ValueAct Capital Reduces Valeant Pharmaceuticals Stake ~ market folly

Thursday, June 11, 2015

ValueAct Capital Reduces Valeant Pharmaceuticals Stake

Jeff Ubben's activist investment firm ValueAct Capital today released a statement indicating that they've reduced their Valeant Pharmaceuticals (VRX) position:

"ValueAct Capital Management, L.P. announced today that it has sold 4.2 million shares of Valeant Pharmaceuticals International, Inc. (NYSE: VRX; TSX: VRX) in brokers' transactions on the NYSE.  ValueAct Capital's CEO Jeffrey W. Ubben said: "Mike Pearson and the Valeant team's exceptional performance have once again caused our investment in Valeant to grow in value to well above 20% of our funds' assets, and we are again compelled to reduce our position to rebalance our overall portfolio.  We have owned Valeant shares for over nine years and have sold shares on three previous occasions for the same portfolio management purposes. After this sale, our investment in Valeant will continue to be well in excess of $3.0bn and will be one of the largest investments in our funds. I look forward to continuing to work with Mike and my fellow members of the Board of Directors."

After the sale, ValueAct should still own over 15.1 million shares.  ValueAct was instrumental in bringing Pearson on board as CEO and has benefited greatly.  This has been a consensus hedge fund favorite stock for some time, with Bill Ackman acquiring a VRX stake recently as well.

Valeant also announced a new CFO, Robert Rosiello.  He's a former McKinsey M&A executive and should fit right in given Valeant's acquisitive strategy (Pearson also used to previously work at McKinsey).

Where Does ValueAct Allocate The Proceeds?

The question now becomes: where does ValueAct put this freed up capital to work?  While they could always initiate a new position, or keep it in cash for the time being, it also wouldn't be surprising to see it allocated to some of their existing stakes given where shares of some of these companies currently trade.

The first option is 21st Century Fox (FOX).  They've previously purchased shares numerous times when trading at $32.50 or below and FOX is currently hovering close to those levels.  ValueAct just added to their FOX position in late May and could look to make it even larger after accumulating their position over numerous quarters.  They also just filed an amended 13D on Fox today which shows that their ownership stake is in an LP named Volpe Velox, which is Latin for 'quick fox.'  ValueAct currently owns over 43.5 million shares of FOX, or 5.5% of the company.

CNBC's David Faber today reported that Rupert Murdoch is set to step down as CEO (but retain his role as Executive Chairman) and son James Murdoch will take the helm, with brother Lachlan Murdoch assisting.  It's unclear if this reorganization would occur this year or next and the company's board is set to review succession plans soon.

Faber also notes that COO Chase Carey is supposedly stepping down from his role as well.  There seems to be some uncertainty as to the timing though it's possible Carey will remain with the company in an advisory role.  Some investors will be dismayed by Carey's potential departure or reduction in role.  Others could view it as a potential opportunity for FOX to bid for Time Warner (TWX) again in the future.  With ValueAct's activist involvement behind the scenes here, it will be interesting to see what's next for the company.

Another place ValueAct could allocate their VRX proceeds is to Halliburton (HAL) / Baker Hughes (BHI).  They were out accumulating shares of both during the first quarter and their exposure to both combined was almost $3 billion as of the end of Q1.  Both shares are trading higher than levels in Q1 though, as ValueAct looks for the companies to combine.

A third option for Ubben's firm is Precision Castparts (PCP).  As our Hedge Fund Wisdom newsletter highlighted, ValueAct initiated a brand new stake in the company during the first quarter.  While this position is much smaller than their others, PCP shares are still currently trading around levels where Ubben's firm could have been buying in Q1.  So they could easily ratchet up their stake around similar prices now.  Not to mention, numerous other prominent investors were buying PCP in Q1, including Berkshire Hathaway, Third Point, Farallon Capital and more.

Another potential option is shares of WESCO (WCC).  ValueAct initiated a small position in the company during the first quarter.  However, shares are trading slightly higher than Q1 levels now.

While the above seem like the most likely to garner incremental capital, ValueAct also owned stakes in the following companies as of the end of Q1 (in descending order of position size): Microsoft (MSFT), CBRE (CBG), Adobe (ADBE), Motorola Solutions (MSI), Willis Group (WSH), Agrium (AGU), Allison Transmission (ALSN), MSCI (MSCI), and Armstrong Worldwide (AWI).

For more on ValueAct, be sure to check out partner Mason Morfit on ValueAct's approach and Microsoft.

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