Third Point's Q1 Letter: Playing Merger Arb & Pro Forma Situations

Dan Loeb's Third Point is out with its first quarter letter.  In it, they talk about how hedge funds have seen a lot of carnage as of late.

Specifically, they see the decimation in merger arbitrage land as an opportunity, writing, "many of these combined businesses should compound in value thanks to the benefit of synergies, modest financial leverage, and strong or improved management teams that have a history of successful capital allocation."

Their letter outlines their thesis on the following plays:

- Dow / DuPont
- ABInBev / SAB Miller / Molson Coors
- Time Warner Cable / Charter Communications
- Chubb / ACE
- Danaher

Embedded below is Third Point's Q1 letter:

Lone Pine Capital Almost Doubles Charter Communications Stake

Steve Mandel's hedge fund firm Lone Pine Capital has filed a 13G with the SEC regarding its position in Charter Communications (CHTR).  Per the filing, Lone Pine now owns 5.7% of the company with over 6.33 million shares.

This is a sizable increase from the around 3.3 million CHTR shares they owned at the end of Q1.  The filing was made due to activity on July 6th.

Charter has announced a takeover of Time Warner Cable (TWC) and Bright House.  They swooped in for the assets once it became clear that Comcast's (CMCSA) previous bid for TWC wasn't going to be approved by regulators and was called off.  Many investors seem to think, however, that CHTR's deal will go through.

As such, arbitrageurs have been going long TWC and shorting the corresponding amount of CHTR, driving down the price.  The deal spread on this was around 9% at one point but recently is closer to 6-7%.  Lone Pine saw this as an opportunity and almost doubled its stake. This stock been a consensus buy among hedge funds we track in our Hedge Fund Wisdom newsletter and has been flagged numerous times in past issues.

Per Google Finance, Charter Communications is "a provider of cable services in the United States, offering a variety of entertainment, information and communications solutions to residential and commercial customers. The Company sells its video, Internet and voice services primarily on a subscription basis, often in a bundle of two or more services. The Company provides broadband communications solutions to business and carrier organizations, such as video entertainment services, Internet access, business telephone services, data networking and fiber connectivity to cellular towers and office buildings. Through its hybrid fiber and coaxial cable network, the Company offers its customers traditional cable video services, as well as advanced video services, Internet services and voice services. The Company’s voice services are primarily provided using voice over Internet protocol (VoIP) technology, to transmit digital voice signals over the Company’s systems."

What We're Reading ~ 7/15/15

The Devil's Financial Dictionary [Jason Zweig]

Discovery Communications and the uncertain future of pay TV [Punch Card]

Charlie Munger's favorite life hack [Business Insider]

Profile of Pat Dorsey [Barrons]

The single most important element to successful investing [The Felder Report]

Single sentence investing philosophies [Morgan Housel]

In defense of corn, the world's most important crop [Washington Post]

A pitch on Cimpress (CMPR) [ValueConferences]

Decoding China's swoon and its impacts [Going Long]

Little known French billionaire circles US cable market [WSJ]

Drahi's American cable dream faces harsh reality [WSJ]

Netflix and the conservation of attractive profits [Stratechery]

Aldi and Lidl are ready to invade the US, beware Walmart & Target [Forbes]

Leon Black's sell-everything call has been heard by his rivals [Bloomberg]

What We're Reading ~ 6/10/15

Focus on the key variables of an investment [Base Hit Investing]

Bias from overconfidence [Farnam Street]

Robert Shiller: things are overvalued [Zero Hedge]

The most important concepts in behavioral economics [StockTwits]

A pitch on Charter/Time Warner Cable [Value Venture]

A look at Precision Castparts [Jnvestor]

Why did John Malone invest in Lions Gate? [Punch Card]

On the looming rental crisis in the US [SoberLook]

Weak consumer spending: the canary in the bear market coal mine [Mauldin]

How Tesla will change the world [Wait But Why]

