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Brookfield Reinsurance Ltd. is asking its shareholders -- many of whom hold a small number of shares as a result of BNRE's spinout two years ago -- to approve the issuance of almost 102 million exchangeable shares that would be available to BN shareholders on a 1-for-1 basis during an offering or offerings in the 12 months following BNRE's Aug. 17 annual meeting.

BNRE shares are already exchangeable for BN shares, an arrangement intended to prop up the nascent insurance business's stock while it developed its business. As a result of this "paired" arrangement, the two stocks generally trade within similar ranges. The June 2021 spinout to create a ticker for an insurance/reinsurance/annuity business that barely existed at the time was very small, producing a BNRE share count of just over 10 million.

The company needs shareholder approval for the plan because the Toronto Stock Exchange requires it "where the number of securities issuable exceeds 25%" of the issuer's outstanding securities at the time. If it were approved and all the reverse-exchangeable shares claimed, the BNRE share count would increase by about 1,000%, to ~112 million. The exchange process is intended to prevent any dilution to BN shareholders as the exchanged shares would simply change tickers.

In theory, the slight premium BNRE shares have generally enjoyed over BN shares due to the original "paired" exchange provision would provide an incentive for reverse exchanges, but the premium is unpredictable and usually very small. In fact, at Friday's close, BN was trading slightly higher than BNRE, making any reverse exchange a money-loser.

It's understandable that Brookfield would want "to increase the equity base and market capitalization" of the insurance sub from its tiny starting point, but it's not clear what the incentive will be to participate in these reverse exchanges. BNRE is based in Bermuda, so the reverse exchanges might appeal to investors in tax havens who are subject to unrecoverable withholding taxes by the Canadian government on their BN dividends. Exchanging them for BNRE shares would eliminate this withholding penalty.

But BN and BNRE both pay pretty puny dividends following the BAM spinout ($0.28 per year at present, a yield of 0.8%), so an entity would have to exchange a pretty hefty block of BN to make it worthwhile. Assuming the proposal passes, and Brookfield big whigs control enough BNRE shares to make it a pretty safe bet, it will be interesting to see what the uptake rate is. Maybe it will be the big whigs themselves who take advantage. It would not be the first time a spinout or arcane stock swap worked to their advantage.

As expected, the proposal to issue not quite 102 million new BNRE shares available for exchange to BN shareholders on a 1-for-1 basis passed at yesterday's virtual BNRE annual meeting. Once the required NYSE and TSE paperwork is done, BN shareholders will be receiving the offer.

A couple of oddities for which no explanation springs immediately to mind other than Brookfield's normal inscrutability:

* No mention of the vote is included in BNRE's press release coming out of the annual meeting. The press release contains only the results of balloting for board members. You have to go to the filings on the SEC website and open the Form 6K filed yesterday to find the results. Of a little more than 6 million votes cast, 174,486, or 3%, voted no.

* The public offering is for 40 million shares, less than half the total authorization. I'm guessing that means the other ~62 million are already subscribed, by institutional partners and/or insiders.

As mentioned in the original post, the immediate incentive to exchange BN for BNRE would be to avoid Canadian withholding tax on the identical dividends with BNRE based in Bermuda. This would only benefit residents of tax havens, since other jurisdictions, including the U.S., impose their own taxes on dividends. Brookfield's opaque nod to this incentive is a reference to "personal circumstances" making it potentially advisable.

https://bnre.brookfield.com/sites/brookfield-bnre/...

A longer-term incentive might be if a BN shareholder likes the emerging shape of the insurance/reinsurance/annuity business and anticipates a delinking of the "paired" tickers at some point in the future. Which of three tickers will benefit most from any success in this business remains a mystery to me given the fact that BAM will be managing most of the insurance float. A max of 2.5% of BN's share count could be exchanged before hitting the 40 million share ceiling.


<editorial remarks>

A handful of no votes represent my small allocation of BNRE shares from the spinout two years ago because I find the accelerating pace of financial engineering exhausting and annoying. Within my deteriorating memory:

* The spinouts of parts of four income-oriented limited partnerships (BIP, BEP, BPY and BBU) ostensibly aimed at income investors and retirees.

* Four more tickers representing corporate versions of those subsidiary limited partnerships (BEPC, BIPC, BPYU and BBUC). In a typical example of Brookfield opacity, the only apparent explanation for this proliferation of twin tickers for the same subs was the IRS determination that capital gains on limited partnerships in tax-deferred accounts might count as UBTI, making them taxable. However, Brookfield continues to market the partnership versions as suitable for IRAs, which seems either disingenuous or contradictory.

* Complaining about BPY's public valuation and ultimately taking it and BPYU private.

* Spinning out BNRE as a "paired" security with the parent (ticker BAM at the time) in tiny quantities, propping up the new ticker by making it exchangeable for the parent.

* Complaining about BAM's public valuation and ultimately renaming it, re-tickering it, and spinning out the "new" BAM.

