Appaloosa Management & Senator Investment Group Send Letter to Allergan Board

David Tepper's hedge fund firm Appaloosa Management has sent a letter together with Alex Klabin and Doug Silverman's Senator Investment Group to the board of Allergan (AGN).  They previously sent letters to AGN's board on May 7th and April 23rd as well.

Here's the text of the latest letter:

"Letter dated June 5, 2018:Board of Directors
Allergan plc
Clonshaugh Business Technology Park
Coolock, Dublin, D17 E400, Ireland

Ladies and Gentlemen:

We write concerning the conclusions drawn from Allergan’s much-heralded strategic review, publicly outlined by Chairman and CEO Brent Saunders on May 30th. Like the rest of the investment community, we were underwhelmed by the Company’s half-hearted attempt to restore strategic momentum. The result of this process is all the more disappointing given our previous discussions and correspondence (attached hereto for reference). In view of this outcome, we are compelled to express our views publicly.

The token measures outlined in Mr. Saunders’ presentation betray the Board and management’s desire to cling to a status quo that has produced three years of steadily declining stock performance and a fire-sale market valuation. It is now clear that fresh thinking is absent from the current regime, thus explaining the market’s complete loss of confidence in the stock. To that point, we reiterate our strong suggestion that at a minimum the Company (1) split the office of CEO and Chairman; (2) retain a new Chairman or CEO from outside the Company; (3) replace at least two additional directors on the current Board; and (4) upgrade management personnel in critical operating units.

Concurrent with these measures, we renew our calls for the Company to stop hiding behind an arbitrary debt reduction target as an excuse to preserve the means to pursue a transformative M&A transaction. Prioritizing such flexibility at this time makes no sense given Allergan’s undervalued equity currency, its mixed M&A record and the market’s loss of confidence in the Company’s ability to deploy capital for the benefit of shareholders. More importantly, it will not address the Company’s malaise. Instead, it is time for Allergan’s management to concentrate on running a world class pharmaceutical and aesthetics business and forego thoughts of, or the exhilaration from, an ambitious acquisition strategy.

In our conversations, Chairman and CEO Saunders has been fond of repeating a famous quotation that “the definition of insanity is doing the same thing over and over again, but expecting different results”. Until Mr. Saunders and the Board heed this advice, adopt new governance and renew the Company’s operational focus, it appears that shareholders can expect Allergan’s stock price to continue to languish."

David Tepper: Market Multiple Kind of Full, Short Bonds, Long European Equities

David Tepper, founder of hedge fund Appaloosa Management, was interviewed on CNBC this morning.  Here's the highlights. 

Regarding the markets in general, Tepper said "Listen, I don't think the market is cheap by any stretch of a multiple, you can't say that.  On the other hand, with that backdrop of growth around the world, with the potential we'll do other things here, with the sugar that's still being put on by the ECB, BOJ and let's face it, the Fed is way low ...  You can't be short in that kind of setup.  I'm not suggesting the market is really cheap, but listen, it's hard to go short when you still have the 'drugs' being given.  The punch bowl is still full."  He went on to add, "On a multiple basis it's kind of full... I don't think the market's cheap." 

Regarding bonds, Tepper continues to be bearish and is short them: "If we're short US bonds, we're betting on a stronger economy here.  That's the bet.  Listen... bonds are really hard to own, the yields are really low."

Tepper also noted he bought Snap Inc (SNAP) shares in the IPO but sold on the spike higher.  "I'm not jumpin' through the hoop to buy it at $21.80.  But if it trades back down to the original offer price, I'd love to buy the stock there.  I'm a believer in the company, it's a valuation question to me.  Up near $30 it's too high for right now ... My youngest daughter loves the thing.  Anybody between 12 and 25 loves it, it's kind of anti-Facebook in that generation."

On Apple (AAPL): Trimmed the position due to concerns over China policy, but that shoe never dropped.  "I wouldn't be adding at $139."

