Prem Watsa was rushing down Bloor Street in downtown Toronto one morning in 1974 to get to a job interview at an insurance company called Confederation Life. He was fresh from earning his MBA and looking for his first job in finance in his adopted country. The street was filled with police officers searching for suspects in a bank robbery that had just occurred, and one of them grabbed Watsa, a 23-year-old Indian immigrant, and pinned him against a police cruiser. He protested his innocence, explaining that he was hurrying because he didn’t want to be late for an important meeting. A few minutes later, the cops let him go.
Watsa ultimately got the job and, after 10 years working as an analyst and a money manager at Confederation Life, began building a company that would become Fairfax Financial Holdings (FFH:CN), now a C$9 billion ($8.8 billion) conglomerate. It invests in everything from insurance to restaurants to sporting goods; the company owns insurers Crum & Forster and OdysseyRe in the U.S., as well as a stake in the Bank of Ireland (IRE). “Prem was this value-based investment manager, and the company was going to be—and a lot of people said they were going to do this—Berkshire Hathaway (BRK/A) No. 2,” says Robert Grundleger, founder of Groundlayer Capital in Toronto. “To a degree, he’s succeeded in doing it.”
Watsa, 63, keeps a low profile, but that changed on Sept. 23, when he announced plans to lead a $4.7 billion group bid to take over BlackBerry (BBRY). By buying the iconic Canadian company, Watsa is hoping to disprove skeptics who don’t believe he has the partners or the money to pull it off.
If he does, the ailing smartphone maker will be taken private, stop releasing quarterly results, and bring its stomach-churning stock market roller-coaster ride to a close. BlackBerry’s turnaround will probably take four or five years, Watsa has said, which, as someone who likes long-term and contrarian investments, is just fine.
Watsa’s financial fortune has been tied to BlackBerry since January 2012, when Fairfax doubled its stake in the company to 9.9 percent, paying an average of $17 per share to become the largest shareholder. With the stock now trading at about $8, critics say Watsa’s bid for the entire company—for now, a letter of intent without financing—is meant to try to salvage the value of Fairfax’s investment and flush other bids out from the bushes. Those who have known him over the years, however, say doubling down on a stock that others see as almost worthless is a classic Watsa move. “Prem likes to buy stuff cheap, and he’s prepared to buy what Warren Buffett calls ‘cigar butts’—things that have been really discarded,” Grundleger says.
“There’s no question it has fallen on hard times, but it will be successful again,” Watsa said in an interview the day his offer was announced. “What we’re trying to do is stabilize the company and then build it over time, over the long term. We’re not short-term oriented.”
Watsa was born in Secunderabad, in southeastern India, in 1950. His father, Manohar, was a Jesuit-trained boys’ school principal. Watsa moved around India as his dad’s career progressed before securing a spot at the Indian Institute of Technology in Madras, one of the country’s top engineering and science universities. He met his future wife, Nalini, there. At his father’s urging, Watsa joined his brother in Canada in the fall of 1972. He enrolled at the University of Western Ontario, 110 miles west of Toronto, and helped pay for his MBA by selling greeting cards door-to-door and, later, air conditioners. In 1984, after 10 years at Confederation Life, Watsa and a former boss, Tony Hamblin, set up their own firm, Hamblin Watsa Investment Counsel, to manage stocks and bonds for clients including Pratt & Whitney and Allied Chemical.
Watsa says mutual fund legend John Templeton, along with Buffett, guided his investment philosophy, leading him to choose out-of-favor stocks and hold them for the long term. Watsa named his first son, Ben, after Benjamin Graham, a Columbia Business School professor and one of the early pioneers of so-called value investing. Watsa and his wife also have two daughters, Christine and Stephanie, and split their time between a home in Toronto’s upscale Rosedale neighborhood and a country house north of the city, where the rolling hills are dotted with golf courses and horse stables.
Hamblin Watsa’s first acquisition, in early 1985, was Markel Financial, an insurer to the trucking industry. It had lost more than 70 percent of its value in the previous decade and needed to cover a shortfall in its reserves or risk losing its insurance license. Watsa thought Markel could be revived with a cash injection and saw it as an entree into the Buffett way of insurance investing.
