As JANA Partners launched new activist positions in the second quarter, the hedge fund’s master long positions chugged along with the stock market. The Master Fund was up 1.6 percent in June and is up 5.3 percent year to date, slightly below the performance of the S&P 500, while the firm’s more concentrated Nirvana Fund was up 2.5 percent in June and is up 8 percent on the year, slightly outpacing stocks, according to an investor letter reviewed by ValueWalk. The Nirvana strategy begins the third quarter of 2014 with about $5.1 B in capital, according to the letter.
JANA Partners largest new commitment: Apache Corporation
The largest new commitment activist investor Barry Rosenstein made in the second quarter was to energy concern Apache Corporation (NYSE:APA), where he is already engaged with the board of directors on changes to the firm’s management and corporate structure. JANA states that the hedge fund has a one billion dollar position in the company – that news was first reported earlier this week by The Wall Street Journal. This new activist bet is followed by a new commitment to PetSmart, Inc. (NASDAQ:PETM), where again Rosenstein has engaged the board of directors and company management to assert his ideas for stock appreciation.
In the case of Apache, Rosenstein says “we engaged with management on three key initiatives that we believe can unlock substantial value.” This basically encompasses the firm becoming a pure play onshore domestic energy producer and includes exiting many of the non-core initiatives, including a complete exit of LNG and a delineation of its Permian Basin play, considered Apaches’s “crown jewel,” so as to operate in line with other large shale players, the investor letter revealed.
In other words, Rosenstein wants to completely change Apache’s corporate structure to suit the fund’s needs – boosting the stock price and delivering shareholders value and do so in a relatively timely fashion.
Rosenstein sums up stating:
Investors are unimpressed by APA’s global diversification and have voted with their feet. Apache has underperformed the company’s own stated peers over the past 10, 5, 3 and 1 year periods. It is true that over the last year Apache has begun to restructure. APA has monetized a portion of its Egypt position, exited Argentina, sold its Gulf of Mexico deep water prospects, and repurchased $2 billion of stock. This is progress, but long suffering Apache shareholders have a right to demand more, and more must be done.
Here’s how we think about what the “New Apache” looks like: adjusted for exits from LNG and the international portfolio, the U.S. business can be created today for about 4.5x 2015 U.S. EBITDA. Unburdened by the LNG capex dead weight and the growth dilution from the international portfolio, the Permian locomotive could drive production growth per share on the order of 15% while generating free cash flow. Peers with similar growth rates, resource bases and financial characteristics
trade for 6.0x-8.0x. The middle of this range would represent an Apache price target of $130 per share.
The recent words and deeds of Apache’s management indicate they see the opportunity and will do what it takes to realize shareholder value. If they do not, we believe a strategic acquirer could move quickly to restructure the assets and capture the benefits for its own account. A value-unlocking opportunity this obvious and extraordinary is unlikely to persist.
JANA Partners’ investment in PetSmart
The story with PetSmart isn’t that different from the macro level. On July 3, Rosenstein filed his 13D and the world was aware he became the largest owner of the company. He “engaged” management and the board of directors and is actively in discussions, but did not reveal specific recommendations to alter corporate strategy at this point. “Following years of underperformance for shareholders, we believe shareholders are overwhelmingly supportive of change,” the investor letter said, as it noted that Longview Asset Management, PetSmart’s second largest shareholder, issued a letter backing Rosenstein’s actions.
JANA Partners’ exisiting holding: RS Corp, URS, QEP
With these new initiatives on the plate, JANA also reflected on news regarding its existing holdings. RS Corp., a stock the fund held and was active with, was acquitted by AECOM Technology Corp (NYSE:ACM). “As Barry often says,” the investor letter read, “when a traditional manager is confronted with the unpleasant experience of a core position veering off track, he is left with two options: he can sell; or he can endure. At JANA our activist capabilities give us a third option. We can engage with the management team and the board to set things right. The value creation committee that was established at URS Corp (NYSE:URS) as a consequence of our engagement with the company in February made quick work of identifying the best buyer for URS and negotiating a favorable transaction.”
Other positive developments in the portfolio included firms divesting non-core assets, as recommended. This was the case with Oil States International, Inc. (NYSE:OIS) divesting and QEP Resources Inc (NYSE:QEP). Overall the portfolio’s long exposure, positive by 8.5 percent in the second quarter, trounced the shorts, down 3.4 percent. But as Rosenstein wisely notes, the shorts delivered alpha with the exception of June, when they were down 2.2 percent. Having a fund 100 percent long to match the performance of the S&P in a rising market environment is much easier than having both long and short exposure. Rosenstein performs right alongside stocks even with the short exposure — a hedge that is likely to come in handy if market environments quickly change.
JANA only mentions one specific short by name, Safeway – the hedge fund states:
The short portfolio contributed alpha for April and May but had a very challenging month in June. While there were a few positions that were impacted by M&A activity, it felt more like death by a thousand cuts as no individual name cost more than 35 bps but just about all our short positions seemed to go up in June. Notwithstanding, we did have some notable successes with our shorts, particularly among the organic grocers, where our Safeway Inc. (SWY) diligence enabled us to recognize increased competition in the organic channel that led to weakness in the category leader.