|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||18,350||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
|Entry||08/07/2007 08:00 AM|
|Oscar - How do you think about valuation for BAM? I find the lumpiness in earnings make traditional multiple analysis tricky. Is sum of the parts or some sort of normalized cash flow analysis the way to go? I'd be curious to hear what you think BAM is worth today and what you think it's appreciation potential is over the near and longer term.|
|Entry||08/07/2007 09:04 AM|
|As I mentioned in the write-up, I think that operating cash flows, including cash flows from exits, is the best metric to use for valuation. Whether the source of cash flows is a hydro power plant, asset management agreement, a dividend, or an exit, operating cash flow provides a fairly apples-to-apples figure to evaluate the business units and each of their contributions, without the vagaries of tax accounting. Analogous to Buffett's "owner earnings", this shows what cash is produced by the business and what is available for re-investment.|
Even this metric is not perfect though, as some assets don't produce much cash until they are sold, or the cash production changes based on their financing. Flatt (the CEO) actually addressed this specific point in the Q2 shareholder letter, which I'll excerpt in the next posting.
In terms of valuation, I think that the operating cash flow figure can be analyzed with a multiple or DCF analysis just as you would any other cash-producing asset. Consider a highly reliable cash-producing asset such as a pipeline or toll bridge that might grow at the rate of inflation or slightly more (since you might have a modicum of pricing power). Fair value might be something like 9-11x cash flows. But if the cash flows were growing at say 15% per year, the multiple should be higher, say 14-16x. The multiple is just a shorthand for a DFC analysis, into which you can plug your risk-free and discount rate assumptions.
Each of BAM's existing cash flows has the characteristics of a toll bridge or pipeline -- long-lived assets producing very reliable recurring cash flows that should grow at least as fast as inflation. The aggregate cash flows are growing since they continually make new investments, and each new cash flow stream is also highly reliable. This is not dissimilar to Buffett's strategy of accumulating high-quality slow-growth businesses to build value.
Thus I think that putting a suitable multiple on the aggregate cash flows makes sense. Given their growth rate, quality assets, and shareholder orientation, I think that something like 14-16x operating cash flow represents fair value, and that fair value has been increasing at 15-25% per year for 5 years, and should continue this rate into the future. Considering their multiple is currently less than 10x, I think there is currently 50% upside to fair value, and the opportunity to have that fair value grow at very acceptable rates going forward.
|Subject||Financial Reporting, 1/2|
|Entry||08/07/2007 09:05 AM|
|From the Q2 2007 shareholder letter:|
INVESTMENT RETURNS AND FINANCIAL REPORTING
We are often asked about the make-up of our cash flow from operations, and in particular, whether we focus on current cash flows or cash flows on a total return basis. The short answer is that we focus on both, but predominantly on total return.
These discussions usually include a question about how shareholders should look at one-time gains. Over the last number of years, one-time gains have occurred on a recurring basis, but have been irregular. As you will see below, the reported amount of one-time gains in our cash flow statement far understates the value being created in our equity base.
To date, for simplicity purposes, we have focused our reporting to you on the cash flows generated on an ongoing basis from our operations and realization gains as they occur. Given our continued focus on total return investing, we thought it appropriate to explain how total return accrues to the shareholders as we invest capital and how it is reflected (or not) in our financial results. The concept is quite simple. How it works in a large organization is less simple to explain, but we will attempt to do this.
On average, we currently invest capital, excluding management fees we generate (both ours and our clients) at an approximate 12% to 15% leveraged return (although we certainly try for more). We assess returns on a total basis – meaning that we include the present values of cash flows received over the life of our investment as well as the “terminal value,” which represents the value of the investment at a future point in time. This is commonly referred to as an internal rate of return, or “IRR.”
As you know, we focus on assets that we believe will generate increasing levels of cash flow over time, and that appreciate in value as a result of the characteristics of these assets. In many cases, the current cash return from an investment at inception may be well below the targeted IRR. This means that for accounting purposes, the returns that are reflected in our financial results are typically significantly below our internal rate of return in the early years of our ownership. Over time, as the cash flows increase, higher returns will be reflected in our reported results.
What are usually not reported in our financial results are increases in the values of our investments over the amount of the original invested capital. The values of assets such as ours typically increase by an amount equal to the capitalized value of the increase in the associated cash flows. This appreciation in value is generally not reflected in our financial results until such time as we sell the asset, at which point we will record a realization gain. And, as discussed in our letter of February 10, 2006, we are generally inclined to hold assets indefinitely, preferring to monetize the accrued value by refinancing the asset as opposed to an outright sale. This has the added benefit of deferring any accrued tax liability, but as a result of no crystallization event, the accrued value may never appear in our financial results.
