Bill Ackman’s Pershing Square Holdings annual report is now out – see the full letter below.
Pershing Square 2014 Letter
Allergan, Inc. (AGN)
In February of 2014, Pershing Square formed a joint venture with Valeant Pharmaceuticals International to pursue a merger between Valeant and Allergan. Allergan is a leading specialty drug company in aesthetics, dermatology and ophthalmology. Over the course of two months, the Pershing Square/Valeant joint venture acquired a 9.7% stake in Allergan at an average cost of $128 per share, which we deemed to be a fair price for the business, assuming no improvement in operations or a transaction.
Allergan had a strong track record of organic growth driven by a portfolio of market-leading products, including the fast-growing Botox franchise, but was not known to allocate capital efficiently or run its business cost effectively. Given the strategic overlap between Valeant and Allergan’s product portfolios, along with Valeant’s superior cost structure, operating model and capital allocation strategy, we believed that a merger between Valeant and Allergan had the potential to create enormous shareholder value.
On April 22nd, Valeant and Pershing Square announced an unsolicited offer to acquire Allergan for $161 per share, a 38% premium to Allergan’s unaffected stock price, and a takeover battle ensued with two price increases, litigation, two proxy contests, a war of words, and ultimately a transaction.
On November 17th, Allergan announced a merger with Actavis plc for cash and stock valued at ~$240 per share when the transaction closed on March 17th. Prior to closing, we hedged a substantial portion of the Actavis shares we would have received while electing to retain 1.35 million shares (held across all funds, ~500,000 are held in PSH) in the newly merged company which we consider to be undervalued and well managed.
Herbalife Ltd. (HLF) Short
We remain confident in our short thesis that HLF is an illegal pyramid scheme that will collapse or otherwise be shut down by regulators. The company’s business has continued to deteriorate as reflected by its substantially reduced forward earnings guidance for 2015.
Herbalife is doing its best to attack the messenger with a public relations campaign against Pershing Square. Ultimately, the facts will drive the outcome. We expect continued substantial business deterioration as the company is forced to reform its highly abusive and deceptive practices, or is shut down.
Air Products and Chemicals, Inc. (APD)
Air Products and Chemicals, Inc. has made meaningful progress since Seifi Ghasemi became CEO on July 1st of 2014. We believe that Seifi is the ideal leader to transform Air Products, and we applaud the Air Products Board for hiring Seifi as Chairman/CEO and supporting him in his efforts to improve the company.
Seifi’s announced goals are to increase EBIT margins from ~16% to ~22.5%, comparable to that of industry leader Praxair Inc. Air Products expects that half of this 650 basis point improvement will come from SG&A and overhead, and half from gains in productivity and operational efficiencies. Air Products was at the top of the industry two decades ago, and Seifi has stated that he believes there are no structural issues that should prevent the company from regaining its industry-leading performance.
Early results, including earnings announcements in October 2014 and January 2015, have been impressive. Earnings per share (EPS) have increased 13% and 16%, respectively in Seifi’s first two quarters as CEO. Operating margins are at the highest levels in nearly a decade, driven partially by reductions in SG&A of ~8% in the most recent quarter. With operating margins now at ~17.5%, Air Products has closed 150 basis points of its margin gap versus Praxair with remarkable rapidity. Air Products’ fiscal year 2015 guidance calls for EPS of $6.30-6.55, which represents growth of 10-13%despite foreign exchange headwinds.
Canadian Pacific Railway Limited (CP)
The remarkable transformation of Canadian Pacific continues under the leadership of Hunter Harrison and the reconstituted CP Board in 2014. Full-year EPS grew 32%, in spite of severe winter weather conditions in the first quarter of the year. In 2014, CP achieved an operating ratio of 64.7%, besting its four-year 65% operating ratio target just two years into the operating plan. On an annual basis, CP has risen from the least efficient Class I railroad to the third-best, and the improvements are continuing. This progress has been achieved while maintaining industry-leading safety performance. The drive to operational excellence is enhancing service and reliability, while lowering CP’s cost to serve its customers.
In October, CP held an analyst day to outline its revised multi-year plan. The company’s new four-yeartargets call for $10 billion of revenue by 2018, representing a 10.5% compound annual growth rate. This impressive revenue growth is driven by efficiencies and service-level improvements that permit CP to win business for which it historically could not compete.
CP’s announced revenue and margin goals translate into about $20 per share in earnings in 2018 including the impact of projected share repurchases. At the inception of our investment in 2011, CP earned $3.15 per share. The achievement of $20 per share in earnings would represent more than a six- fold increase in the earnings power of the business following the proxy contest and Hunter Harrison’s appointment as CEO. We believe CP remains an attractive investment led by a superlative management team.
Restaurant Brands International Inc. (RBI)
At the end of August, Burger King announced that it would acquire Tim Hortons, Canada’s leading quick- service restaurant (QSR) company, for $12 billion forming the newly renamed Restaurant Brands International (RBI). The transaction closed in December of 2014. Tim Hortons operates a 100% franchised business model with ~4,500 units. In Canada, where 80% of Tim Hortons’ restaurants are located, the company commands a market share which RBI estimates to be more than 40% of total QSR traffic and nearly 75% of QSR caffeinated beverages sales.
We believe the acquisition of Tim Hortons will create significant long-term value for RBI shareholders as executed by the company’s controlling shareholder, 3G Capital, which has an extremely strong track record of successful business transformations. In the four years that 3G has owned a controlling stake in RBI, the company has dramatically improved its operations, reduced its capital intensity, significantly grown its number of restaurants, and put in place an improved capital structure.
We believe the improvements that 3G has enacted at Burger King will serve as a template to create value in the Tim Hortons transaction. We believe there is substantial unit growth opportunity outside of Canada, and that under 3G’s leadership, Tim Hortons is well positioned to identify meaningful operations and capital efficiencies. The acquisition enhances Restaurant Brands’ medium and long-term EPS growth rate, andlong-term shareholder value.
Platform Specialty Products Corporation (PAH)
We believe that Platform Specialty Products has the opportunity to invest large amounts of capital at a high rate of return by acquiring a portfolio of specialty chemicals businesses that can operate more efficiently as part of a larger industry platform.
Platform’s business model of investment in asset-light, high-touch specialty chemical businesses is characterized by high margins, low capital intensity, and high switching-costs. Platform’s management team has a demonstrated record of value creation which benefits by an environment which is favorable for M&A activity.
In 2014, the company announced $5 billion in acquisitions in the agricultural chemicals industry by acquiring Chemtura AgroSolutions, Agriphar and Arysta LifeScience Limited. Agricultural chemicals are vital