John Paulson's Latest Bet: Doubling Down On Cadbury (CBY) ~ market folly

Wednesday, November 11, 2009

John Paulson's Latest Bet: Doubling Down On Cadbury (CBY)

John Paulson's hedge fund Paulson & Co has doubled down on their Cadbury (CBY) stake. According to UK disclosures, Paulson emphatically boosted his stake in Cadbury to 2.1% of the company as he purchased 14.8 million shares at a price of 759.59 pence each in the UK market and he now owns a total of 28.5 million shares. This means he bought 112 million pounds sterling (or $187 million) worth of shares. Cadbury of course was the recent subject of a bid from Kraft Foods (KFT) to take over the company. Paulson seems to be wagering that not only will a buyout happen, but it will come at a higher bid. Kraft's stock and cash offer was for 720p while Cadbury was trading around 763p. Needless to say, it appears many besides Paulson think that given Cadbury's rejection of the initial bid, a higher bid is inevitable. We note that Paulson & Co is not the only prominent hedge fund in this play as Eric Mindich's Eton Park Capital had been buying shares in September for 800 pence each.

While hedge fund Paulson & Co has been thrust into the spotlight over the past 2 years for their bet against subprime or their more recent big gold purchase, many seem to forget or overlook the fact that Paulson's equity strategy involves merger arbitrage and this type of play is right up his alley. While we cannot verify that Paulson & Co specifically has done this, it would be pretty safe to assume that like most funds pursuing this trade, he would go long Cadbury and then short Kraft. And, as FTAlphaville points out, "the short base in Kraft - a measure of how much of its total share pool is on loan - has risen by 45 per cent in the past week. Meanwhile, utilisation - the amount of stock available to borrow that has actually been borrowed - now stands at 4.2 per cent." Clearly, the merger-arb players are out in full force.

Interestingly enough, 1.49% of Paulson's ownership stake in Cadbury is represented by securities, while 0.59% of their ownership stake is represented by derivatives, and in particular, CFD's (contract for difference). We've previously examined what CFDs are as it is unique to the UK and hedge funds often use this derivative to help establish a position in a company. This primer of course goes right along with our introduction on how to track a hedge fund's UK positions. We're expanding our portfolio tracking coverage to include stakes held in other markets and many prominent hedge funds often hold positions in UK based companies. To see what some of the largest hedge funds are buying and selling in the UK, head to our most recent post covering Moore Capital Management, Louis Bacon's hedge fund firm.

In other notable activity, Paulson also recently invested $77.9 million in insurer Conseco (CNO). This purchase comes from 16.4 million common shares as well as warrants to purchase 5 million additional shares in a new offering that was announced October 14th that will dilute current shareholders. This gives Paulson & Co a 9.9% stake in the company.

So now we wait to see if Paulson can get that higher bid he is hoping for in his most recent play. 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.

Taken from Google Finance,

Cadbury plc "formerly Cadbury Schweppes plc is a confectionery company. The Company is engaged in the confectionery business, with participation across the three categories of chocolate, gum and candy. The Company’s seven business units are Britain and Ireland, Middle East and Africa, North America, South America, Europe, Asia, and Pacific. Cadbury plc has developed a global portfolio of brands. The Company’s brands in chocolate are Cadbury Dairy Milk, Creme Egg, Flake, and Green & Black’s. Trident is the Company’s gum brand. Other gum brands include Hollywood, Stimorol, Dentyne, Clorets and Bubbaloo. Halls is a candy brand of the Company. Other brands are Maynards, The Natural Confectionery Co. and Cadbury Eclairs. On May 7, 2008, it completed the demerger of the Americas Beverages business, which became Dr Pepper Snapple Group, Inc. (DPS) following the demerger."

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