An insurer gathers clients’ premiums into a pool called a float and invests it. An insurer’s profit depends heavily on how well this float is used. To buy control of Markel, Watsa raised C$2 million from equity investors and C$3 million in debt from his former employer, Confederation Life. The Fairfax model was born.
After raising C$20 million through a public share sale in 1986, Markel Financial began a steady stream of acquisitions. In 1987 it changed its name to the more patrician-sounding Fairfax Financial, which is meant to signify “Fair, friendly acquisitions.” Over the next two decades, Fairfax would make more than a dozen insurance acquisitions, primarily in North America, with forays into India, Singapore, and Poland.
Not all of Watsa’s investments have worked out: In 2009 he wrote down losses of $175 million and $121 million tied to stakes he bought in Canadian newspaper publishers Torstar and Canwest, respectively, and $65 million in Dell. Yet his dealmaking pace continues, with at least 10 acquisitions since 2010, including the Sporting Life network of stores and the Bier Markt and Casey’s restaurant chains in Canada. His biggest win came after his prescient wager against the U.S. housing market. Watsa believed that the mortgage lending binge would come back to haunt American banks and bet against them using credit-default swaps. From 2003 to 2006, those swaps lost Fairfax more than $200 million as the real estate market continued to climb. But when the market collapsed in 2008, Fairfax earned a record $1.47 billion.
Along the way, Watsa has amassed his share of adversaries. In mid-January 2003 shares of Fairfax dropped 27 percent over two days after an analyst for brokerage Morgan Keegan published a report saying the company was short $5 billion of reserves needed to cover future claims. The Toronto Stock Exchange demanded an explanation. Watsa released a statement saying the assertions “were totally wrong and have no validity whatsoever.” What Watsa didn’t say at the time was that he thought the report was an early tactic used by a band of hedge funds out to destroy the company, according to Fairfax.
The dirty tricks campaign intensified in 2005, Watsa says, and then turned personal. Reverend Barry Parker of St. Paul’s Bloor Street church in Toronto, where Watsa chaired the investment committee, received a letter later that year, warning that the church’s finances may be at risk from an “insurance Medusa” and that Watsa should “make a full confession” to his priest. Watsa and Paul Rivett, Fairfax’s president, began getting anonymous threatening calls at home, they say.
Fairfax shares fell 17 percent from June 20 to June 22, 2006, as rumors circulated questioning whether Watsa had fled Canada in a jet with Royal Canadian Mounted Police on his trail. Fairfax hired the New York law firm Kasowitz, Benson, Torres & Friedman to assemble a case against the hedge funds Watsa said were seeking to undermine him. The group included Steven Cohen’s SAC Capital Advisors and Daniel Loeb’s Third Point.
Some evidence collected in the case included an e-mail from Loeb to Spyro Contogouris, a research analyst named in the lawsuit, which read “die, Prem, die!!!!!” “Bend over,” read another e-mail between Loeb and Adam Sender of Exis Capital Management, referring to Watsa, “the hedge funds have something special for you.” Fairfax sued eight hedge funds and Morgan Keegan for racketeering on July 26, 2006, seeking $5 billion in damages. Jonathan Gasthalter, a spokesman for SAC, said only that SAC was dismissed as a defendant, and the case was ultimately thrown out by the New Jersey courts. “The case was frivolous,” Matthew Dontzin, a lawyer for Third Point, wrote in an e-mail. “We are confident that the dismissal will be sustained on appeal.” Kathy Ridley, a spokeswoman for Morgan Keegan, declined to comment. A call and an e-mail to Anthony Picone, chief financial officer of Exis Capital, also named as a defendant, were not returned.
“We have nothing against short sellers; we short stocks ourselves,” Watsa says. “It took us some time to figure that out, that this group of shorts, these hedge funds, were trying to destroy us.”
