Friday, 15 February 2013

Fear and the unknown . . . mitigating equity risks via pref shares

A quick note today to catch up after I rode Akuna Bay yesterday. A nice day in the northern fringes of Sydney and it put me in a good mood for weekend ahead. I'm heading up with my bike kit to the Blue Mountains to get some hill climbing efforts in.

Yesterday I took my sister in law for her second hill climbing session and as you'd expect the improvement was significant. It put me in mind of the adage about fear coming from the unknown. If you remember Andy Schleck's face before the start of the final time trial for the 2011 TdF you'll know what I mean. The Schlecks had failed to ride on the course during spring and therefore for all their efficiencies as pro's they still had lots of questions about the course as the electronic clock ticked down for the start of the ride. Cadel Evans had ridden the course and on the platform looked calm and determined. The rest is history.

It's the same for all riders and that's why it's often good to revisit hills soon after a first ride to see what extra you can get out of it. Once the fear goes you're free to ride. This weekend I'm hoping to set some new PB's on the Mt Irvine to Bells Line of Road ride for these very reasons.

Fear is a strange thing and the market has lost it. The familiarity with how the central banks of the world behave has left the market with expectations of continual bailouts when things get tough. Bernanke has clearly got what he wants, but a note of caution that riders familiar with a particular course disrespect it at their own peril. 

Finally, continuing my theme of the past week or so comes yet another M&A deal. This time the chief benefactor of the US governments bailout of AIG Mr. Warren Buffett teams up with  3G Capital, a private equity firm backed by Brazilian billionaire Jorge Paulo Lemann to take Heinz private. The bid values Heinz at $28bn, including $5.1bn of net debt, with Buffett (Berkshire) and 3G will contributing $4bn of equity each, and Berkshire buying another $8bn to $9bn of preferred stock paying a 9 per cent coupon. Buffett loves prefs and especially those that pay him an above market rate of return. He did the same on numerous occasions. His only risk is that Heinz is too geared to pay back the leverage on it's balance sheet. He's now first in line in the case of a bankruptcy and he's smart enough to know that the equity value of some of the Heinz brands far exceeds the risk he has taken on. Good for him. 

The lesson you should get out of Buffett's actions is you can buy equity if you like, but if you get the chance always have preference shares or convertible bonds in your portfolio.


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