He also likes Europe:  "I am long European equities, I could lose my behind.  There's upside people aren't recognizing.  It's a probability game to me.  (Valuations) are much much lower (than the US). 

On the Federal Reserve, he thinks they will raise interest rates more quickly.

Appaloosa now manages around $17 billion.  You can see the rest of their portfolio in the new issue of Hedge Fund Wisdom.

Embedded below are videos from David Tepper's interview with CNBC:

Video on the market:


Video on shorting bonds:


Video on the Federal Reserve:


Video on Snap Inc (SNAP):


Video on Europe & ECB:


Video on Apple (AAPL):


Video on regulation / tax cuts:

Carl Icahn Reveals Allergan Stake

Activist investor Carl Icahn today in a statement revealed he has taken a position in Allergan (AGN).  On his website, he writes:

"We have recently acquired a large position in Allergan and are very supportive of CEO Brent Saunders. We were instrumental in bringing Brent on board as the new CEO of Forest Labs a few years ago and worked cooperatively and constructively with him to help increase value for all Forest shareholders. Less than a year later Forest was acquired by Actavis (which subsequently merged with Allergan) resulting in massive gains for Forest shareholders. While we at that time disposed of our position in Forest, we still have always maintained great respect for Brent. We have every confidence in Brent’s ability to enhance value for all Allergan shareholders."

As our brand new Hedge Fund Wisdom issue detailed last week, AGN is a crowded hedge fund trade.  The company's merger with Pfizer (PFE) was called off after the US government implemented anti-inversion rules.  AGN has now basically become a capital deployment optionality story.

Third Point's Q2 Letter: Allergan, Suzuki Motor, Constellation Brands, Mohawk, Roper

Dan Loeb's hedge fund firm Third Point is out with its second quarter letter.  The hedge fund has generated annualized returns of 20.5% over the last two decades.

Third Point's Q2 letter outlines their thesis on 5 stocks.  Here's the brief summary with the full letter below.

Allergan (AGN):  Formerly Actavis, this company recently sold its generics business for ~17x EBITDA and Third Point thinks the company is poised to grow as a pure-play pharma company.  Branded assets + unlevered balance sheet + valuation below comparables = opportunity.

Suzuki Motor: This could be largely viewed as a play on India to capitalize on a growing middle class given the company's stake in Maruti as more people purchase cars. Overhang on shares due to litigation with Volkswagen.

Constellation Brands (STZ):  The next three stocks Third Point has labeled as 'compounders,' or companies that have good management and generate a lot of cash flow that's then allocated wisely to drive returns.  They see margin improvement and solid volume trends for this alcoholic beverage company and also think capital return to shareholders will ramp up further once capex comes down.

Mohawk (MHK):  This global flooring company is at the beginning of a cyclical recovery and seeing margin improvement.  They also see a lot of potential acquisition targets for the company.

Roper (ROP):  This company has generated 18% annualized shareholder returns over the last 10 years.  ROP runs a decentralized strategies and acquires a lot of companies.  They like the company's organic revenue growth and think it'll see a 15% CAGR going forward.


Embedded below is Third Point's Q2 letter:



You can view additional portfolio activity from Third Point here.

Bill Ackman's Pershing Square Q3 Letter: Zoetis, Allergan & More

Bill Ackman is out with Pershing Square Capital's third quarter letter to investors.  Pershing is up 35% net for the year as of the end of October.  The Q3 letter outlines Ackman's thesis on his newest holding: Zoetis (ZTS). 

ZTS is a spin-off from Pfizer and is an animal health company.  Ackman took this position alongside Sachem Head Capital, another activist hedge fund run by Scott Ferguson (who previously worked at Pershing).

He likes that Zoetis has a durable product portfolio and is involved in markets with secular growth. Ackman writes, "We believe Zoetis is a scarce asset."