Over time, seven of the eight hedge funds Fairfax sued were dismissed from the suit. In September 2012, New Jersey Superior Court Judge Donald Coburn threw out the lawsuit against the remaining defendants, Morgan Keegan and Exis Capital. Coburn said that while “it’s clear here that there was evidence of intent to adversely affect the actual business dealings” of Fairfax, the company wasn’t entitled to damages under New Jersey law. Kasowitz Benson is appealing the decision and expects the appeal to be heard in the first half of next year, attorney Michael Bowe says.
An even greater challenge than fending off short sellers and alleged racketeers is convincing skeptics that Watsa can save BlackBerry—and that it’s worth saving. On Aug. 12, Watsa announced he was stepping down from the BlackBerry board as the company said it would explore a sale, fueling speculation he might use his BlackBerry stake to mount a bid. He stayed quiet for five weeks while he discreetly began to sound out Canadian pension funds and other investors to gauge their interest.
On Friday, Sept. 20, the company announced a writedown of nearly $1 billion for unsold smartphones and said it would cut about 40 percent of its workforce. That sent the stock plunging 17 percent, to below $9, and pushed Watsa’s dealmaking into overdrive. He and Fairfax President Rivett spent the weekend and into Monday huddled with BlackBerry’s executives to try to secure a deal. A letter of intent to buy the company for $9 per share, including a lucrative breakup fee, was worked out on Sept. 23 and announced that afternoon.
“When these things present themselves you have to act quickly—and we pride ourselves on acting quickly,” Rivett said.
BlackBerry agreed to pay the group a fee of 30¢ per share, or $157 million, if it strikes a better agreement with another buyer. The breakup fee rises to 50¢ a share, or about $262 million, if the smartphone maker and Fairfax sign a definitive transaction. Willy Shih, a Harvard Business School professor, calls it a “beautiful” deal for Watsa that shows “Fairfax is pretty shrewd.” Private equity firm Cerberus Capital Management is also interested in taking a look at BlackBerry, a person familiar with its plans said.
Even if Watsa can find partners for his offer, his consortium may struggle to pull together the funding, given the dwindling value of BlackBerry’s assets, says Andy Perkins, an analyst with Société Générale (GLE:FP) in London. Watsa, however, says, “We wouldn’t put our name on the line and we wouldn’t be doing this if we weren’t very confident.” He isn’t revealing what his plans might be to revive BlackBerry, but a few options exist: The company could abandon consumers completely and focus on the enterprise market, where BlackBerry’s security features carry a lot of weight; there may be a Chinese manufacturer in the market for a well-known brand, even if only for BlackBerry’s still-popular Messenger service; Fairfax could sell off the company and its patent portfolio for parts. Or it could do a combination, à la Eastman Kodak: File for bankruptcy, sell off some patents, and reemerge as a barely recognizable, though viable, business. Watsa has said he does not want to break up the company. He is friendly with Mike Lazaridis, the inventor of the BlackBerry and the company’s second-largest shareholder, who resigned as co-chief executive officer in January 2012. Watsa says Lazaridis isn’t involved in the transaction. Lazaridis did not return a message seeking comment.
Watsa says investors should have faith in the bid because he’s done business this way in the past. In July 2011 he and four investors pooled about €1.4 billion ($1.9 billion) to buy a 34.9 percent stake in Bank of Ireland, the country’s largest. “The Bank of Ireland was the only bank that was not nationalized in the country. There was only one bank standing,” Watsa recalls. “Its market cap was down 95 percent or more, and nobody wanted to put money into that bank.” Fairfax’s investment partners in that deal were U.S. billionaire Wilbur Ross, Fidelity Investments, Kennedy Wilson (KW), and the Capital Group.
“We’ve done this many a time before, but when it’s subject to due diligence, you don’t know who’s comfortable and who’s not,” Watsa says. “It was only after the due diligence that our two or three other partners got comfortable.” That investment has paid off, with shares of Bank of Ireland more than doubling since.
“When we invested in Ireland, many people asked us why we put money into Ireland at the time,” Watsa says. “We try to understand the facts, we try to understand the company, we understand the people, and we make our own decisions.” He says the same goes for BlackBerry: “When you have a good situation, the borrowing comes. We’ve done this before, and I think we’ll do it again.”