A worker uses a lift while painting the Seaspan Pacer tugboat in North Vancouver, B.C., in 2013.Darryl Dyck/Bloomberg
When Fairfax Financial Holdings Ltd. inked its latest contrarian bet on a container-shipping business, it was motivated by more than just a turnaround story.
The Toronto-based insurance and investments company founded by Prem Watsa is no stranger to billion-dollar big bets on insurance companies or firms such as BlackBerry Ltd., but its latest $250-million (U.S.) debt and warrants investment in Seaspan Corp. has more to offer than just profit, the company says. It could create new opportunities in the United States, where Fairfax's strategy of taking stakes in undervalued companies has yet to be built out.
Mr. Watsa said that coming into Seaspan alongside like-minded entrepreneurial investors was even more motivating than the chance to be a consolidator in the global container-shipping business.
"This deal will help us in terms of making similar deals with the right type of people in the U.S.," Mr. Watsa said, adding that the company has been a lot more active in Canada in the past.
Seaspan transports goods around the world in in massive metal boxes on behalf of big shipping lines. While Seaspan's major offices are in Vancouver and Hong Kong, its largest shareholder, with about 45 per cent of the shares, is U.S. billionaire industrialist Dennis Washington and his family. Their Washington Companies conglomerate is stacked with North American-headquartered businesses such as mines, machinery and a regional railroad in Montana. In addition, the company provided the initial venture capital that got Seaspan up and running more than a decade ago.
It's the latest example of the country's largest investors broadening their web of relationships as a way to access deals in a competitive market where public and private-equity valuations are high. More pension funds and other investment firms are relying on their reputations and long-term approaches to do repeat deals with trusted partners.
For Seaspan and its investors, Fairfax will provide much needed capital. The container-shipping industry has faced a series of challenges in recent years, including the overbuilding of increasingly large ships that pushed prices down and squeezed profitability for shipping lines. Bankruptcies and mergers eventually followed.
In the past five years, these tie-ups have consolidated about 30 liner companies down to a handful of players, or two. Seaspan, which leases, operates and manages vessels on behalf of many of those large shippers to help them absorb supply and demand changes, has also been hit by these changes. In the same amount of time its share price has crested and fallen by more than 70 per cent to less than $7 (U.S.) a share.
Mr. Washington brought this challenge to David Sokol, a former top lieutenant of Warren Buffett who has experience building businesses. Mr. Sokol, unimpressed by Seaspan management's response to market conditions, agreed to join the company's board. He also says he persuaded Mr. Washington to take a more pro-active approach to turning the company around.
"The downturn in the industry was pretty obvious, and they should have been raising equity and paying off debt to provide themselves more financial flexibility to take advantage, frankly, of the downturn," said Mr. Sokol, who has secured a new CEO for Seaspan. "We just recently purchased some ships at 50 cents on the dollar to what they would have been a couple of years ago. We could have done a lot more of that."
Seaspan now aspires to be a further buyer in the industry and grow its fleet of nearly 100 ships that are used by industry giants like A.P. Moller-Maersk AS and China Shipping Container Lines Co., Ltd. Mr. Sokol, who knew the team at Fairfax, reached out to the company seeking capital to take advantage of some of potential acquisitions. In exchange, the warrants part of the deal provides Fairfax the ability to own up to 25 per cent of the company if fully executed.
Mr. Watsa and Mr. Sokol both say that the shipping industry, which is driven by gross domestic product growth, is turning a corner as old, small ships are scrapped and demand for goods picks up.
"We see a long runway here where the U.S. starts moving up. And Europe is picking up significantly," Mr. Watsa said, adding that Fairfax is ready to take advantage of economic growth in the United States amid a lower corporate tax rate and plans to boost infrastructure spending. "It hasn't been a stock-pickers market – a value market – in five or six years, and perhaps that's in the process of changing."
Along with the container-shipping business, Faifax has also been trying to buy the deep water port and rail line leading to Churchill, Man., along with partners. Right now, the assets are largely unusable as a result of flood damage and current owner, Denver-based Omnitrax has yet to settle with the government over the cost of repairs. Fairfax was drawn to the prospect that Churchill could be an instrumental port if the northwest passage becomes a crucial trade pathway as climate change continues.
Fairfax says negotiations have been slow owing to the number of stakeholders and parties involved. The company wants to get the deal done and the track fixed before next winter, but stresses that the deal must be economic and make business sense.