Comment: Where now for FBD as Fairfax cashes out?
With Fairfax after taking its money off the table what does the future now hold for FBD, the last remaining Irish-owned insurer? Last Monday FBD announced that it had agreed to repurchase the €70m of convertible notes which it sold to Canadian investment firm Fairfax in 2015. It has been a sweet deal for Fairfax.
Not alone did the notes pay an annual coupon or interest rate of 7pc, FBD is paying a €16m premium, ie a total of €86m, to buy them back. This means that the notes have yielded Fairfax an annual return of more than 12pc. Nice work if you can get it.
This is not the first time that Fairfax has made a killing investing in Irish financial shares. In 2011 it pumped €300m into Bank of Ireland as part of the deal that kept Ireland's oldest bank out of majority state ownership. By the time Fairfax had offloaded most of its Bank of Ireland shares six years later it had almost trebled its money.
So why did FBD pay a premium to repurchase the notes? With FBD haemorrhaging cash - it recorded an €85m pre-tax loss in 2015 - and regulators demanding that it raise extra capital, Fairfax was able to drive a hard bargain three years ago. In addition to the 7pc coupon, the notes were convertible into shares if the FBD share price stayed above €8.50 for 180 days after September 23 of this year.
With the FBD share price trading at just over a tenner before the repurchase announcement, it was virtually certain that the notes would be converted next March. This would have resulted in Fairfax receiving 8.23 million new shares, giving it a 19pc stake in FBD. The issue of the new shares would also have diluted FBD's existing shareholders. The IFA-linked Farmer Business Developments and FBD Trust, which between them own 32.5pc of FBD's shares would have seen their combined stake diluted to 26.8pc.
FBD has already fended off several unwanted takeover approaches, most notably in 2008 when Dutch financial services group Eureko was reported to be offering up to €36 a share (€1.2bn for the entire company).
Repurchasing the notes, rather than letting Fairfax convert them into shares, rules out the possibility of a predator being able to acquire a ready-made large shareholding in FBD, which could then be used as a platform from which to launch a hostile bid.
"There would have been a big overhang [of shares] if Fairfax had converted," said Davy analyst Diarmaid Sheridan.