The state of Chinese social media in 2015 [AdAge]

Why China is blowing an equity bubble [FT]

Xiaomi, China's new phone giant, takes aim at world [WSJ]

Coal woes are spreading but it still has fans [Economist]

Caesars: a private equity gamble in Vegas gone wrong [Fortune]

On the truly exceptional business [Value Investing World]

Japan's economy grows faster than estimated [Bloomberg]

Apple is the new king of bonds [Bloomberg]

What Twitter can be [lowercase capital]

Protections for late investors can inflate start-up valuations [NYTimes]

What We're Reading ~ 5/27/15

On investing in bad businesses [Aswath Damodaran]

10 non-investing quotes with great investing lessons [Clear Eyes Investing]

Kahneman: clients driven by losses, not gains [Think Advisor]

Mary Meeker's 2015 internet trends [Kleiner Perkins]

Qualcomm: the biggest bargain in large cap tech [Capital Observer]

Are declining businesses good shorts? [Young Money]

The ability to focus and make the best move when there are no good moves [Farnam Street]

Big cable is coming for big wireless [Bloomberg]

Charter's deal for Time Warner Cable is classic John Malone [FT]

Meet Altice founder Patrick Drahi [Venture Beat]

Inside the trillion dollar war on packaged food [Fortune]

What makes Danaher such a stock market star? [Bloomberg View]

Goldman on 7 trends that will reshape the auto industry [Bloomberg]

Sergio Marchionne: Detroit's chief instigator [NYTimes]

A look at Markel's Tom Gayner [WSJ]

Tech firms seek ways to fend off activist investors [WSJ]

'The Big Short' movie starts filming [WSJ]

Interview with Brunello Cucinelli, king of cashmere [PI]

Children's Investment Fund Boosts Time Warner Cable Stake

Chris Hohn's hedge fund firm, Children's Investment Fund, has filed a 13G with the SEC regarding its stake in Time Warner Cable (TWC).  Per the filing, Children's now owns 5% of the company with over 14.1 million shares.

This means Hohn has increased his position size by over 4.23 million shares since the end of the first quarter.  The filing was made due to portfolio activity on March 6th.

TWC is set to be taken over by Comcast (CMCSA), pending regulatory review.  Hohn must be pretty confident that this deal goes through, though there's no way to know if/how he's hedged out this position.  Even if this deal does fall through, TWC shares likely have a 'floor' as it's been reported that Charter Communications (CHTR) would then be interested in acquiring TWC (something they tried to do previously).

US cable stocks in general also have rallied sharply over the past month on the news that while the FCC has imposed net neutrality, the operators won't be regulated on pricing.  One of the key tenets of the cable investment thesis is that these companies are oligopolies and could have pricing power for their broadband products.  Even if these companies lose video subscribers as customers shift to over-the-top (OTT)/streaming content products, people will still need a (fast) internet connection to receive this content.  

Per Google Finance, Time Warner Cable is "a provider of video, high-speed data and voice services in the United States with clustered cable systems located in five geographic areas including New York State, the Carolinas, the Midwest, Southern California and Texas."

What We're Reading ~ Analytical Links 2/25/15

An interview with The Outsiders author William Thorndike [Joe Magyer]

The extraordinary story of America's most successful industry [Morgan Housel]

Howard Marks: have an approach and hold it strongly [Reformed Broker]

Observations from a decade in the investment business [Wealth of Common Sense]

What is Yahoo worth after the Alibaba spinoff? [MicroFundy]

A look at CDK Global [Scuttlebutt Investor]

The problem with intuitive investing [Wealth of Common Sense]

Profile of SC Fundamental: old school investors [Barrons]

Calculating the odds of a Comcast / Time Warner Cable deal [NYTimes]

The high cost of falling prices [Economist]

Robert Shiller's CAPE ratio recently passed its 2007 high [Twitter]

Americans are borrowing more [WSJ]

