John Paulson Files 13D On Conseco (CNO) ~ market folly

Wednesday, November 25, 2009

John Paulson Files 13D On Conseco (CNO)

As we detailed in a previous post, hedge fund Paulson & Co has taken a stake in Conseco (CNO). John Paulson's firm just recently filed a 13D with the SEC on shares of CNO and we now get more details regarding his position. A 13D signifies an activist investment in a company so it will be interesting to see what happens here. As per the filing, Paulson now shows a 20,000,000 share stake, representing 9.9% ownership. On November 13th, 2009 Paulson & Co acquired 16,400,000 shares of common stock and warrants to purchase 5,000,000 shares at an exercise price of $6.50 per share, well above the current share price of around $5.

As we detailed previously, this arrangement was originally agreed upon back on October 13th and so one month later it has now been executed. The bulk of his shares are in the Paulson Recovery Master Fund and the Paulson Advantage Plus Master Fund. What's interesting about their warrants is that they will not be exercisable (except under limited circumstances) until June 30th, 2013. So, shares of CNO certainly have plenty of years to ascend from their current levels to $6.50 or above. The exercise date of 2013 is notable in order to preserve deferred tax assets.

Overall, the 13D filing is quite lengthy as they've attached a whopping 9 exhibits to it. In sorting through them all, we also see that under the terms of their forward purchase agreement, Paulson's Opportunity Master Fund and Recovery Master Fund, "agreed to purchase from Morgan Stanley up to $100,000,000 aggregate principal amount of the 7.0% Convertible Senior Notes due 2016 of the Issuer." For purposes of this 13D, the SEC does not consider the underlying shares of these notes to be beneficially owned yet. On June 30th, 2013, these notes will be convertible into shares of common stock based on a conversion rate of 182.1494 shares per $1,000 principal amount of Convertible Notes. This is equivalent to a conversion price of $5.49 per share. Those of you who wish to read the entire SEC filing can head here.

In the end, Paulson's built a nice longer term wager on Conseco (CNO) here as he has numerous years for the stock price to climb to levels above his execution prices on all of his notes and warrants. While we already knew of his position, we now have more clarity regarding how it is broken down. This certainly sticks with his meme of 'betting on a rebound' as he bought financials and started a real estate recovery fund. It will be interesting to see if he can time the upside recovery just as he did the downside with impeccable precision. His wager on the recovery though will technically not need as much pinpoint precision in terms of timing. He merely just needs to hold on to investments long enough for the recovery to occur. And, as evidenced by this position in CNO, he is banking on things turning around before 2013. And while he may be wagering on an economic recovery over time, he is certainly still bearish on one thing: the US dollar. Paulson has assembled a massive gold position to effectively hedge against what he thinks will be the dollar's continued devaluation.

One of Paulson's other recent big bets is on Cadbury (CBY). He has been betting on a takeover and has appropriately doubled down on his stake as he anticipates higher bids. Hedge fund Paulson & Co is of course famous for their bet against subprime which made them billions. For more on John Paulson and his hedge fund, we highly recommend checking out WSJ columnist Gregory Zuckerman's new book, The Greatest Trade Ever, where he had exclusive access to Paulson in order to pen the story behind his victorious subprime bet. And reportedly, Paulson is not necessarily happy with how the book turned out. You can read our book review here.

We'll be tracking Paulson & Co very shortly in a separate post as part of our hedge fund portfolio tracking series so stay tuned.

Taken from Google Finance, Conseco is "the holding company for a group of insurance companies operating throughout the United States that develops, markets and administers supplemental health insurance, annuity, individual life insurance and other insurance products. The Company focuses on serving the senior and middle-income markets. CNO sells its products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of its product lines) and direct marketing."

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