Additionally, Ackman outlines the Allergan (AGN) saga and also gives updates on his positions in Canadian Pacific (CP), Howard Hughes (HHC), Platform Specialty Products (PAH), Fannie & Freddie, Air Products (APD), as well as his Herbalife (HLF) short.

Embedded below is Pershing Square's Q3 letter:



For more from Ackman, check out some of his recent conference appearances: Ackman's fireside chat at Invest For Kids Chicago as well as Ackman's talk at Great Investors' Best Ideas Dallas.

Notes From Invest For Kids Chicago 2014: Ackman, Zell, Robbins & More

The sixth annual Invest For Kids Chicago just took place and featured hedge fund managers sharing their latest investment ideas to benefit local children's charities (100% of the money raised goes directly to the charities).  Below are links to notes from each speaker's presentation.  Enjoy!


Invest For Kids Chicago 2014 Notes

- Fireside Chat with Bill Ackman (Pershing Square)

- Larry Robbins (Glenview Capital): 4 long ideas

- Sam Zell's Fireside Chat 

- Mason Hawkins (Southeastern Asset Management): long Level 3 Communications 

- Wally Weitz (Weitz Investment Management): long Liberty Media

- Steve Kuhn (Pine River Capital): On Japan

- Nehal Chopra (Tiger Ratan Capital): long Actavis and Charter Communications

- Jonathan Kolatch (Redwood Capital): Puerto Rico Power Authority

- Mike Wilkins (Kingsford Capital): On Short Selling

- Emerging Managers: Nancy Prial (Essex) long iCAD

- Emerging Managers: Tim Hurd (Blue Spruce) long BlackRock 

Bill Ackman's Fireside Chat at Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is a fireside chat that Mick McGuire of Marcato Capital had with Bill Ackman of Pershing Square.  McGuire worked at Pershing before launching his own fund.


Bill Ackman's Fireside Chat at Invest For Kids Chicago

•    Pershing Square up over 30% this year. Benefiting from a Jim Bean sale, Platform Specialty, Air Products, Burger King, Herbalife continue to play out, Pershing Square Holdings and other newsworthy items.


•    Allergan (AGN) – revised their disclosure to include they are in active merger discussions with what Bill thinks is Actavis.
•    Ackman believes VRX can offer the most value versus Actavis. VRX has demonstrated track record for material acquisitions. More comfort with VRX vs. Acatvis. Actavis could be the white knight perhaps.
•    Either party will have to offer stock in the deal. Allergan has put themselves up for sale.
•    Thinks the best thing is that AGN asks for bids from VRX/Actavis and take the best/highest bid. December meeting is relevant. Co did everything they can to stop shareholders from voicing their views.
•    Incentive to negotiate before directors get thrown off.
•    AGN – essentially a management change with many synergies if VRX acquires.



•    Fannie and Freddie (FNMA / FMCC) now. They were short when Mick was at Pershing. Increased exposure in light of the case.
•    Fannie/Freddie two of the best businesses in the world.
•    Very safe business. Allows banks to sell/offload 30 yr mortgage which isn’t a good instrument for banks yet is very helpful to homeowners.
•    They di-worisified their business by buying fixed income securities (subprime, etc.). That is why Pershing was originally short before the US government recapitalized the company.
•    Became profitable in late FY11, when housing markets recovered. Over-reserved during the crisis. Heading back to their core mission/business. Bought them on that basis.
•    USA government took 100% of future profits of both entities, excuse was that they could never pay the government back. That was false, on their way to pay back the government.
•    Largest taking of a private asset by the government. Thankfully, it’s illegal. 5th amendment.
•    Judge Lamberth decision wasn’t about the takings claim which matters the most.
•    His best argument (for a hostile judge) is that shareholders can still trade the stock and make a profit. This could ultimately go to the Supreme Court.
•    Maybe Republicans want to get this solved and recapitalized. Very interesting risk reward, stock went from a dollar on the lost. Think it’s worth $40 - $50.
•    Reminds him of GGP when it was bankrupt.
•    “Always bet on America”
•    How do you size an opportunity on Fannie/Freddie? AGN hard to lose money but make 2x, make it bigger. Fannie could lose a lot but make a ton, hence for Pershing its 2% position.