As an example of the above, assume we purchase an asset for $1 billion, at an initial return of 6%, and finance the acquisition with $700 million of debt with a similar cost. This investment will generate an approximate 12% IRR if the cash flows from the asset increase at 2.5% per annum (inflation only) over a 20 year period and capitalization rates remain unchanged. In this example, our reported cash flows will initially be approximately 6% on our equity investment, and will increase over time, with such increases being reflected in cash flows as they occur. The value of our investment will increase by approximately $600 million over the 20 year period (assuming capitalization rates do not change), but this increase will not be reflected in our financial results unless we sell the asset (if ever).
|Subject||Financial Reporting, 2/2|
|Entry||08/07/2007 09:05 AM|
|Accordingly, a very important component of our return, which would otherwise represent nearly 60% of our reported cash flows over that period of time, may never be reflected in our financial results.|
In addition, we have many assets that do not produce any meaningful annual cash flows on a current basis (sometimes they are negative starting off), and therefore further depress current cash flows. The amount of equity invested in these types of assets on our balance sheet today is more than $4 billion. We believe these assets, because of their risk profiles, will earn annualized returns in excess of 15% over the longer term on a leveraged basis. Included in this group of assets are our hydroelectric and commercial property development projects; residential, agricultural, timber and higher and better use lands; other development assets; investments which pay no regular dividends such as our investment in Canary Wharf Group; and our limited partnership interests in funds which are opportunistic in nature (like our restructuring fund) and therefore do not generate meaningful current earnings.
We also purchase securities of companies in our areas of operations when we believe they trade at less than their intrinsic value. At best, the dividends paid by these entities generate a 2% return, which is included in our reported cash flows. It goes without saying that it is not our expectation to merely earn a 2% return when buying these securities. In these situations, we believe the underlying assets that we are acquiring will generate total returns for us of at least 15% which, if we are correct, will ultimately accrue to us.
The implications of this analysis are twofold. The first implication is that the cash flows reported on a meaningful amount of our capital are not, in our view, representative of the total return that we expect to receive over the life of the investment. This is particularly so for newer investments, development initiatives, and securities investments. The second implication is that realization gains, when they do occur, form an important part of our total returns and typically represent only a small portion of the overall increase in intrinsic value that is built each year within our operations.
|Subject||Compare and Contrast|
|Entry||08/07/2007 02:46 PM|
|Thanks for the idea. I would love to hear your take on how BAM compares with LUK (and to a lesser extent) BRK from a method of operations, management quality, valuation, long-term return potential, downside risk perspective.|
|Subject||Re: BAM vs. LUK|
|Entry||08/07/2007 03:48 PM|
|I have not followed LUK nearly as closely as BAM over the past few years. But let me take a shot at a comparison off the top of my head.|
I would say the primary difference between the two is that LUK seems geared towards increases in book value, while BAM is focused on recurring cash flows and increases in equity are secondary. I think this is partially driven by the accounting treatment of their preferred asset classes. If portfolios of commercial real estate were marked to market, it may be different. But I think that BAM has much more capability for multiple expansion, whereas LUK will be more tied to book value.
Another important difference is attitudes towards debt and leverage. BAM clearly embraces debt and leverage, and an investor in BAM must be comfortable with it, whereas LUK uses it sparingly. LUK is running debt:equity of around 0.35 while BAM is at around 3:1. I think that BAM is safe (as does "safe and cheap" Marty Whitman), but leverage is leverage.
With LUK, my impression is that the exit is clearly in sight when they get into an investment, and that they are generally more transaction oriented. BAM could conceivably hold many of their assets for decades, and seem to prefer to buy, hold, and manage. This isn't to say that BAM doesn't have a lot of transactions nor that LUK couldn't hold something for the long term, but it seems to be a different preference. BAM has proven adept at building up asset-specific management expertise, which is already proving to be very valuable for deriving management fees from managed assets, a trend that I expect to continue. I just don't see Cumming and Steinberg managing a group of 100 operational managers.
LUK seems to have a "two guys in a quiet office" approach, and decision making seems very centralized. Given their age, succession is a big question for me. BAM on the other hand seems very distributed, Flatt operates as more of a conductor. Their management team must be wide and deep and cover many facets including deal-making, financing, capital markets, and expertise in each asset class. I feel more comfortable about BAM being an organization with a singular purpose rather than a hodge-podge of investments, which I think provides better longevity and succession. BTW, Flatt is only 41.
