Prem Watsa (Trades, Portfolio), the Canadian investor who owns Fairfax Financial Holdings (TSX:FFH, Financial), back in 2011 formed a consortium with Wilbur Ross (Trades, Portfolio) and several other financiers to infuse cash into the struggling Bank of Ireland (IRE, Financial) – 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, Financial)(BRK.B, Financial), 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 letter.
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, Financial).
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 (BBRY, Financial). 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 shares.
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 leadership.”
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 in March.
“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, Financial), Edwards Group Ltd. (EVAC, Financial) and Provident New York Bancorp (PBNY).
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