Certain advocates of Brookfield's value sensibility and stock market performance used to advertise it as "the Berkshire of Canada." All the financial engineering around this dizzying array of tickers, spinouts and share exchanges makes this claim seem ridiculous. It's also worth pointing out that very little of this engineering has had the desired effects:

* The corporate versions of the partnership subs all trade at significant premiums to their twins, mostly because of supply and demand, imposing a penalty on those who want to hold them in retirement accounts, originally the ostensible beneficiaries of these income-oriented subs.

* Taking BPY private has done nothing to change Mr. Market's valuation, which it now imposes on BN, the new ticker for the parent. It may, as Bruce Flatt insists, reap a big reward one day when the CRE market recovers, but it won't benefit former BPY holders.

* Spinning out 25% of the asset management business as the new BAM had the desired effect of achieving a pure market multiple for that asset-light business. It has not, however, had the desired effect of inflating the parent's valuation based on its majority ownership of that business. To the contrary, the spinout coincided with a reduction in the parent's valuation roughly twice the value of the spin that has persisted to this day.

So there's a rational case to be made that all this engineering has been harmful to shareholders and the overall franchise and should stop. An interesting mental exercise is imagining the current valuation of the original BAM if everything Brookfield does was still represented by that single ticker. Alas, the pace of fiddling seems to be increasing, not slowing. Other than John Malone, I can't think of any other major market participant as fond of such difficult-to-follow public market manipulations.

I still like the substance of Brookfield's business. I'm just tired of trying to keep up with the constant changes in packaging. So my plan is to cast my insignificant votes against future maneuvering with no simple, obvious purpose. It won't make any difference, of course, but sometimes symbolic protest is all you can do.

</editorial remarks>

...
<< Other than John Malone, ... >>

Hah! While reading through your post I was thinking how it reminded me
of Liberty Media -- and then you name check the guy himself. ;-)

I've also been reading "Lights Out: Pride, Delusion, and the Fall of General Electric"
which tends to make me a bit more sensitive to this issue.

-Rubic

if you still like brookfield, then why not just closely monitor what flatt,marks,etc... are retaining?
(still ~90% BN as the underlying asset ? please correct if wrong.)

not only do you avoid the complexity brain damage, but reduce the odds of being on the wrong side of minor vehicles that brookfield is manipulating against minority\retail interest.
(including items where brookfield, as a complex, has very small voting share but outsized influence via the board and anointed c-suite)

if you still like brookfield, then why not just closely monitor what flatt,marks,etc... are retaining?
(still ~90% BN as the underlying asset ? please correct if wrong.)

Far as I can tell, Flatt retains pretty much everything -- all the spinouts -- because he sort of has to as CEO. This public relations aspect of his job makes him a particularly bad investor to clone, even if one were into that sort of thing. For example, if he thought BBU was an inferior stand-alone investment, he couldn't say so. In fact, he received 112,201 shares of BBUC in that spinout last year, meaning he was holding about twice that much BBU.

This strategy does not add up to ~90% BN. In the recent hubbub over Flatt's relatively small sale of BAM and buy of BN (possibly leaked as yet another attempt to influence markets that BN is undervalued, a case he's been making for quite some time), the resulting balances were ~66 million shares of BN and ~15 million shares of BAM, which would make BAM more than 18% of just those two holdings. More to the point, it's roughly maintaining the proportions of the spin -- one share of BAM for every four shares of BN.

Besides, it's not always easy to keep up with what these guys are doing, which is part and parcel of the original complaint. For example, roughly 60% of the new BNRE shares authorized last week are already spoken for before everyday BN shareholders receive the offer. By whom? Is that Bruce and Co. or somebody else? Does Flatt have an offshore residence that would make BNRE more tax efficient for him than BN? Do company execs have some insight into the likely timeline for delinking BN and BNRE and what the likely values will be when they trade independently? I don't think it's overly cynical to conclude that all this complexity and opacity serve someone's interests, and it's not ours. (Flatt reported owning more than 1 million shares of BAMR, the original ticker for BNRE, more than a year ago.)

My complaint is not that I don't know what to own. For better or worse, I like making those calls myself and no longer have much internal debate when it comes to Brookfield. At Friday's close, my Brookfield stake consisted of 64.2% BN, 32.6% BAM and 3.2% BNRE. This differs from the proportions of the respective spins in part because of my obsessive-compulsive affection for round numbers and in part because I diversified my allocation to alt managers recently by selling off some BN. I don't think owning mostly BN means you don't have to pay attention to the shenanigans. That's the parent. That's where the shenanigans are coming from.