I personally find LUK to be almost completely opaque. I can never seem to get a handle on what they're doing, even after they explain it. Rail cars, Russian Pepsi bottlers, California wine, distressed telecom... nobody can argue with their results, but I think a strong element of faith is required. BAM on the other hand I find to be very transparent. Their businesses are quite simple. They provide copious amounts of supplemental data on their operations, at a high level and for all of the business units. Their larger partially-owned subsidiaries (i.e. BHS and BPO and soon the infrastructure partnership) are publicly traded and thus provide additional transparency. Flatt is obviously a value investor and Buffett disciple and follows the "if our positions were reversed" principle when presenting results.
BAM has pretty clearly defined asset classes where it focuses (more true recently), whereas LUK obviously feels free to participate anywhere they want.
Things they have in common are an international reach, deal-making, shareholder orientation, and paying little in the way of taxes (though the way they each go about avoiding taxes is quite different).
Well I guess that is more contrasting than comparing...
I am a lot more comfortable with the cash flows and asset types at BAM, but that may just be preference. I also see a tailwind as municipalities and governments around the world seek financing for, and seek to upgrade or replace, infrastructure assets. I would never bet against LUK but I have no idea what they're going to get into next, and at over 2x book I find them too expensive.
|Subject||Re: BAM vs. BRK|
|Entry||08/07/2007 04:16 PM|
|I guess a lot of the same comments could apply to BRK. Attitudes about debt, centralized decision making, variety in asset classes, and size of management team are similar at BRK and LUK and different at BAM. Though BRK is not without leverage, considering its insurance operations, and debt in some subsidiary operations.|
It would not surprise me to see BRK and BAM competing on some deals, as infrastructure type assets both domestic and abroad would appeal to both of them. For instance I would think that BRK's MEC would love to have BAM's hydro power assets, and I could imagine BAM looking at PacifiCorp when it was available. Of course Buffett would be paying cash from retained earnings while BAM would be financing the deal with 7% debt.
The main similarity between BAM and BRK is the focus on free cash flow (i.e. owner earnings) regardless of the accounting treatment, and the building of shareholder value by establishing numerous diverse streams of recurring, high-quality, growing free cash flow. Buffett does it with carpet and candy while BAM does it with hydro power and real estate, but I think it is the same concept.
I think that BAM's international presence is an advantage over BRK, especially in the current market environment. BAM is just getting into Australia and is looking at Asia, and could be a lot more diversified geographically in a few years, which I find very appealing.
One thing that LUK and BAM have in common different than BRK is the willingness to take simple actions to benefit shareholders such as buybacks, dividends, and spin-offs. I don't think you'll see tens of billions of surplus capital accumulate at either LUK or BAM.
The downside of each of the three companies is interesting to compare. BRK's downside is probably minimal in almost any market event, the minimum conceivable fair value is probably still a premium to book. I think that LUK has to continually justify its premium to book, and it does, but that would seem to be a floor valuation if something went wrong or if the principals depart. BAM, at 3x book, might have more downside here, but the market value of many of their assets is far in excess of book value, so if the assets were marked to market, their premium to book would be much less. The floor valuation would probably be a liquidation value of their assets which is probably further down than BRK or LUK but not all the way to GAAP book value. But in all of these scenarios we're talking about a catastrophic impairment of huge amounts of assets or managers.
BAM is probably focused more in areas that are susceptible to natural or man-made catastrophies than either BRK or LUK. I have to assume that they have decent insurance (including terrorism) given their infrastructure orientation, and this is probably a nonzero risk.
Obviously with the leverage, if BAM somehow got upside down on a substantial portion of their assets, things could go sour quickly. This would seem to be more likely early on in an acquisition, so a large, bad acquisition with a lot of leverage could really hurt them. They have been swinging bigger as they've been getting bigger, so this is a potential risk.
Enough rambling. Hope that answers your questions!
|Entry||08/08/2007 08:49 AM|
|Here is a transcript of the last CC in which Flatt addresses concerns about credit and the debt markets.|
|Entry||08/08/2007 04:23 PM|
On the spin-off of the infrastructure assets, will BAM retain the GP? If so, what are the management and incentive fees?
|Entry||08/09/2007 09:57 AM|
|Q: On the spin-off of the infrastructure assets, will BAM retain the GP? If so, what are the management and incentive fees?|
A: Here is a link to a diagram showing the ownership structure of the spin-off:
I think BAM will have 100% of the GP and 40% of the LP. This is a fairly typical structure for them based on other deals.
