Paul Rivett, president of Fairfax, declined to comment on Fairfax’s performance and strategy.
Fairfax has successfully invested as part of a group before. It joined WL Ross & Co. and Fidelity Investments and two other investors to buy a combined 34.9% stake in Bank of Ireland, the country’s largest lender.
Hefty Portfolio
Watsa takes specific risk with companies trading at a significant discount and offsets that with a “pretty hefty, safe and secure portfolio,” Jonathan Adams, a senior analyst at Bloomberg Industries, said in an Oct. 22 phone interview from Skillman, New Jersey. “What makes this company different? Part of the answer certainly lies in investment strategy.”
Watsa has said in remarks to shareholders that Buffett guides his investment strategy, leading him to choose undervalued stocks and holding them for the long term.
Fairfax’s investment portfolio includes everything from pet insurance to cattle feed and Greek malls.
Fairfax benefited from betting against U.S. banks and insurers during the financial crisis, then bought US$100 million of convertible debt of Chicago-based USG Corp. in November 2008 and profited from the housing recovery. USG, the world’s largest gypsum product manufacturer, has risen about 300% since then as housing starts recovered, fuelling demand for the ingredient in plaster.
Animal Feed
Watsa is now wagering on Greece’s recovery. Fairfax allocated about 164 million euros (US$226 million) to boost its holding in Athens-based Eurobank Properties Real Estate Investment Co. to about 42% from 19%. The company leases offices and malls. Fairfax raised its holdings in Mytilineos Holdings SA, also based in Athens, to 5.02% from 4.25% on Oct. 18. The energy and metals producer has gained 35% this year.
Fairfax’s investment in Winnipeg, Manitoba-based Ridley Inc., an animal feed manufacturer, rose about 75% since it acquired a CUS$81 million (US$77.5 million) stake in 2008.
“People always saw Fairfax as an insurance company that was more dependent upon its investment returns to generate earnings,” said Stewart, whose Toronto-based firm manages $230 million in assets and has been a Fairfax investor for at least two decades. “Now there’s the potential for continued strong investment returns but also improving results in the insurance business, which is encouraging to see.”
Insurance Business
Net income among U.S. private property and casualty insurers advanced 42% to US$24.5 billion in the first half of 2013 from the same period a year earlier, with average rates of return increasing to 8.2% from 6.1%, according to an Oct. 3 report by Jersey City, New Jersey-based Insurance Services Office Inc.
Premiums, or the prices paid by clients for coverage, rose over last year but are still below normal due to higher taxes on their products, the report said.
“Insurers now need much better underwriting results just to be as profitable as they were in the past,” said Michael Murray, ISO’s assistant vice president of financial analysis.
Fairfax posted a loss of US$157.8 million in the second quarter compared with a profit of US$93.7 million in the year-ago period as its bond portfolio slipped on higher interest rates. The Toronto-based company reports third-quarter results on Oct. 31. Fairfax climbed 2.9% on Oct. 25 to $468.11 in Toronto, raising its market value to $10 billion.
Undue Attention
Not all the insurer’s picks have paid off. Fairfax invested US$17.6 million in Zoomermedia Ltd., a lifestyle publisher. The stock has declined about 48% since the deal was finalized on June 15, 2009. In 2009 Watsa wrote down losses of US$65 million in Dell Inc. and his $64 million bet on children’s toy-maker MEGA Brands Inc. soured as its shares fell 70% in the last five years.
Watsa’s investment in BlackBerry has not worked out so far. Fairfax more than doubled its stake in BlackBerry in January last year to 26.9 million shares. The device-maker’s stock has fallen 49% since then as the company lost market share for its products to Apple Inc. and Google Inc. Fairfax currently holds 51.9 million shares of BlackBerry, according to Bloomberg data.
The BlackBerry deal “has got an undue amount of attention considering the magnitude and the size of Fairfax’s investment portfolio,” Stewart said. “Their long-term results have been excellent and we don’t have reason to believe that will change.”