Fairfax India Holdings (FIH-U.TO) – Odd Lot Tender Offer – $189 Upside

Current Price: $13.09

Offer Price: $12.50-$15

Upside: $189 (if priced at the upper limit)

Expiration date: 6th of August, 2021

Issuer bid circular

 

On the 15th of June, Fairfax India Holdings announced substantial issuer bid (tender offer) for 6%-7% of its outstanding shares at $12.50-$15.00. Shares currently trade close to the lower limit. Odd-lot priority is included. Paid-up capital is $11.55/share, so net of potential withholding taxes (for non-Canadian residents) the consideration would be c. $12.36-$14.48/share offering $137 upside if the tender gets priced at the upper limit and $72 downside if priced at the lower limit.

Given the small size of the tender, odd-lot position sizing might be necessary to ensure acceptance in the offer. However, at current prices the company seems to be relatively cheap and management is doing their best to communicate that to shareholders. So there are some chances that majority of shareholders will decide not to participate in the tender and the offer will get prices at the upper limit.

 

A bit of background

Fairfax India is a subsidiary of Fairfax Financial Holdings, founded by a legendary Canadian investor Prem Watsa. Historically, before 2019 FIH used to trade around its book value, however, with the impact of the pandemic, the discount has widened considerably. Current BV stands at $17.98/share and the offer comes at 0.7x – 0.83x BV.

Prem Watsa himself has commented on the cheapness of FIH at the current level:

The Offer will allow us to return capital to our shareholders at what we view as an attractive price given our belief that the Company’s recent trading price does not fully reflect the value of our business and future prospects

Hence, FIH directors, parent (Fairfax Financial Holdings) and its affiliates, who own a combined 22% of shares, will not tender.

The company takes a long-term value approach towards investments in the Indian region. Portfolio consists mostly of stocks (public and private) and bonds (2% of the portfolio). The largest asset (around 50%) is a stake in Bangalore National Airport (the 3rd busiest in India), around 30% is in the financial industry and around 20% is in the chemical and related products industry.

Since its IPO (at $10/share in 2015) FIH grew its BV at 10.7% CAGR, outperforming broad Indian indexes. At the moment, FIH trades at pre-COVID levels, whereas the indexes are trading at 30%+ premium to pre-COVID levels:

The company has also been buying shares in the open market – 1.36m since Sept’20 slightly below $10/share average price. Another 2.1m shares were authorized for open market purchases as of Sept’20.

12 COMMENTS

  1. Mike

    sorry for the noob question but when you select where in the range you will accept, for me, at IB, what price do you select? upper end? thanks

    1. dt

      I you want to be sure that your shares will be accepted in the tender offer, then submitting odd-lot position at the lower limit (or no price) makes this happen. If the final tender price is set above the lower limit, you would still get paid the same as everyone else.

    1. dt

      I believe it is 15%. And I have heard that IRA accounts are not subject to this tax (but do not quote me on that).

  2. snowball

    FIH.U price did not move significantly higher in response to the tender offer announcement on June 15.

    Does it mean that the post-tender downside will be quite limited?

    If the risk is mostly about where the offer will be priced at, then I don’t think odd-lot or not is that important.

    In other words, if we consider the risk-reward to be attractive, then we should take a full-size bet;

    or, if it’s not that attractive, then the protection provided by odd-lot ($173 upside vs $72 downside) does not change the picture.

    1. dt

      The risk is not only about where the offer will be priced but also about whether your position is prorated or not. That’s is where odd-lot positions could make a difference.

      Whether pre-announcement price indicates the likely post-expiration price is debatable, but at least that is one of the reference points.

  3. snowball

    “FIH directors, parent (Fairfax Financial Holdings) and its affiliates, who own a combined 22% of shares will not tender.”

    I don’t seem to able to get to the 22% figure (I get to 10.8%, and 27.8% if also counting OMERS) .