•    Canadian Pacific (CP) next topic. Started buying September 2011. June 2012 gained control. One of the best industrial turnarounds.
•    Canadian Pacific approached CSX about a potential transaction, was rebuffed.
 •    Investment business – learned a lot over time. Started out buying cheap companies, now really emphasizes quality of business. Didn’t emphasize management at first, but Hunter at Canadian Pacific really shows the power of a strong management team.


•    Air Products (APD): Thinks the company could improve with the new CEO.


•    Howard Hughes (HHC) – brought on a strong management team that developed the assets and created a lot of value.


•    Platform Specialty Products (PAH) was a cash shell, great example of management. Raised $900MM, Pershing brought $300MM. Martin the CEO made an acquisition, the stock doubled. Bought a business in an auction. Starting to consolidate the specialty chemical industry.


•    On Executive Compensation: When you are going into these situations how do you think about the ideal CEO compensation structure? Bill’s response: S&P 500 co usually pays $10MM - $12MM, mix of cash options, restricted stock. Doesn’t align mgmt as they continually want lower priced options, especially if an acquisition occurs (more upside to them ~ not exact wording)
•    Sold a warrant of 4% of the outstanding shares with sale restriction at FMV to the CEO (did this for Howard Hughes).  Warrant went from $15MM to $250MM, 6 yr holding period, alignment and good upside for the CEO.
•    With Hunter who was 67, his incentives was also reputational. Gave him options upfront.


•    Thinking of Philanthropy: Always viewed as business as a way to make money in order to do good.  A lot of good is created by capitalism.
•    One philanthropy investment in Mexico giving iPads to store owners to run their stores better. Pepsi/ Nestle tracking data and the small store owners become more profitable through better management.
•    No cure – medical device to solve certain cancers. Prefers to invest in for profit to solve good as people are economically incentivized.
•    For things that there is no for profit solution, will do big grants (cultural, etc.). Never invest in a not for profit if there is a for profit competitor/solution.

For more from Ackman, he recently talked at the Great Investors' Best Ideas Dallas conference as well.


Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

Sequoia Fund Investor Day Transcript 2014

Today we wanted to highlight the transcript from Sequoia Fund's investor day earlier this year.  This is old (6 months ago) but is still worth reading due to the in-depth color they provide on their investments and the fact that they're long-term shareholders so most of the positions still remain in their portfolio.

Positions they talk about include Valeant Pharmaceutical (VRX), Allergan (AGN), Google (GOOGL/GOOG),  Mastercard (MA), TJ Maxx (TJX), Omnicom (OMC), IBM (IBM), Ritchie Brothers (RBA), Fastenal (FAST), Costco (COST), Berkshire Hathaway (BRK.A/B), O'Reilly Auto (ORLY), Rolls Royce (LON:RR), Precision Castparts (PCP), and more.

Embedded below is the Sequoia Fund's Investor Day Transcript: 



You can download a .pdf copy here.

And given their long-term focus, we'd also point you to Sequoia Fund's 2013 investor day transcript as well as Sequoia Fund's 2012 annual letter if you haven't read those either.

What We're Reading ~ Hedge Fund Links 6/27/14

Hedge funds are now a $3 trillion industry [Barrons]

Inside the mind of Fairholme's Bruce Berkowitz [Institutional Investor]

How to craft the world's worst pitchbook [HF Intelligence]

Cybersecurity firm says large hedge fund attacked [CNBC]

Omega Advisors' Einhorn says bull market not over [Reuters]

Paulson & Co amasses large stake in Allergan [Reuters]

Relational said to plan activist campaign against Manitowoc [Dealbook]

Jeff Ubben has new target: his hedge fund peers [WSJ]

Former ESL pros open activist operation [HF Alert]

Hedge fund investors are fussy about fees [Funds Europe]

Hedge funds face higher prime broker charges under Basel III [Risk.net]

Saba, Brevan Howard struggle as volatility disappears [BusinessWeek]

Investors adopting partnership-driven approach to hedge funds [COO Connect]

HF analyst: the things I know for sure [Wall Street Oasis]

ValueAct Steps Down From Valeant Board, To Trim Position

ValueAct Capital filed an amended 13D with the SEC regarding their position in Valeant Pharmaceuticals (VRX).  Per the filing, they note that Mason Morfit will be stepping down from the board of directors.