Russia's Yandex takes on Google, Android [Barrons]

Millennials ditching their TV sets at a record rate [NYpost]

Capitalism's unlikely heroes: activist investors [Economist]

Profile of one of the most important people at Apple: Jonathan Ive [New Yorker]

Amazon bought this man's company, now he's coming for them [Bloomberg]

Netflix's long-term view [Netflix]

Jamie Dinan's Stock PIcks at Capitalize For Kids Sohn Canada Conference

We're posting up notes from the Capitalize For Kids Sohn Canada conference that just took place.  Next up is Jamie Dinan of York Capital who shared a myriad of investment ideas.


Jamie Dinan's Sohn Canada Presentation

Started off with some general comments. US growth is still quite healthy (although not considered by many people), Europe on the other hand is still not. With oil prices coming down, it will give a huge amount of money to the US consumer (essentially a $130B tax break for consumers – this of course assumes money is not relocated to other spending). Believes Europe will be a reactionary market to policies and this will create lots of distressed situations in Europe (and there is still plenty today).

Some merger-arb names which have ~90% probability of closing: Time Warner Cable/Comcast Corporation, Albemarle Corporation /Rockwood Holdings, and DIRECTV/AT&T Inc.

Next, pitched LONG Molson Coors Brewing (TAP), believes an event could happen with the recent news of Anheuser looking for a deal with SAB. Molson has a 42% stake in MillersCoors (The JV between Molson and SAB). This possible transaction will force SAB to divest their 58% interest from MillerCoors (STZ/BUD deal, divestment of Groupo Model JV), Molson seems like the only option. The deal will likely get done with debt and take Molson to 5x Net Debt-EBITDA. Believes Molson can realize great about of synergies (~$300M) from the US JV with their current Canadian operations. 

Be sure to check out the rest of the presentations from Capitalize For Kids Sohn Canada here.

What We're Reading ~ Analytical Links 4/9/14

On unsentimental investors [Ritholtz]

The best and worst thing about investing [Reformed Broker]

Wall Street's brightest minds reveal the most important charts in the world [BusinessInsider]

Dollar General (DG) annual valuation [ModernGraham]

In scrutiny of cable merger, internet choice will be crucial battlefield [NYTimes]

Report on the performance of controlled companies [IRRC Institute]

Bank of America (BAC) has more upside [Barrons]

What investors need to know about rising rates [BlackRock]

What We're Reading ~ Analytical Links 3/12/14

On UnionPay, China and smuggling money in Macau [Thomson Reuters]

Google's Eric Schmidt on the future of internet freedom [NYTimes]

IPOs: when stability creates instability [Pragmatic Capitalism]

Fannie Mae/Freddie Mac would be eliminated in Senate Bill [BusinessWeek]

The 'easy money' myth [Reformed Broker]

Media industry lists things that worry them about TWC/Comcast merger [WSJ]

Are malls over? [The New Yorker]

The future of TV is coming into focus and looks pretty great [Quartz]

Barely keeping up in TV's new golden age [NYTimes]

Mexico seeks telco and TV competition [Advanced Television]

Big batteries threaten big power stations and utilities' profits [Economist]

Kate Spade (KATE) faces uphill fight to be next Ralph Lauren [Bloomberg]

Smartphone payment system to be unveiled in UK [FT]

The gaming console market is in crisis [TechCrunch]

Google looking to keep its search engine relevant in age of apps [WSJ]

The future of wearable technology [SlideShare]

Alibaba to buy control of ChinaVision [Reuters]

What We're Reading ~ Analytical Links 2/12/14

The single best metric: EV/EBITDA [Crossing Wall Street]

Why margin debt matters [Seeking Alpha]

What I learned at the mall about investing [Institutional Investor]

Half of Americans can't raise $2k in 30 days [Time]

Get ready for a long proxy fight over Time Warner Cable [Dealbook]

