Onex: Canada's Berkshire Hathaway

by: Larry MacDonald

People are saying now is a good time to buy into Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) while it is undervalued (and/or a good time to buy shares in some of his holdings). The same could be said of another investing oracle and his investment vehicle: Gerald Schwartz, chairman and CEO of Toronto-based Onex Corp (OTCPK:ONEXF)

Even though its shares have rallied by more than 60% in the past two months, ABC Funds portfolio manager Irwin Michael says Onex is still trading at a substantial discount to net asset value. Mr. Michael estimates Onex’s net asset value (NAV) at over $32 per share compared to the current market price of $21.

His estimate of NAV is based on a sum-of-parts analysis. He adds up cash at the parent level, market value of publicly-traded investments, book value of the private-equity investments, value of the “management fee and carried interest on approximately $7.3 billion of third-party capital,” and deducts 20% for a holding company discount.

With this undervaluation comes a long history of performance. Since founding in 1984, Mr. Schwartz and team have:

  • seen a 3,136% gain in Onex shares over the twenty years to Dec. 31, 2007, compared to 601% for the S&P/TSX Composite and 833% for the S&P 500
  • returned 3.3 times invested capital and generated a 29% internal rate of return (IRR) on realized and publicly traded investments, using a value-oriented, active investment strategy
  • completed more than 200 acquisitions totaling approximately $34 billion

“Aligning shareholders’ and management’s interests is one of the key drivers of the company’s outstanding track record,” says Mr. Michael. The management team owns 28 million shares and reinvests 25% of gross carry proceeds in Onex stock. Any stock options granted are exercisable only when Onex shares are at least 25% above the exercise price. Management also has more than $350 million invested in Onex businesses alongside company funds and its limited partners.

Current investments include public companies such as Celestica (NYSE:CLS), Cineplex (OTC:CPXGF), Spirit Aerosystems (NYSE:SPR), Emergency Medical Services, Skilled Healthcare and private investments such as Sitel (SWW), Cosmetic Essence, Center for Diagnostic Imaging, Carestream, the Warranty Group, Hawker Beechcraft, Tube City, Allison Transmission and Husky Injection Molding.