The key takeaway here is that ValueAct says they're doing this in order to trim their position size because they have a "practice of reducing portfolio weightings in companies where we no longer serve on the board of directors."

Their current stake is valued at approximately $2.5 billion and the letter specifically references that they'd like to still maintain "more than $1 billion in shares."  As far as the timetable of their sales, the letter hints that they might choose to sell some of their stake "later this year."


Mason Morfit's Letter to Valeant

Here's the full letter of his resignation:

"Dear Mike, 

I am hereby resigning effective today as a director of Valeant Pharmaceuticals International. 

As you know, ValueAct Capital has been a shareholder of Valeant Pharmaceuticals since 2006 and I have been a member of the board of directors since 2007. My team and I are proud to have worked with you and to have been a part of tremendous value creation for all shareholders. As I have told you, after seven years on the board of directors, and with my new position on the board of directors of Microsoft, the time has come for me to reallocate my time to other board work. The company is in an extremely strong position and I feel good about the future of Valeant. 

Due to the company?s strategy, there have been very long periods during which we have not been able to buy and sell shares. Most recently, ValueAct Capital has been restricted from selling any shares in Valeant since June 2013, during which time the stock has risen from $85 to $135. Beginning in February 2014, I expressed to you and the board my desire to manage down this position in our fund (currently approximately $2.5 billion out of our $14 billion in assets under management). By resigning today, with the Allergan transaction in the public domain and with Valeant?s earnings report later this week, this will create an opportunity for ValueAct Capital to sell if we choose (of course depending on stock price) later this year. Serving out the remaining term of my board service, could potentially create additional delays and complications, particularly if Allergan enters into negotiations with Valeant. 

To reiterate, we are making a portfolio management decision, not a decision about Valeant?s fundamental business, future performance or the merits of the Allergan deal.  ValueAct Capital has a practice of reducing portfolio weightings in companies where we no longer serve on the board of directors. We have done this consistently since our inception in 2000. That being said, after my resignation we still plan to be large Valeant shareholders for some time. We currently plan to hold more than $1 billion in shares and Valeant should remain one of our top positions. I wish you, your team and my board colleagues all the best and look forward to many more years of extraordinary performance.  Sincerely,  /s/ G. Mason Morfit"


For more on ValueAct, head to Jeff Ubben on Valeant in his recent interview as well as Mason Morfit's lecture on activist investing.

Pershing Square Exercises Allergan Options, Acquires Voting Securities

Bill Ackman's hedge fund firm Pershing Square Capital Management today filed an amended 13D with the SEC regarding their new stake in Allergan (AGN).  Per the filing, Pershing Square notes early termination of the waiting period under the Hart-Scott-Rodino Antitrust Act was amended and granted with respect to Pershing's shares.

As such, Pershing exercised their call options to purchase 24,831,107 shares of AGN.  The purpose of this transaction was to acquire voting securities of the issuer.

Ackman has been working with Valeant Pharmaceuticals (VRX) to acquire AGN.  Allergan, however, has apparently been exploring a sale to Sanofi as well as Johnson & Johnson, according to Bloomberg.

You can view other recent portfolio activity from Pershing Square here.

Pershing Square's Presentation on Allergan/Valeant: The Outsider

Bill Ackman's hedge fund firm Pershing Square Capital has released a presentation called "The Outsider" that details perspectives from Allergan's largest shareholder and talks about a potential combination with Valeant Pharmaceuticals (background on Pershing's involvement via that link).