John Maynard Keynes' own portfolio not too dismal [NYTimes]

Don't believe the tech bubble hype [Andreessen Horowitz]

US switching from credit card signatures to PINs, but banks need to get on board [Verge]

Investor group targets Ocwen's mortgage servicing practices [FT]

Microsoft's mobile muddle [Stratechery]

Two notable mutual fund trends [AAII]

Why ADT is appalling [Herb Greenberg]

How Mulberry got squashed in fashion's squeezed middle [The Guardian]

Coca Cola: glass less than half full [FT]

On an upturn in capital spending [FT]

TPG-Axon's Dinakar Singh Likes Sirius XM & Time Warner Cable: Interview

Dinakar Singh, CEO of $4 billion TPG-Axon Capital recently sat down with Bloomberg TV so we wanted to post up some of the highlights of his rare appearance.

It seems as though he is betting against telecom stocks and is also bearish on some financials (in particular US regional banks).  He's bullish on names like Sirius XM (SIRI), Time Warner Cable (TWC), and W.R. Grace (GRA).  He sees growth in the chemical, aerospace, and healthcare industries.

A graphic on screen showed TPG-Axon's key long exposures in tech & media: SIRI, TWC, Viacom (VIA.B), Kabel Deutschland, Equinix (EQIX), Expedia (EXPE), Priceline.com (PCLN), and Yandex (YNDX).


On the current environment:   “For us, we pick stocks. That is how we make money. More and more, everyone has become more emotional in markets. We get scared by headlines and we all start acting the same way whether you are a CEO or a consumer. Jobs do matter. I think when you look at the U.S. in the last number of months, our view coming in this year is that people got too excited. There was a bounce back from last year and some good weather but it was going to be a slow gradual sloppy messy restructuring without a big recovery. Things have reversed. I think people are getting too pessimistic…I think ultimately consumers and CEOs are reading the same headlines and scared. I think you are seeing a cyclical or temporary step down. We do not think there one should expect a big bounce, but there won’t be much of a plunge either. It feels like the numbers are crummy but they will probably stay this way for a while. The fiscal cliff is a real issue. I think you're seeing an impact right now.”  


On how to play this market:   “People have gotten scared and they’re paying a lot for safety. On the safety side, people like dividends in safe industries. So Verizon is trading 18 times earnings because people want safety and a good dividend. There are companies like Time Warner Cable that we think are just as defensive but they did not happen to pay a dividend, they have even better cash flow, but they traded as a result much less well last year. For us, big opportunity. So media and cable that’s very cash flow rich and where we think management is going to turn that spigot on and turn it into a dividend or buy back machine that makes sense. Sirius, Time Warner Cable, companies like that. On the cyclical side, not everything is terrible. There are some sectors where we think there is good structural growth and balance sheets will be put to work. Some chemical companies are very good restructuring candidates. Aerospace suppliers.  Aerospace is in the middle innings of a very long term upgrade cycle.”


On telecom services:   “In a hedge fund, this is called a funding short. It is not that you think it is terrible and going straight to 0, but it is priced fully and not going up much so not a very good risk reward. Within telecom services there are two categories. There are the Verizons, we get it, they trade here for a reason, but they are pretty fully priced. On the other side, there are other companies that are legacy telecom companies where the dividend is a very high, but business really is eroding. It is priced well today because of a high dividend, but it is not sustainable. When you look around the world, a lot of high dividend stocks in Europe are not trading well because people are looking at them and saying I get it. I have a dividend today but it might not be there tomorrow.”


On China:   “If you look at China specifically, multiples had really collapsed…You have two general types of companies. Big, state-owned companies that people don’t trust and private companies that people really don’t trust. There isn’t a lot that trades at big multiples anymore. I think if you can find cases where there is real growth and they can pay cash back to you, you’ll make money.”


Embedded below is the first part of the interview of Dinakar Singh's interview with Bloomberg TV:



And here's the second part: