Fairfax Financial Holdings Inc. chief executive Prem Watsa says his bearish market views played a key role in a recent pension fund partnership.
In February, Fairfax made an offer to acquire London-based Brit PLC in a deal valued at about $1.8-billion (U.S.). Two private equity sellers owning about 73 per cent of the specialty insurance company supported the deal and agreed to lock up their shares, i.e. they would not sell them to a rival bidder. Fairfax quickly went out to raise more than $1-billion via the sale of debt and equity securities. By late March, the takeover had been declared unconditional as to acceptances, meaning it had enough shareholders on its side to proceed with its offer.
Then Fairfax entered into a memorandum of understanding with the Ontario Municipal Employees Retirement System, where the pension fund would take as much as a 30 per cent stake in Brit.
That move surprised some investors at Fairfax's annual meeting of shareholders in Toronto on Thursday, including one who wanted Fairfax to explain why it decided to sell part of the business before the deal had even closed.
"When you're financing a purchase, the last thing you want to tell people is what you're going to do – especially if it's a big purchase," said Mr. Watsa said about the OMERS memo, adding that the company wanted to be nimble enough to pounce on new opportunities if the market turns, the way it did in the financial crisis. "We'll benefit significantly if what we're worried about comes true, and we have a lot of cash," he said.
Fairfax has heavily hedged its stock portfolio against stock market losses in recent years amid concerns over a "grand disconnect" – a host of global issues including deflation, debt levels, government stimulus and bubble conditions in sectors such as technology. "As I said last year, we are focused on protecting our company on the downside against permanent capital loss from the many potential unintended consequences that abound in the world economy," Mr. Watsa said in a recent letter to shareholders.
Since the two private equity firms, Apollo Global Management and CVC Capital Partners Ltd., had owned more than 70 per cent of Brit, Fairfax will essentially take on that stake first. OMERS will take the rest – for now. Fairfax plans to buy the last of Brit back in the next three to five years.
Mr. Watsa said Fairfax would have just bought the shares back from the stock market over time, except that there are rules in the U.K. against owning 75 per cent of a company or more without completely privatizing it. "We had to step back and say, okay, we can raise more money and we'd perhaps have to do an equity issue to buy 100 per cent. Or we could do what we wanted to do in the first place," he said, adding that Fairfax has long had a good relationship with OMERS.
"We'll own 100 per cent of Brit. But what we wanted to do was be really strong, financially," Mr. Watsa said.