Fairfax invests $190-million in global food processor AGT

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It's a deal that apparently took 10 months to put together, and some believe is overly generous. But it's one that may scare away the shorts.

Fairfax Financial Holdings Ltd. announced on Tuesday that it is investing $190-million via an interest-bearing security (essentially preferred shares) into AGT Food and Ingredients Inc. While Regina-based AGT (formerly Alliance Grain Traders Inc.) might not be a household name, it's a major global processor of pulses such as lentils, peas, beans and chickpeas. Last year, it pulled in revenue of $1.9-billion.

Fairfax will earn a coupon of 5.375 per cent on the securities, a premium of about 300 basis points compared to the dividend yield on the common shares. The securities have a term of 99 years – a duration one analyst called "bewildering." In addition, Fairfax has been granted 5.7-million warrants exercisable for the next seven years into common stock with a strike price of $33.25 a share (about 28 per cent higher than the current share price). Fairfax gets to nominate a director right away and can nominate a second director if it exercises all of the warrants. That would eventually make it AGT's biggest shareholder with a 19-per-cent stake. AGT's founder and chief executive Murad Al-Katib is currently its biggest shareholder.

On the surface, it appears that Fairfax came away the winner.

"I was, I guess like everyone else, surprised to see the deal done with Fairfax," said Michael Sprung, president of Sprung Investment Management. "I thought it was very generous to Fairfax."

"Perhaps AGT could have gotten a little lower coupon, a little higher strike on the warrants," said Michael Simpson, portfolio manager with Sentry Investments, which is its second-biggest institutional shareholder with 1.4-million shares.

But over all, Mr. Simpson said he likes the deal and said Sentry is sticking with the company. He said that Fairfax approached AGT and it took nine to 10 months to hammer out an agreement. "I think it was a tough negotiation," he added.

What AGT gets from the Fairfax deal immediately is a vote of confidence from one of Canada's best-known value investors in Prem Watsa.

"Fairfax represents a high-quality new strategic partner," Steven Hansen, analyst with Raymond James wrote in a note to clients.

Analysts said the deal also allows AGT to pay down debt, which had been a significant overhang on the company. This hybrid debt/equity investment is considered equity on its balance sheet, so its leverage will go down.

Also of significant help to AGT will be Fairfax's global footprint which will open doors for the company, particularly in India, one of its most important markets.

"Fairfax is also intimately familiar with India, the world's largest pulse consumer/importer, and a strategic market where AGT has long-term ambitions," Mr. Hansen wrote.

India is one of the world's biggest consumers of pulse crops but lately uncertainty has arisen for Canadian exporters such as AGT. India is pushing for pulse crop imports be fumigated with methyl bromide before entering the country. Canadians have consistently pushed back on India, saying Canada's frigid winters negate the need for the pesticide, which is banned in many parts of the world.

PointNorth Capital Inc., a Toronto investment firm that is known for its recent activist campaign on Liquor Stories N.A. Ltd., also revealed a 9.75-per-cent stake in AGT.

"This is not similar to other investments we've done where we've gone in and concluded that a management change was necessary. We have looked at this company and concluded the opposite," said Phil Evershed, managing partner with PointNorth. "This is a high-performing management team and we want them to stay in place."

Sentry's Mr. Simpson believes that the short interest in the firm, which is currently at an elevated 8.9 per cent of the float, according to Thomson Reuters, is set to go down as a result of this deal and that could offer a short-term boost to the stock. He said the short thesis was based on the belief that AGT would be forced to raise equity to pay off debt – a thesis that is now out the window.

"Eventually some of those people shorting it will have to cover," he said.

Mr. Sprung thinks that the money raised from the Fairfax deal may ultimately be put towards making an acquisition.

"I wouldn't be surprised to see something happen in the not too distant future," he said.

With a file from Jacqueline Nelson