Fannie Mae-No Politics (FNMA)

[capitalismforever]

Ackman's 2014 valuation has been brought up by several. For some reason, it's caused much confusion. In the following, I separate the two companies and bring the valuations up to date to reflect the preferreds he erroneously failed to include and account for a recap.



First thing about this valuation that several people (nearly everyone I've heard talk about it on a message board) get wrong is the fact that the valuation is a COMBINED value of the GSE's. Two reasons we know this:

1. It says so at the top of the page,
2. The combined par value of the Sr. Pfd's is $2b, which is the amount discounted in the valuation.

Fannie Mae earned $12.313b in 2016 while Freddie Mac earned $7.815b. That means Fannie earns 61.18% of their combined profits while Freddie's take is 38.82%.

Using Ackman's "Illustrative Future Value", we can separate the two entities value by applying the above percents;

FNMA: $206b x 61.18% = $126.03b
FMCC: $206b x 38.82% = $79.97b

Next, Ackman failed to include a recapitalization scenario even though at this point the entire investing world knows a recap will happen. Instead, he simply combined the diluted shares outstanding of the GSE's that include warrants.

The final valuation for Fannie is $126.03b / 5.893b = $21.39 pps, and $79.97b / 3.234b = $24.73b for Freddie.

Now, let's add the Jr. Pfd's (since somehow he erred in doing that) and include a recap to the same scenario.

FNMA
$126.03b - $19.13b = $106.90b mkt cap
$80b recap / $106.90b = 74.84% recap weight ratio
100% - 74.84% = 25.16% total share weigh ratio
5.893b current shares out / 25.16% = 23.42b total shares required
$106.90b / 23.42b = $4.56 pps valuation

FMCC
$79.97b - $14.109 = $65.86b mkt cap
$50.75b recap / 65.86b = 77.06% recap weight ratio
100% - 77.06% = 22.94% total share weight ratio
3.234b current shares out / 22.94% = 14.10b total shares required
$65.86b / 14.10b = $4.67 pps valuation

It's easy to see the difference between Ackman's 2014 valuation and an updated valuation that properly includes a recapitalization as well as the Jr. Pfd's which was an obvious accounting blunder on his part.

Other assumptions Ackman made that were inaccurate: 60-100 basis point G-Fee's. Current G-Fee rate is 10 basis points. I'll let you figure out the other flaws he made.