If you search lower in that document for "Infrastructure GP LP" you can get the full text of the incentive structure.
It looks like they get a 1% fee for cash received in excess of costs up to a certain cash value per period, then above that there is an 85/15 split up to a second tier, then a 75/25 split above that. The dollar values on the tiers are not yet available.
This too I believe is a fairly typical structure for them.
|Entry||08/13/2007 07:10 PM|
|Thank you for the questions. Of the names you mention, I'm most familiar with Macquarie.|
I have looked at the various vehicles from Macquarie and one thing I've never quite been able to do is understand the unit economics of each of their investments and see how they add up to provide the reported consolidated EBITDA and cash flows. This isn't to say that their cash flows are insufficient or that anything is amiss (as suggested by Chanos recently), but I just haven't been able to get from A to B. I find their financials to be very opaque, with lots of deals and partial ownerships and spin-offs, but the results reported at a high level, without the detail I need to get comfortable, but that might just be me.
I do think that management should eagerly provide everything an investor needs to understand the investment, and I believe BAM does this in spades, they practically spoon feed analysts.
In contrast to Macquarie, BAM is structured as a total return vehicle, not a high yield investment, and I think it can get dangerous to obligate yourself to a high dividend yield when the underlying business has a lot of transactions and variance (true of MREIT's, BDC's, MLP's, etc). I am more comfortable with BAM for that reason, they are a "retained earnings" vehicle and they have more discretion over what happens to their surplus capital because the dividend yield is only about 1.4%.
Also, perhaps most importantly, the unit economics of each of BAM's deals are available, and you can put them together to see how the whole adds up to the sum of the parts. Let me post the unit economics of one of their deals in another message.
Hope that addressed your questions. I am not that familiar with B&B, MFS, and Challenger. If you care to raise more specific questions about them I'm happy to give them a shot.
|Subject||re: 1985 to 1995|
|Entry||08/13/2007 07:28 PM|
|The company has a long history going back decades. In the 80's and 90's they were involved in some lines of business that are present today, such as natural resources and power generation, and other lines of business that are either absent or insignificant today, such as merchant banking and brokerage. They had different management and a different focus, and a lot of that is probably just water under the bridge at this point.|
I would say that their success over the past ~7 years was a combination of superior leadership, focusing on shareholder value, and a few tail winds. It is important to mention that BAM's results over the past 10 years were not achieved in a difficult environment. The combination of low interest rates, relatively easy credit terms, boosts to their held assets, and solid deal flow has helped them. The long bull market for commodities also allowed them to unload some resource based assets and interests at very attractive prices, which gave them capital for new opportunities.
That said, I think they made many deliberate changes that made a huge difference, and I attribute these to Bruce Flatt who formally took the reins in 2002. Focusing the organization on returns on equity and recurring cash flows helped to make sense of the hodge-podge of assets and helped them choose the ones that provided the most shareholder benefit, and embark on strategies such as the focus on management fees. This encouraged them to divest the "mines and forests" and focus instead on long-lived cash flow producing assets. They have also shown to be very savvy in buying assets when they were temporarily distressed (i.e. good price discipline). I've just been impressed with deal after deal from them, in an environment when I am sure that other entities are willing to pay more than they are.
|Entry||08/13/2007 07:42 PM|
|In mid-2006, BAM bought Transelec, which delivers electricity to approximately 99% of the Chilean population.|
The purchase price was $2.5 billion, which was financed with $1.0 billion of debt (about $600M assumed and $400M raised) and $1.5 billion in equity. BAM provided 30% of the equity, and raised the other 70% from their institutional investment partners.
The asset produces about $195M of cash flow after cash costs such as debt but before non-cash costs such as depreciation. BAM manages the asset and charges a management fee which I estimate to be around 1% after cash expenses (similar to the terms of their infrastructure partnership). The cash flows are controlled a favorable rate regulatory environment, and BAM also gets regulated returns on invested capital for additional cap ex.
The returns for the different stakeholders breaks down as follows. The debt holders are secured by secure, unique, long-lived, and appreciating asset financed at a reasonable debt/equity of about 0.67. Assuming the operating cash flow is split proportionately between the equity partners (i.e. 30/70 for BAM/others), BAM's equity partners get a cash return of around 11% (i.e. $136.5M of cash flow, minus ~$25M mangement fee, on an equity investment of $1.05B). BAM's 30% equity interest gets about 18% (i.e. $58.5M cash flow plus ~$25M in management fee on an equity investment of $450M). Meanwhile the cash flows from the asset should grow steadily according to inflation and population growth.
