Fairfax Financial Holdings Ltd. is once again doubling its investment in Seaspan Corp. in a deal that will make it the largest investor in the publicly traded container shipping company.
The Toronto-based insurance and investments firm founded by Prem Watsa said Thursday that it would invest another US$500-million in Seaspan through the exercise of warrants over the next few months, bringing Fairfax’s total investment in Seaspan to US$1-billion.
The deal boosts Fairfax’s exposure to the ship-leasing business at a time when the industry is recovering from a downturn caused in part by the overbuilding of increasingly large vessels. Seaspan intends to be a platform that will buy up similar companies, and it could one day branch into other businesses in the shipping industry.
“Our thinking is that the industry has bottomed out … leasing rates are going up,” said Mr. Watsa. “As the global container-ship industry continues to consolidate, we believe owner-operators like Seaspan, with financially sound balance sheets, will have excellent growth prospects.”
Fairfax first took a US$250-million position in the company in January, drawn to the entrepreneurial attributes it recognized in Seaspan management and the potential to connect with more investment opportunities in the U.S.
Seaspan transports goods around the world in in massive metal boxes on behalf of big shipping lines. The company’s largest shareholder has been U.S. billionaire industrialist Dennis Washington and his family. Their Washington Companies conglomerate is stocked with North American-headquartered businesses such as mines, machinery and a U.S. regional railroad.
Mr. Watsa said Fairfax couldn’t think of a better person to give its investment capital to than Seaspan chairman David Sokol, a former top lieutenant of famed investor Warren Buffett best known for building Mid-American Energy Holdings Co. Mr. Washington brought Mr. Sokol in to help turn Seaspan around last year.
Mr. Sokol joined the company’s board in April, 2017, and was appointed chairman in July. Uninspired by Seaspan’s response to market conditions, he has since brought in a new CEO and is implementing growth plans that Mr. Watsa expects will lead to significant profits.
Seaspan has been looking to participate in the flurry of mergers in the industry – a trend that stems from a shipping crisis spurred by a high volume of boats competing for lower cargo volumes.
In March, Fairfax put another US$250-million into Seaspan to help fund the acquisition of the 89 per cent of Greater China Intermodal Investments LLC that it didn’t already own from Carlyle Group. Mr. Watsa said that Seaspan had watched the business drop in value and was able to acquire the business at a much lower price.
Seaspan now commands 9 per cent of the world container shipping market, about the same size as the next three biggest competitors combined, Mr. Sokol said. He and Seaspan CEO Bing Chen have been talking to competitors about the potential to join Seaspan’s business, touting customer relationships with large liner companies and its operational expertise in running ships.
“My guess would be that five years from now we’re not just a container shipping company owner [and] operator, but we may own some assets on the land side,” Mr. Sokol said, adding that this could include port infrastructure or other types of shipping.
With the extra capital from Fairfax, Seaspan will look to bolster its balance sheet and edge toward a sought-after investment grade credit rating. Mr. Sokol said the company hopes to achieve that status within two years.
“When you have a downturn, banks tend to lose your phone number, where the public markets are always available to you if you’re investment grade. In my view it’s just one of the foundations to build a business around,” Mr. Sokol said.
Seaspan learned this lesson the hard way. With its stock flying high at more than US$20 per share in 2015, Seaspan could have shored up its balance sheet in anticipation of an inevitable downturn, Mr. Sokol said. Instead, it piled on debt and not only cost itself the opportunity to be a buyer when the shipping crisis began, but also put the company under stress as its share price fell to about US$5 in 2017. The company’s stock hovered at US$8.80 as of Wednesday’s close.
“That’s a mistake a CEO should never make, in my view,” Mr. Sokol said, adding that credit quality in the business is essential and valued by its customers.