FAIRFAX FINANCIAL HOLDINGS LIMITED Highlighting Fairfax As A Beneficiary Of The Stelco Buyout
Conclusion: The Stelco buyout represents a nice (albeit modest) win for
Fairfax which owns 13.0 million shares. We estimate a pre-tax gain of nearly
US$400 million, which amounts to 1.8% of book value. The occurrence of
these value-crystallizing events (for equity investments that are not marked
to market) tends to be lumpy and episodic but is a nice bonus when it does
materialize.
Key Takeaways
Stelco to be acquired by Cleveland-Cliffs. Earlier today it was announced
that Cleveland-Cliffs (CLF-NYSE) has entered into an agreement to acquire
Stelco (STLC-TSX) at a price of C$70 per share, representing an 87%
premium to Stelco’s closing share price on July 12, 2024.
Fairfax stands to be a beneficiary of the buyout. Fairfax Financial holds
13.0 million shares of Stelco, which is carried on balance sheet as an equity
accounted associate. As of March 31, 2024, the carrying value of Fairfax’s
interest in Stelco ($275 million) was significantly below fair value at that time
($427 million).
We crudely estimate that the buyout could produce a pre-tax gain
equivalent to 1.8% of book value. The table in Exhibit 1 lays out some
simple back-of-the-envelope math that details how we estimate a US$392
million pre-tax gain for Fairfax on the Stelco investment based on the buyout
price. This translates to 1.8% of Fairfax’s Q1/24 book value