There is some slop in these numbers, I'm guessing on a few items such as the exact management fee and break down of cash flows, but it adds up to a picture that makes sense. Each stake holder is getting a reasonable return, and BAM's ROE is squarely within their 15-25% target and seems sustainable. The equity partners get a reasonable return, and the asset was acquired for about 13x operating cash flow.
Going forward, these terms may not be achievable, but overall none of the present terms strike me as unreasonable or unsustainable.
|Entry||08/14/2007 10:13 AM|
|The accounting on the infrastructure deals usually merits some examination. For example the financials of the Dulles Greenway (a toll road in the Virginia suburbs owned 50/50 by two Macquarie entities), are available. It shows that the toll road is not currently profitable nor cash flow positive, yet most of the financing is through zero coupon bonds. The bank bought the asset in 2005 and then sold 50% of it to the Macquarie Infrastructure Partners (MIP) in 2006, and there is not a lot of data on MIP available. Meanwhile Macquarie bank doesn't provide details of their unit economics of that deal.|
Not suggesting that anything fishy is going on, though a skeptical analyst could look at the non-cash accounting, lack of profitability and cash flows, and insider deal to a private entity and develop theories.
This is where I believe BAM really stands out, by providing excellent transparency, and with deals that are pretty clearly oriented around recurring cash flows and not accounting gimmicks.
|Entry||09/14/2007 10:57 AM|
|I thought I'd post some updates for anyone still following this stock.|
BAM has a group of private equity and restructuring funds that are starting to represent a meaningful amount of its capital and income. The restructuring group is named Tricap. One of Tricap's funds (in which BAM has a 48% interest) participated in the restructuring and recapitalization of Stelco, Canada's largest steel maker, following a bankruptcy. Stelco was recently sold to US Steel for $38.50 per share, and Tricap's cost basis was reportedly about $6.00, representing a 6.4x return on investment in less than 2 years. Based on the success of this and other deals, they are launching the "Tricap II" fund, and are looking for $1 billion of institutional money:
I think this is interesting for those that think BAM is just about commercial real estate.
BAM is anticipating spinning off the infrastructure partnership ("BIP") in "early to mid" October. We still don't have final terms on the deal, but I have some thoughts on the motivation for this deal.
BAM is positioning themselves to attract large pools of institutional money, particularly in the US, and are creating vehicles that meet the requirements of those investors. The structure of BIP seems targeted towards these investors as a pure-play in certain infrastructure assets (primarily timber and electricity transmission). While the spin-off will not be accretive initially (since it basically involves moving assets at fair value into another entity), I believe this will allow them to attract larger pools of money. This is consistent with their other "pure play partially owned public entity" holdings in BPO and BHS.
BAM's assets under management was around $77 billion in Q2 and will be around $83 billion after Multiplex closes. However, around half of these assets are directly held or are low-fee specialty funds. BAM is clearly looking to increase their asset base to include assets from which they can derive more fees.
I think BAM is extremely well positioned to take advantage of the current turmoil in the credit markets. They have ample liquidity, fresh capital, and excellent deal flow in many areas.
|Entry||09/26/2007 12:49 PM|
|The stock is up around 21% since the write-up, but I believe this is the beginning of a long and happy story for BAM longs. I think the recent price increase is primarily due to the smoke clearing around the credit crunch as investors realize that BAM's exposure was not tremendous. The stock is still very cheap in light of likely future improvements in its business.|
BAM gave an investor presentation on Sept 20, and the slides make for interesting reading:
They lay out their 5-year strategic plan. The slides are brief and make for easy reading, but I'll provide some comments.
One important thing that has changed for BAM over the past 5 years is that they now have audited track records in many asset categories, whereas before they did not. BAM has its roots in commercial real estate and has entered the asset management game on a large scale fairly recently. Professional asset managers here on VIC will recognize an audited track record as one of the most important milestones to reach in terms of attracting assets to manage, and typically allows an asset manager to enter the major leagues. This in combination with entities geared specifically to attract large pools of capital such as the pending infrastructure partnership spin-off helps us understand how BAM is going to meet their AUM goals.
