LF Partners' Charles Frischer Sends Letter to Atlas Corporation Special Committee

Frischer requests at least a $2.05 increase to the current $14.45 bid.

The following letter was sent to the Special Committee of Atlas Corporation today.

Charles Frischer
3156 East Laurelhurst Drive, NE
Seattle, WA 98105
August 15, 2022

Atlas Corporation
23 Berkeley Square
London, United Kingdom W1J-6HE
Attn:    Atlas Special Committee 
Re:       Poseidon Acquisition Corp Go Private Proposal

Dear Special Committee:

My name is Charles Frischer and my family owns common shares and call options in Atlas Corporation that give us an economic interest in more than 1,349,000 shares. I have been a shareholder in Atlas since July of 2020. I have also been a shareholder in Fairfax Financial for more than 20 years, so I tend to follow the important investments of Fairfax very closely. In this letter I am going to outline why the Special Committee must reject the current $14.45 offer from Poseidon and demand a minimum increase to $16.50, if not more, to consider approving the transaction. 

The management team, including David Sokol and Bing Chen, has done an incredible job creating value for shareholders, even though that value is not fully reflected in the current share price. They have dramatically improved the balance sheet over the last five years. They have done a wonderful job growing the pipeline of new containerships that will be delivered over the next few years; all leased to the very best counterparties in the shipping industry. The company outlined in their latest investor day presentation in March of 2022, that Atlas has a "differentiated business model delivering predictable, through cycle returns". The company produced $1.68 in adjusted earnings per share in 2021 and projected adjusted earnings of $1.82 for 2024 and $2.00 in 2025. I would assume that as the company continues to grow the future size of the fleet since that investor day, earnings would likely come in nicely higher than those estimates. Plus this is before APR Energy starts to really grow. I think with David Sokol's extensive experience in the energy industry it is just a matter of time before this division shines. 

The management team at Atlas has executed brilliantly since David joined the company in 2017 and Bing in 2018. In 2017, Atlas owned 89 containership and as of the 2nd quarter 2022, now controls a fleet of 194 ships with an additional 67 set for delivery between today and 2024. Due to improvements in the balance sheet, Atlas is also on the verge of obtaining an investment grade credit rating. Finally, over the last five years, the company has greatly improved their counterparty risk by diversifying their customer base. 

Prem Watsa, Fairfax Financial's CEO, has long been an admirer of David Sokol and his business acumen. David built a fantastic company at Mid American before selling a majority interest to Warren Buffett's Berskhire Hathaway in 1999. Berkshire paid $2.15 billion in cash and assumed $7 billion in debt to complete that acquisition. Mid American, now renamed Berkshire Hathaway Energy, is now worth more than $90 billion. While David hasn't been employed at Mid American since 2011, many investors, including myself, believe that David laid the foundation for this incredible growth. 

Fairfax initially made a $250 million investment in Atlas in February 2018, less than a year after David became Chairman of the Board. After just a few months of that initial investment, Fairfax committed a total of $1 billion to the company in May of 2018. Fairfax is now the largest shareholder with close to a 50% stake in the company. 

Poseidon Acquisition has put together an amazing group to take Atlas private. The existing investors include Fairfax Financial, Dennis Washington and his family and the key leadership of David Sokol. One Ocean Network Express, a Singaporean investment company comprised of three Japanese shipping leaders 'K' Line, MOL, NYK is the final part of the group. One Ocean Network was formed in 2017 and they have become the 6th largest container carrier in the world. They provide full worldwide service to their customers and are highly profitable. The company earned over $16 billion in 2021 and $5.5 billion in net profits in the first quarter of their 2022 fiscal year. One Ocean Network is the largest customer of Atlas, representing 25% of Atlas' revenue based upon year-end 2021 figures. One Ocean Network has agreed to invest up to $1.4 billion into this take private transaction. 

I believe David Sokol was brilliant in bringing in Atlas' largest customer into this take private transaction. They have a Fort Knox type balance sheet, provide great worldwide shipping services and will be a fantastic operational and anchor financial partner moving forward. This consortium looks to me like the 1927 Yankees with Babe Ruth, Lou Gehrig and Tony Lazzeri. For my Canadian friends, it might be the 1977 Montreal Canadians with Guy LaFleur, Ken Dryden and Serge Savard.

The consortium has total capital commitments of $1.605 billion ($30 million from Sokol, $175 million from the Washington Family, Fairfax Financial has agreed to roll their shares into the transaction and $1.4 billion from One Ocean). Since they already own 68% of the outstanding shares of Atlas, they only need to buy approximately 90 million shares. At $14.45 per share, the cash required is only $1.3 billion. If we assumed they allocated their entire $1.605 billion commitment, they would be paying closer to $18.00. I believe this consortium committed the $1.605 billion upfront so they have all their approvals in place to negotiate a higher bid in a quick and efficient process. In fact, in Poseidon's offer, they thought a final deal could be reach in 2-3 weeks from their August 4th letter. Poseidon is clearly ready to close, with their only requirement being a 10-day due diligence period, which I assume has already begun. 

Atlas is a great company and in their March 2022 investor presentation they highlight how the company is the largest containership lessor in the world and how that scale creates sustainable competitive advantage. The company has one of the youngest fleets, longest contract coverage and a great management team. Of course they want to take the company private. 

In full disclosure, as a Fairfax Financial shareholder, I look forward to being an indirect partner in Atlas for many years to come, should this buyout happen. But is has to be a fair and reasonable price for minority shareholders. Fairfax owns 131.7 million shares of Atlas and assuming a $16.50 final price, that stake would be worth $2.174 billion or $94.52 in Atlas value for every share of Fairfax, given Fairfax has 23 million shares outstanding. Given the low price to book of Fairfax and strong future prospect for the company, I would use some of my proceeds from the sale of Atlas to buy more Fairfax shares. The available discount on Fairfax shares also makes it easier to accept a bid of only $16.50. 

At $14.45 the shares of Atlas are still extremely cheap, despite the 32% premium of the take private offer. Atlas has said they expect to earn at least $2.00 per share in 2025. So they are paying just over 7 times projected 2025 earnings and only 8.6 times 2021 actual earnings for a fantastic business. This is simply too low a multiple for such a good company. I believe the consortium must increase their offer to at least $16.50 to justify supporting this take private deal. In fact, I think they should push for $18.00 per share based upon the value of the company and all the future profits that will be generate by this consortium. Finally, $16.49 is the 52-week high for Atlas and the $16.50 price would simply meet the highest price the shares have achieved over the last year, before any premium. 

If the Special Committee doesn't get such an increase in the price, I suggest you don't bother bringing this transaction to shareholders for a vote. As you know, you will need a majority of the minority to approve this transaction. Of the 90 million shares that would be eligible to vote, no more than 70 million would likely actually vote. Therefore only 35,000,001 shares are likely required to vote against the deal and to stop it from happening. If I were to vote 1,349,000 shares against the existing deal, that would already be 3.86% of the number of shares necessary to strike the deal down. Even without a take out, the prospects for Atlas shareholders are terrific and the company will do quite well over time. We might see a dollar or so decrease in our share price in the short-term, but see 15-20% annual returns over the next 5 or 10 years. 

I know as the Special Committee you will do your duty to fight for minority shareholders and not sell out the minority owners. The consortium is telegraphing to you that they are willing and able to pay more for a great company. I have great faith you will do the right thing for us. 


Charles Frischer

Contact:         Charles Frischer



Source: LF Partners