My complaint is about a corporate culture apparently obsessed with trying to outsmart Mr. Market by constant fiddling with an endless array of tickers, spinouts, spin-ins, exchanges, reverse exchanges, and organizational restructures. That brings echoes of the smartest guys in the room, and we know how that turned out.

thx for the thoughtful reply.
flatt is known for his frugality (generally a positive characteristic for asset allocators), and would not surprise if he has retained most every piece of flotsam and jetsam broken off brookfield of old, while still avoiding the wrong side of parent transactions. (which is why i believe bn is still the least likely to get opportunistically dinged)

to be honest, even keeping track of what flatt and oaktree founders retain has gotten to be a pain. between the separate Canadian and u.s. listings, not to mention all the effective cross holdings, complexity is the common theme for all things brookfield.

ultimatespinach you have (delightfully in my opinion) finally bridged the gap from cult fantasy to reality as per the Brookfield yard sale --- in excellent fashion. Just a few years ago it was %-of-portfolio into Brookfield competition on all forums and threads related to anything Bruce Flatt. Not only was it boast-of-Bruce it was boast-of-Bruce at any cost at any time.

I was simply amazed at the incredible beliefs many had as to the outcome projections. It was silly and it was extreme.

So it was, and I'm 69 years old, that my newspaper owning family hooked up with a guy named Marshall Johnson some 50 years ago (50 plus actually) and along the way in the mid 1970's the "put" the family into "Crackerjack" Warren and some other oddities such as North Carolina Railroad (bought by the state of NC- NSC's track through the Piedmont), Brascan, later Fairfax and Markel...and Brascan was a royal 8x earnings stock at times and the times rocked and rolled of good and bad.

...but anyway what I'm trying to project is a little energy towards our bunch actually reading the financial reports, not just copy/paste of Brookfield management presentations and quotes. Yes, there is a growing, steadily growing, gulf between what Bruce and Co say and write and what I see in the financial reports. Am I stupid?

Interest rates? I mention and all I'll get is "Hell dealraker...rents and leases will go up and we will blast to the heavens!" It continues, the responses I get, "Buy boy, you just don't know anything...buy and trust Bruce!"

Really? I just read the Brookfield Property financial report. Does anybody ever actually read the Brookfield stuff and leaving out management's comments try to grasp what is happening?

Anyway, I'd suggest more of the growing trend to see the scene as it is, not as management projects. We are cruising along at probably half of plan value now (yes I know plan value is evidently vanished) and things look very interesting. My questions remain: Who is feeing who? How do these entities thrive with multiple layers of fees? Is management so good that fees do not limit the upside? What is actually in these FFO and DE numbers? What happens to these numbers if management can not access loans with low rates to haul in more cash so that more FFO and DE (???) can be "reported" in the financial statements? Similarly what happens if at some point outside investors do not see this complexity as an ideal spot to hand over massive funds to be invested and feed through multiple layers of massive numbers of investment managers?

BEP's financial reports too looked "interesting" recently. I read and then see euphoric, and I mean absolutely EUPHORIC interpretations. Are these happy-days interpretations more accurate than my sense of reality?

I've been here before with these type things and each time my worst fears and outcomed even more worse than I expected. LOL. I look on with both enthusiasm and no big convincing view of good nor bad, just that things to me seem far away from management comments.

Life is fabulous.......if you can stand it. In the meantime MASSIVE funds are headed BAM's way evidently which of course as is the norm...makes it all work out screamingly well for shareholders (they say).

I sold this month. This has been in the too hard pile for a while, so I gave up and folded. Nice run, but time to get out.

Here is the typical BAM outpouring. Make your own opinion as to math, facts, and projections. And if you are in to this stuff I'd go to Barry Schwartz' twitter or X page and get his firm's research. If you believe this stuff it will get you affected you'll be shaking with positive anticipation.

https://seekingalpha.com/article/4630257-brookfiel...

Dealraker -

I've had a small position in BAM and now BAM and BN for quite some time, and always appreciate your take on things.

Along those lines I recently took a starter position in AJG after looking at its beautiful 10 year chart; thank you for mentioning it a few times over the years

BAM comments aside, I'd love to hear what companies you think might represent good value at today's prices to invest for the next 5+ years.....at least something worth doing my own due diligence on

rivervalley, yes...watch those starting points carefully as they do count. The brokers continue to surprise me over time to their "toll booth" model, one that Mr. Buffett himself labeled 45 years ago.

Ever looked at Fairfax Financial (Canada)? Still a relative bargain and not at all sure to always be discounted as it is today given the postive changes within the company. A fire or hurricane may give an even better starting point there this fall, but the quote today isn't horriffic.

When I read a BRO or AJG quarterly report? The picture is blisteringly clear. When I read anything Brookfield I get a view and opinion. Then management steps up with a view that is contrary to what I just read.

And it repeats and gets more conflicting as time passes. My questioning management long ago on these boards (the predessor board) as to BPY was extremely unpopular, yet correct it seems. I'd go so far as to say, once again, those likes are often, maybe the great majority of the time, not the place to bet your money.

But that of course won't be popular by defintion.

Down the road we go. Life is great...if you can stand it!

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