Canada’s answer to Warren Buffett in the money on Irish ‘bailout’

Prem Watsa, Canada's answer to investment guru Warren Buffett, has made well over a €500 million profit from taking part in a rescue investment in Bank of Ireland at the height of the financial crisis back in 2011.

As the Indo-Canadian's company Fairfax Financial Holdings prepares to finalise its accounts for 2017, it is also well in the money on a second Irish "bailout" – a €70 million investment in FBD Holdings in 2015.The deal at the time was in order to help the insurer bolster its capital levels as FBD and the wider industry were stuck in a quagmire against the backdrop of spiralling claims costs and diminishing investment returns.

Watsa’s investment in a bond in FBD entitled him to a 7 per cent interest rate and opportunity to convert the instrument automatically into ordinary shares in Ireland’s only publicly-quoted indigenous insurer within three to 10 years, if the stock traded above €8.50 during the period for 180 days.

At the time of the deal in September 2015, shares in the then loss-making company were wallowing at 27 per cent discount to that threshold.

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However, FBD returned to profit last year ahead of when the market expected, following heavy restructuring under chief executive Fiona Muldoon – including the sale of property investments, cutting back on the use of brokers, hiking of insurance premiums and closing its defined benefit pension scheme to future accrual.

Pre-tax profits for 2017 are expected by Davy analysts to rise more than 130 per cent to about €27 million, helped by the release of €5.6 million of provisions as the Supreme Court moved the cost of Setanta Insurance's 2014 collapse from the industry to the State's Insurance Compensation Fund.

Motor premium hikes across the industry (following years of mispricing risk), Government efforts to reduce the cost of insurance claims and a relatively benign weather in recent times (FBD estimates that Storm Ophelia in October will cost it no more than €6 million) have also helped.

Shares in FBD have surged by more than 50 per cent this year – shooting through the key €8.50 threshold that Watsa’s focused on – to reach €10.40 this week. It’s a level last seen in early 2015.

While Fairfax’s bonds can’t convert until around St Patrick’s Day in 2019, on today’s prices the Canadians are sitting on a potential €15.6 million paper profit.

Watsa’s expected arrival on the shareholder register – with about a 19 per cent stake, a fraction below that of Farmer Business Developments – will be just on time to benefit from an expected return to dividends at FBD in 2019, for the first time in four years.

Xavier Niel and Eir

Xavier Niel, the French telecoms billionaire who made his fortune from being a thorn in the side of former monopolies, is buying into something of a hybrid as two companies he controls – NJJ Capital and Paris-listed Iliad – prepare to take a 64.5 per cent stake in Eir.

While the Irish phone group remains very much the incumbent in the fixed-line and wholesale broadband markets, it is a challenger in the mobile market with just an 18 per cent share (behind Vodafone, a 38 per cent, and Three, at 35 per cent).

This makes it ripe for Niel – who disrupted France’s mobile phone market in 2002 by offering unlimited calls and data for less than a third of the price of rivals – to inject more competition in Ireland.

Meanwhile, Olivier Rosenfeld, a partner in NJJ, board member of Iliad and general front man for the announcement of €3.5 billion Eir deal during the week, said that the incoming investors “aim to improve the relationship between Eir, [regulator] ComReg and the Government – which is one point where we’ve seen weakness”. It almost sounds too good to be true.

But the big upside is that Eir, after racking up €4.1 billion of debt through a series of ownership changes in 1-1½ decades and being forced into the State’s biggest examinership in 2012, finally seems to have owners intent on making money the old-fashioned way. That’s through dividends from sustainable profitability, rather than the massive and high-cost debt refinancings that have historically accompanied changes in control at the phone group.

Standard & Poor's, one of the world's leading debt ratings firms, said on Friday it expects the new owners to continue to lower the burden of Eir's remaining net €2.1 billion debt, while Fitch expects the phone company to continue to invest in its network.

Iliad executives told analysts on Wednesday they expect Eir will start paying dividends from 2019. The publicly-quoted company, which is 52 per cent owned by Niel, has an option to buy out 80 per cent of interest of the entrepreneur’s NJJ Capital in 2024, bringing its total investment to almost 59 per cent.

The question is how long two continuing Eir investors, US hedge funds Anchorage and Davidson Kempner, who have opted to retain part of their existing holdings in the phone company under the new deal, will stick around.