The presentation shows a current $28 billion of third-party equity AUM, and goals for increasing this to $100 billion within 5 years, which includes converting $20 billion of currently held assets into third party equity. There is also a goal of achieving fees of 1.5% on these assets, or a management fee income stream of $1.2 billion. This figure is close to $90 million today, so this represents more than 13x growth in 5 years. While this seems to be a lofty goal, I believe BAM is very well positioned to achieve this goal and they break down their strategy in detail.
The presentation also shows that BAM intends to invest their own ~$20B of equity to achieve another $2.8B of cash flows, a cash ROE of 14%, way below their recent 5 year average of 37%. This in combination with the $1.2B of management fees adds up to $4B of annualized cash flows in 5 years. This excludes what they call "NAV creation", which is appreciation and back-end cash flows such as from exits and refinancings. You can apply what multiple you wish to this $4B cash flow figure (BAM suggests a range of 10-25x and they are current at around 11x), but this adds up to 5 year returns that range from good to spectacular for BAM equity holders.
|Entry||12/04/2007 10:52 AM|
|Some updates for anyone following this.|
BAM's Q3 report showed fairly weak results across many units, but I believe the results are largely explained by cyclical weaknesses, not the dramatic impairments that many expected. The worst impairment was a "residential land provision" of $42M, associated with writing down some US residential real estate land in connection with their luxury home builder operations (BHS) which of course are sucking wind. But aside from that, there were no impairments from the assorted sources that we've seen in other companies -- sub-prime loans, CDO's, CMBS, mark to market impairments, etc. So far it looks like my thesis is reaffirmed that BAM, as a direct owner and manager of hard assets, simply doesn't have a lot of exposure there.
Power operations were impacted by abnormally low hydro conditions during the Q. Other hydro operators reported similar results, and those of us who live in the NE US know that we had near-drought conditions during Q3. The year-ago quarter had unusually high hydro conditions, making the year-over-year comparison a bit skewed. These results are very lumpy in the short term but very reliable and very long tail. I'm very excited about the power generation segment.
On Nov. 30, Brookfield Power completed the financing for Prince Wind, the largest operating wind farm in Canada. Wind power is relatively new for Brookfield Power which is currently primarily in hydro, and provides another area for growth. Financing wind power projects is often difficult because of the irregular power production. BAM figured out a way to fix the financing for 5 years and sell the power in 19-21 year contracts.
Through Brookfield Power, BAM is clearly creating a diversified pure-play in renewable power, which is particularly attractive in the current political climate. Following their strategy of building and spinning off pure plays in various asset classes, I expect this to be spun off in subsequent years. Assets in Brookfield Power are around $5 billion and they've stated a goal of building this up to $10 billion.
On Oct 31, BAM exited their Stelco investment (mentioned here earlier) for a pre-tax gain of about $250M during Q4. Also on Oct 31, they monetized their interest in the Brazilian stock exchange (the "Bovespa"), which IPO'ed and provided about $160M of proceeds. During Q3, BPO (the commercial property subsidiary) refinanced one of their premier properties (One Liberty Plaza) and was able to realize about $240M of cash from the property. Their ability to close a major refi during the darkest days of the credit markets demonstrates their strong access to capital. These three transactions alone raised $650M of fresh capital, giving them dry powder during this time when opportunities are rife. They ended the quarter with about $2 billion of liquidity and their operations should produce something like $250M of free cash flow per quarter. I am sure they are busy making deals in this environment of higher spreads, constrained capital, and widespread distress and panic.
Fraser Papers is a small pulp, paper, and timber operation that has been crushed by not only weak market conditions but very unfavorable US/CDN exchange rates. Their Q3 was the worst reported quarter by any company that I've ever seen that was not actually in bankruptcy. BAM bought more of Fraser equity to bring their ownership up to 56% and has consolidated Fraser on their own financials. Fraser recently announced a rights offering to raise capital (at 30% of book value) to pay down debt. This looks to be a disaster so far, but it is a small part of BAM's capital base and they obviously seem intent on supporting the entity until the cycle turns.
On Nov. 19, BAM announced the acquisition of KG Redding, "an investment manager of North American and global real estate securities with more than $6 billion in assets under management, for consideration including $80 million cash and Class A limited voting shares of Brookfield and potential contingent consideration based upon future performance." BAM has a stated goal of bringing their assets under management up to $100 billion within 5 years, and this helps them move toward that goal. Offhand, paying 1.3% of AUM sounds like a pretty decent price, and demonstrates BAM's ability to make deals during terrible market conditions.
Overall I'm very pleased with how things are progressing despite the volatile stock price. I think 2008 will be very interesting to watch.