One of the main concepts detailed in the presentation is platform value.  Pershing notes that, "Considerations in valuating this asset include management's ability to (1) identify new acquisitions, (2) execute those acquisitions on reasonable terms, and (3) integrate them effectively."

Though Ackman is newer to the VRX story, other hedge funds are not.  ValueAct Capital has been invested in the name for many years and has seen Valeant do all three of the above time and time again.

This is due in large part to a fantastic management team with CEO Michael Pearson at the helm.  There's a great book on the best capital allocators of our time called The Outsiders, which made Warren Buffett's recommended reading list.  Ackman argues Pearson should be included in that group.

Embedded below is Pershing Square's slide deck on Allergan and Valeant, entitled "The Outsider":




You can download a copy here.

Pershing Square Acquires Allergan Stake, Working With Valeant Pharmaceutical To Propose Merger

Bill Ackman's hedge fund firm Pershing Square Capital Management has just filed a new 13D with the SEC regarding shares of Allergan (AGN).  Per the filing, Pershing Square now owns 9.7% of the company with over 28.8 million shares.  This is a brand new position for Ackman and the filing was made due to activity on April 11th.

The stake is actually broken down into 24.8 million shares underlying call options at strikes ranging from $1.20 to $1.33 and exercise dates from March 2015 to April 2015.  They also have exposure to 3.45 million shares of common stock via forward purchase contracts with an expiration of April 22, 2015 and based on a forward price of $140.37.


Working With Valeant Pharmaceutical To Propose Merger

Pershing has filed the 13D jointly with Valeant Pharmaceutical (VRX).  Pershing and Valeant entered into their agreement on February 25th, 2014 and they're working together via a joint vehicle called 'PS Fund 1, LLC' that VRX will contribute $75.9 million to.

There's a lot of details and it's worth viewing the entire SEC filing here (including all exhibits)  But basically, what you need to know is that Valeant intends to propose a merger with AGN.

VRX has been a serial acquirer in the pharmaceutical space under the guidance of CEO Michael Pearson.  The stock is also a hedge fund favorite.

ValueAct Capital has held a large VRX stake for quite some time, as has Ruane Cunniff.  Additionally, VRX was one of Lone Pine Capital's top five holdings in their Lone Cypress fund as of the end of the first quarter.  With Ackman joining the party and now working with VRX, there are a lot of prominent investors involved here.

Per the 13D, Pershing Square intends to "engage in discussions with the Issuer and Issuer’s management and board of directors, other stockholders of the Issuer and other persons that may relate to governance and board composition, management, operations, business, assets, capitalization, financial condition, strategic plans and the future of the Issuer."

The filing also notes that, "Valeant currently intends to propose a merger in which the Issuer’s shareholders will receive a combination of cash and Valeant common shares. Valeant has not yet determined the amount of cash and number of Valeant common shares it will offer, but it currently expects the cash component will total around $15 billion. Barclays and Royal Bank of Canada have indicated that they are prepared to deliver financing commitments covering the cash portion of the transaction at the time Valeant makes an offer.  Although Valeant currently expects to make an offer, it is under no obligation and provides no assurance it will do so.  If Valeant fails to make an offer before May 2, 2014, the Reporting Persons will have the right to terminate the letter agreement."

*** Update: Valeant has proposed a merger of $48.30 in cash and 0.83 shares of VRX for each share of Allergan, with shareholders allowed to elect a mix of cash and shares.  Based on today's trading, that's a deal of about $157 per AGN share, a significant premium over the $116 they were trading at just yesterday. 

If the merger goes through, AGN shareholders would own 43% of the combined company. As Allergan's largest shareholder, Pershing Square would elect to take only stock in the deal and plans on being a holder of the combined entity. ***


Now we know what Ackman was buying with the proceeds from his sale of General Growth Properties shares and Beam shares.