Regular readers will know that I have covered the infrastructure conglomerate Atlas Corp. (ATCO, Financial) several times in the past. What has always interested me about this company is the fact it is managed and has been funded by some incredibly astute and successful capital allocators.
One of its founders and current chairman is David Sokol, who was instrumental in building Berkshire Hathaway Energy into the utility powerhouse it is today. It was once rumored that he would be following Warren Buffett (Trades, Portfolio) as the CEO of Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), but he had to retire from his post after an insider trading scandal at the conglomerate. He moved on to Atlas, where he gained the backing of Fairfax Financial (TSX: FFH) CEO Prem Watsa (Trades, Portfolio).
Fairfax has been referred to as a baby Berkshire in the past, mainly due to its large presence in the insurance market and track record of building shareholder equity. While the two businesses are not entirely comparable, there is a lot of overlap between them. Wasta uses profits from his insurance business to invest in a portfolio of private and public companies, although the vast majority of the portfolio is invested in fixed-income securities.
On the other hand, Berkshire's insurance portfolio focuses on equities (that is the main reason Buffett's track record is so impressive; he has earned high returns with other people's cash).
Still, Fairfax's track record of buying and building private companies is highly impressive, and it is adding another business to its portfolio in the form of Atlas.
Taking the business private
Earlier this month, it was announced Fairfax, Sokol, the Washington Family and Ocean Network Express Pte. Ltd would acquire all of the shares in Atlas they did not already own for $14.45 per share in cash, representing a 32.1% premium over the 30-day average closing price. Fairfax, the Washington Family and Sokol own or control approximately 68% of Atlas's fully-diluted outstanding common shares.
I think this transaction is interesting for a number of reasons. The deal will allow shareholders to exit the position, which has been a perennial underperformer ever since it came to the market.
That's not for lack of trying by management. The company has nearly $8 billion in contracted cash flow obligations over the next few years from its shipping assets. Locked-in guaranteed revenue is always a desirable quality, and it's one we do not see very often with individual businesses. However, despite this revenue clarity, the stock has consistently traded below book value. The last time I looked, the stock was trading at just 90% of book value and around eight times earnings with a 3.5% dividend yield.
Investors should take note
This is something we are seeing more and more of in the markets. Good, quality companies are becoming cheaper and cheaper because the market does not understand the opportunity, and the businesses are too small or do not fit into the right buckets to qualify for index inclusion.
Ultimately, these businesses will need to create value one way or another. A buyout, share buyback or special distributions with cash generated from significant asset sales are the only ways they can generate value and unlock shareholder returns.
Of course, these kinds of deals will present opportunities for investors, but value investors also need to be careful. Stocks will remain cheap without the right sort of management in place, one capable of optimizing capital returns and unlocking shareholder value. Atlas always had a strong management team behind it, and they were never going to put up with continued underappreciation by the market. Most other companies are not so lucky.
