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June 20, 2022 Flash Research
FAIRFAX FINANCIAL HOLDINGS LIMITED
Paws-itive Take On The Sale Of Pet Insurance Business
Our Take: The sale of Fairfax’s pet insurance business appears to crystalize
significant value for what was perhaps a hidden gem within the portfolio. By
obtaining better recognition for the value of this business through a sale,
Fairfax will achieve a step-up in book value and enhanced financial flexibility.
The pre-tax gain could be as much as 10% of Fairfax’s market capitalization.
This appears similar in nature to the investment by CPPIB and OMERS in
Odyssey Group in late 2021, in the sense that Fairfax is surfacing value by
selectively selling assets in the private markets at values exceeding their
implied valuation in the public markets. We continue to like Fairfax and rate
the stock Outperformer with a C$950 price target.
Key Takeaways
• Fairfax announces sale of pet insurance operations: Fairfax
announced that it has agreed to sell its global pet insurance operations
for total proceeds of US$1.4 billion to JAB Holding Company (an
investment firm). The company will receive US$1.15 billion in cash and
US$250 million in seller notes. As part of the agreement, Fairfax will also
make a US$200 million investment in JAB’s latest consumer fund.
• Potential for significant book value accretion: The carrying value of
the Pet business would have been slightly above US$200 million,
implying a substantial pre-tax gain of US$1.15 billion to US$1.2 billion (or
~10% of Fairfax’s market capitalization). In our view, this transaction
appears to be a clear win and surfaces significant value for a perhaps
underappreciated or hidden gem within the Fairfax portfolio of insurance
subsidiaries.
• Proceeds provide financial flexibility: Unlike the Odyssey transaction
announced late last year, there was no indication on what the after-tax
proceeds will be earmarked for. We suspect that Fairfax will be balanced
in its approach to capital return and see several potential priorities,
including debt repayment, the buyout of minority interests and share
repurchases.