), the Canadian investor who owns Fairfax Financial Holdings (
), back in 2011 formed a consortium with Wilbur Ross (Trades,
Portfolio) and several other financiers to infuse cash into the
struggling Bank of Ireland (
) - an investment which turned out to be one of his "most
successful," as he said in his recently released 2013 annual letter
to shareholders. Like Warren Buffett (Trades, Portfolio) at
Berkshire Hathaway (BRK.A)(BRK.B), Watsa invests the float of his
insurance conglomerate. Also like Buffett, he has rapidly increased
the book value of Fairfax, registering a 21.3% compound annual
growth rate in intrinsic value since 1985, according to his 2013
For the past several years, Watsa's returns on his common stock
portfolio have been more muted than his historical numbers, due to
a 100% hedge he has placed out of concern for the economic
consequences of fiscal and monetary stimulus in the U.S., which he
believes has yet to play out. Individual investments, however, have
exceeded previous success in some cases, such as the strategy he
devised with Bank of Ireland (LSE:BKIR).
But it didn't start out that away for the long-term investor. In
2011, the year he initiated his position in the bank, it was among
his worse performers - along with his notoriously rocky investment
in BlackBerry (
). He invested in the bank at 10 cents per share. By Dec. 31, 2011,
it had dropped to 8.3 cents per share - near an all-time low.
Watsa first heard about the opportunity at Bank of Ireland from a
fellow investor who was impressed by Ritchie Boucher, the bank's
CEO, who also impressed Watsa. He then formed a group with Ross and
two other investors, who together purchased $1.6 billion of Bank of
Ireland shares in a rights issue which reduced the Irish
government's ownership from 36% to 15%.
Watsa's share of the investment totaled $387 million. Though he
does not report foreign holdings, at his purchase price of around
10 euro cents per share, his stake totaled around 3,870,000,000
The purchase by the group also helped the Bank of Ireland remain a
public company. It was the only major Irish bank to not come under
government control during the credit crisis, during which house
prices and commercial real estate prices dropped by nearly half,
according to Watsa's 2011 letter.
In addition to the bank's laudable management, Watsa also noted
that it had strong capitalization and traded at a discount to book
value. In 2011, Bank of Ireland had a core tier 1 ratio of 15.1%,
compared to 9.7% in 2010. It also reported risk weighted assets of
?67.1 billion, compared to ?79.0 billion in 2010. For 2013, it
reported a total capital ratio of 13.6% and risk weighted assets
totaling ?56.4 billion.
For book value in 2011, Bank of Ireland reported ?0.34 per share,
lower than the ?0.10 per share Watsa paid for his shares. This had
plunged from ?6.85 per share in 2009. Book value slipped a few euro
cents to ?0.28 per share in 2012.
Bank of Ireland's 10-year share price history:
Bank of Ireland's book value per share history:
Watsa saw the company's late-2011 price dip as temporary.
"As we review our common stock portfolios, we believe these stock
price declines are predominantly fluctuations and will be reversed
over time," he said in his 2011 letter.
He proved correct rather quickly. By early 2012, the stock's price
appreciated to ?0.15 a share. Although it hung around slightly
lower levels for much of the rest of that year, it began to perk up
more dramatically in 2013.
Watsa commented on the changes taking place in Ireland and in the
bank last year.
"It is amazing to witness the transformation that has taken place
in Ireland. In 2011, when we made our investment in the Bank of
Ireland at 10 euro cents per share, 10-year Government of Ireland
rates were 12%, housing prices had come down 40% and sentiment was
bleak. Since then, 10-year Government of Ireland rates have dropped
to 3.1%, house prices have bottomed out and have begun to rise,
Ireland has access to the bond markets again and capital is
flooding into Ireland! Under Richie Boucher's strong leadership,
the Bank of Ireland continues to do well as it recently refinanced
its government-owned A1.8 billion preferred by doing a ?580 million
equity issue at 26 euro cents per share and selling the rest into
the marketplace. Also, it did a ?750 million unsecured five-year
bond financing at 3.34%! The Irish Government has now had all its
loans to the Bank of Ireland paid back and its 13.95% ownership of
the common stock is in a sizeable profit position. We thank the
Irish Government for its exceptional support of the Bank of Ireland
and look forward to the Bank's continued progress under Richie's
These developments helped push up Watsa's stock significantly. As
of March, he has more than tripled his investment, as the price
reached a 52-week high of ?0.39. At that price, his original $387
million investment would be worth more than $1 billion.
But Watsa took advantage of the appreciation to sell some shares.
At a price of ?0.33 per share, he reduced the position by one-third
"The Bank of Ireland has been one of our most successful
investments because of the outstanding performance of Richie and
his management team," he told investors. "We continue to be strong
supporters of Richie and the Bank of Ireland."
In the fourth quarter of 2013, Watsa also bought several new
positions, the largest of which were ViroPharma Inc. (VPHM),
Edwards Group Ltd. (EVAC) and Provident New York Bancorp (PBNY).
See Prem Watsa (Trades, Portfolio)'s portfolio here.
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