It was hedge fund activist day on Wall Street on Friday.
First of all, Nelson Peltz’s Trian Fund Management identified its newest activist target. The New York hedge fund manager said on Friday that various of its entities owned a total of 7.08 percent of Sysco Corporation, the industrial food service giant. Little surprise, the stock surged more than 7 percent on the news.
In a regulatory filing, Trian says the stock is undervalued and is an attractive investment. It also says the firm has held discussions with Sysco president and chief executive officer William Delaney and non-executive chairman Jackie Ward related to strategies it thinks “would enhance value,” including recommendations related to the company’s operations, capital structure, capital allocation, corporate governance and board structure and composition.
Trian also says that despite having a number of competitive advantages, Sysco’s operating and financial performance “has underperformed relative to its potential,” calling on the firm to adopt certain initiatives to boost operating margins and working capital efficiency, and consider using “prudent amounts of incremental leverage” to return additional capital to shareholders.
In a statement, Sysco said it expects to continue a “constructive dialogue” with Trian, adding that it “welcomes collaborative discussions with investors who share our interest in creating value by marketing and delivering great products to our customers with exceptional service.” Sysco also asserts in the statement that it is “extremely well positioned to execute” it strategy “in a manner that will support the success of our customers, profitably grow our business and improve our return on invested capital.”
___
In other activist news, John Paulson’s Paulson & Co. is trying to inject itself into the middle of a hostile takeover battle in the health care industry. In a press release, the New York hedge fund firm said it voted all of its 21.9 million shares of Mylan N.V. in support of the drug giant’s unsolicited $36 billion takeover offer for Perrigo.
“The combination of Mylan’s unparalleled generic capabilities with Perrigo’s attractive OTC platform would create a global pharmaceutical powerhouse,” Paulson says in a statement. “The combined company will benefit from the growth in generics and OTC plus the migration of generics to OTC for many years to come. Mylan management has a successful track record of integrating acquisitions.”
In a separate regulatory filing, Paulson reported it owned more than 2 million shares of Perrigo at the end of the second quarter. Mylan’s stock has fallen since its recently raised bid, lowering the value of its cash and stock offer. Teva Pharmaceutical Industries also bid for Perrigo but withdrew its offer about a month ago.
Meanwhile, on Friday influential proxy advisor Institutional Shareholder Services recommended that Mylan shareholders vote against the deal, citing “unreasonable uncertainties,” according to the Wall Street Journal. “The transaction Mylan envisions may indeed be a solid business strategy,” ISS reportedly wrote. “What it has asked shareholders to approve at this meeting, however, is not a compelling acquisition strategy.”
___
And in yet more activist news, Thomas Sandell’s Sandell Asset Management, which owns 5.5 percent of Ethan Allen Interiors, said in a letter to chairman and chief executive officer Farooq Kathwari that it thinks the furniture company’s stock is worth more than 30 percent above its current price.
“Ethan Allen serves as an abject example of the ill effects that can befall shareholders invested in a company that does not earn an appropriate return on its capital,” Thomas Sandell writes in the letter. Sandell estimates the company’s real estate is worth more than 50 percent of Ethan Allen’s entire market value. He also asserts there are many interested parties and several ways to boost this value, ranging from sale-leaseback transactions to the creation of a tax-efficient REIT through an OpCo-PropCo structure.
Sandell also calls the company lack of debt “an astonishingly unsophisticated fiscal policy that we believe is at odds with the fundamental precepts of modern corporate finance.” Sandell also criticizes the board for its large number of directors with particularly long tenures. The hedge fund calls on Ethan Allen to recapitalize with some debt, do a “meaningful” stock repurchase via a Dutch tender offer and issue a special dividend, additional cash and/or shares of a real estate PropCo, or property company.
Sandell adds: “The unique characteristics of the company, such as Ethan Allen’s exceptional brand name recognition, its robust free cash flow, its minimal core capital spending requirements, and its unlevered balance sheet and extensive real estate holdings make Ethan Allen an ideal, and in fact almost prototypical, LBO candidate.”
___
Paul Hudson’s Glade Brook Capital Partners, one of a handful of Tiger Management descendants with large portfolios of private companies, led the $100 million Series D financing of Honest Co., the baby products e-commerce company founded by actress Jessica Alba.
___
Julian Robertson Jr.’s Tiger Management is betting on China. The New York firm announced it has formed a strategic partnership with Yulan Capital Management to invest in the greater China region. Tiger will be a seed investor in Yulan, which was founded in January 2014 by Lilian Zhou, a specialist in Asian securities. “Asia, in general, and China, in particular, offer great opportunities for hedge funds, both on the long and short sides,” says Robertson in a press release.
Elsewhere, Tiger Management disclosed on Friday that at the end of the second quarter, it boosted its stake in JD.com, a Chinese e-commerce site, which had already been its largest holding. Other firms with major positions in the stock include three so-called Tiger Cubs: Stephen Mandel Jr.’s Greenwich, Connecticut-based Lone Pine Capital, Charles (Chase) Coleman III’s New York-based Tiger Global Management and Phillipe Laffont’s New York-based Coatue Management.
___
Jana Partners took a initial stake of 2.47 million shares of Precision Castparts in the second quarter, making it the New York activist’s eighth largest individual stock holding. Great timing. Last week Warren Buffett’s Berkshire Hathaway agreed to acquire the maker of equipment for the aerospace and energy industries for $37.2 billion, including debt.