    According to the latest proxy circular, there are 149.6 million common shares outstanding (119.6 million subordinate voting + 30 million multiple voting).

    Fairfax Financial (via Hamblin Watsa Investment Counsel ) owns 42.5 million shares (12.5 million subordinate + 30 million multiple).

    Directors own about 400k subordinate (320k by Watsa).

    So parent and directors own 12.9 million subordinates, which account for 10.8% of subordinates outstanding.

    =====

    P.S., OMERS owns 20.4 million subordinate. I think we can assume that OMERS won’t tender either.

    OMERS acquired its stake at a cost of $11.75 per share in a 2017 private placement, and hasn’t made much money yet.

    Furthermore, OMERS has agreed to invest $130 million fresh capital into a FIH’s sub called Anchorage (whose main asset being the BIAL airport). So I believe that OMERS is not interested in paring back its FIH stake yet.

    1
    1. snowball

      The deconsolidated RiverStone Barbados owns another 9.7 million shares of Fairfax India.

  4. Sean McMahon

    Thanks for doing this work. If we use your high number of 28% of insiders/affiliates that don’t tender, but the market price is as close to the minimum tender price, as it is now, I’ve got to think that at least 50% of the remaining 72% (so, 36%) tender. Looking through a list of holders, there are lots of actively managed mutual funds that I imagine would tender. So, I think proration could be significant, say, 15%–20% (6% bought back / 36% tendered = 17%). That said, my track record at predicting proration % is horrendous!

  5. dt

    I am quite surprised by the low tender offer participation – a much better outcome than we expected. Likely most of the shareholders value the company higher:

    “Upon completion of the Offer, the Company expects its book value per share to increase from US$19.26 (as at June 30, 2021) to approximately US$20.00, representing an increase of approximately 3.8%, due solely to the impact of the Offer.”

    This idea has resulted in 13% return for those not liable to pay withholding tax or 10% after withholding taxes. Odd-lot holders pocketed $180 or $130 respectively.

    1
  6. snowball

    Fairfax Financial Holdings the mothership has just announced a Dutch-auction tender offer of US$1 billion, approximately 8.72% of outstanding shares.
    Prem Watsa will not tender his shares.
    Price range is US$425-500. Last closing price was near the lower limit at US $432 (C$ 543).
    Book value per share at September 30, 2021 was $561.88, and not included in this number is $37 per share for additional gains expected on its investment in Digit (to be recorded in Q4), and a pre-tax gain of $19 per share from the excess of fair value over adjusted carrying value of non-insurance investments in associates and consolidated investments.
    So even $500 the upper limit of the range is nearly 20% discount to net asset value (about $600).
    ========
    Fairfax Financial Holdings Limited (“Fairfax” or the “Company”) (TSX: FFH and FFH.U) announces its intention to commence a substantial issuer bid (the “Offer”), pursuant to which the Company will offer to repurchase for cancellation up to US$1.0 billion of its subordinate voting shares (the “Shares”) from shareholders for cash.

    The Offer will proceed by way of a “modified Dutch auction”, which allows shareholders to select the price, within the specified range, at which each shareholder is willing to sell all or a portion of their Shares. The Offer prices range from US$425.00 to US$500.00 per Share (in increments of US$5.00 per Share). The Offer will be for up to a maximum of 2,352,941 Shares, or approximately 8.72% of Fairfax’s 26,986,170 total issued and outstanding Shares, based on full participation and a purchase price equal to the minimum purchase price per Share.

    Fairfax has been informed by Mr. Watsa that he, and entities controlled by him, will not deposit any Shares owned or controlled by him pursuant to the Offer (including, for greater certainty, in respect of any Shares into which multiple voting shares of Fairfax controlled by Mr. Watsa are convertible).

    https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-US1.0-Billion-Substantial-Issuer-Bid-and-Sale-of-9.99-Minority-Stake-in-Odyssey-Group/default.aspx

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