Keith Meister's Corvex Management Goes Activist on ADT: Slideshow Presentation ~ market folly

Wednesday, October 31, 2012

Keith Meister's Corvex Management Goes Activist on ADT: Slideshow Presentation

Keith Meister's hedge fund Corvex Management has filed a 13D on ADT (ADT) and has disclosed a 5.02% ownership stake with 11,541,021 shares.  This filing is also made jointly with Soros Fund Management, who have disclosed a 0.25% stake in ADT with 575,000 shares.  The filing was made due to portfolio activity on October 24th.

Corvex's Activist Stake

Keith Meister founded Corvex after working under Carl Icahn for years, so it should come as no surprise that he employs a similar activist strategy.  In the 13D, Corvex notes that they've already had discussions with management about the company's business and strategies and intend to have further discussions.

It's also worth pointing out that the footnotes reveal that Corvex only owns 1,844,021 ADT common shares.  The rest of their stake is broken down in a series of options trades:

- Own call options representing 7,307,000 shares with strike price of $25 and an expiration of 09/30/2013

- Own calls representing 1,065,000 shares with $25 strike and expiration of 10/28/2013

- Own calls representing 750,000 shares with exercise of $42 and expiration of 1/19/2013

- Sold OTC "European-style put options referencing an aggregate of 8,372,000 shares at an exercise price of $25.00 per share, of which 7,307,000 expire on September 30, 2013 and 1,065,000 expire on October 28, 2013 or, in each case, the date on which the corresponding American-style call option described above is exercised."

- Sold open market American-style put options referencing an aggregate of 750,000 shares with an exercise of $36.00 and expiration of January 19, 2013.

Soros Fund Management has also entered into an agreement that allows Corvex to vote Soros' shares as they see fit.

ADT Spun-Out From Tyco

The first thing you need to know is that ADT, a home security business, recently became independently traded as part of the Tyco spin-off.

It appears as though Corvex did not receive any shares in the spin-off and instead purchased the when-issued shares from September 17th through 28th at various dates and also made open market purchases and option purchases post-spin throughout the month of October.

Corvex's Thesis & Presentation on ADT

Meister has laid out an entire presentation on how ADT can improve its business and create more shareholder value.  This presentation was originally given at the Excellence in Investing: San Francisco event on October 24th.

The entire presentation is embedded below, but in summary, he basically believes that ADT is a unique franchise asset and has a defensive & predictable business model with consistent cash flows.  He points to the company's unappreciated secular growth tailwinds and notes its mispricing post-spin (poor capital structure, no public comps, etc).

The crux of his thesis, though, centers around balance sheet optionality.  Meister feels that ADT should increase leverage and improve capital allocation.  He calls ADT a "equity shrink story waiting to happen."

Embedded below is Keith Meister & Corvex Management's presentation on ADT:

For more on this hedge fund, we've also detailed some of Corvex's other activism here.

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