Valeant Pharmaceuticals International’s hostile offer earlier this week to buy Cephalon for $5.7 billion is the latest deal in less than year involving a major holding of hedge fund ValueAct Capital.
At the end of last year, ValueAct was Valeant’s third largest investor, with nearly 27 million shares. It was also by far the hedge fund firm’s largest holding, accounting for about 25 percent of its $5.2 billion in total assets. This week alone the stock is up about 11 percent. ValueAct’s G. Mason Morfit currently sits on Valeant’s board, and, until recently, so did ValueAct’s Brandon B. Bozet.
The San Francisco-based hedge fund firm is led by co-founder Jeff Ubben, a former Fidelity analyst and portfolio manager. ValueAct is known for taking concentrated positions in a small number of companies. Typically, these are under-performing companies that Ubben and his team believe are worth much more if they would, say, shed some businesses, or bring in new management or focus on certain core businesses. Frequently, ValueAct will play a major role in recruiting new management.
Since 2001, it has made at least 56 “core” investments. During that time its partners or other key people have sat on 27 Boards of Directors and helped to sell 18 businesses.
ValueAct was up 42 percent in 2010 and 36 percent in 2009.
Valeant is a good example of how Ubben and his people play a behind the scenes role. Since taking its initial stake in 2006, the firm helped Valeant identify major cost savings and sell its pharmaceutical pipeline so it could focus on its branded generics business, which was less volatile. This enabled the company to slash R&D by more than half.
In 2008, ValueAct also recruited J. Michael Pearson from McKinsey, where he had spent 23 years, to serve as Chairman and Chief Executive Officer of Valeant. Last year, Biovail acquired Valeant for $3.2 billion, retaining the name Valeant.
Meanwhile earlier this year ValueAct seemingly played a behind the scenes role when Sara Lee announced a major restructuring, whereby it would spin off its North American Retail and Foodservice business in a tax-free transaction, creating two pure-play, publicly traded companies.
Ubben would not discuss any role he might have played. However, he has said his firm invested in Sara Lee in 2007 and 2008 based on the restructuring opportunity, as the company’s operating margin was almost half of the food industry average. Today, the operating margin is in double-digits, up from the 6 to 7 percent range. Ubben has served on the board since August 2008.
The separation is expected to be completed in early calendar year 2012. Also as part of the plan, the board of directors intends to declare a $3 per share special dividend, the majority of which will be funded with proceeds from the sale of the company’s North American Fresh Bakery business. The special dividend is expected to be declared and paid in fiscal 2012 and before completion of the spin-off of the two companies.
In February 2010, Sara Lee announced plans to repurchase between $2.5 and $3 billion of stock. After payment of the $3 special dividend in fiscal 2012, the company will have returned a total of $3.5 billion of capital to its shareholders since the revised capital plan was announced.
Also last year, British software maker Misys — which at the time accounted for 13.5 percent of VA’s portfolio — agreed to sell its majority position in Allscripts, paving the way for the merger agreement between the health-care information company and Eclipsys Corp. in their $1.3 billion all-stock deal.
At Misys, ValueAct sold three businesses and used the proceeds (with some new equity from VAC) to help fund the merger of Allscripts with Misys’ practice management software business in the US.
At year-end, ValueAct had just 16 positions, including Moody’s and New York Times, which were added to the portfolio in the fourth quarter. The hedge fund firm is believed to have a particular interest in three companies — Willis Group Holdings, CR Bard and Verisign.
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