An article by Mary Schlangenstein and Katherine Burton of Bloomberg regarding Bill Ackman’s Pershing Square Capital Management and a letter to raise money for a single stock fund and was the catalyst for 4.4% move up in FedEx Corporation (NYSE:FDX) stock on Tuesday (vs the S&P 500 +0.7%).
JPMorgan is skeptical on Bill Ackman’s chances taking on the management of FDX. In a note dated July 10th, Thomas R. Wadewitz of JPM notes:
Top value fund managers are ready for the small cap bear market to be done
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Letter indicates PSCM is raising capital for a single stock fund
We believe the hedge fund letter from Pershing Square was sent to investors in its hedge fund to provide the opportunity to co-invest with PSCM through a fund that would be invested in a single stock. According to the article, Pershing Square already has built a position in this company. The Bloomberg article identifies a 10-day time frame for raising the money but we note that this would likely be followed by a period of time to invest the capital before the company in focus would be identified. Our sense is that the commentary from the letter (free cash generative, customer switching costs, high barriers) does not imply a narrow characterization and that FDX could fit a loose definition of the description.
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FedEx Corporation (NYSE:FDX): A proxy fight vs. Fred Smith would be much tougher than the fight vs. Fred Green.
An activist could potentially prod FedEx Corporation (NYSE:FDX) management to make certain moves but a proxy fight to remove management would also be possible. In contrast to PSCM’s proxy fight vs. CP’s Board and prior CEO Fred Green, we believe that a proxy battle against Fred Smith would be much more difficult to win. Mr. Smith is not only the Chairman and CEO but also the founder and largest shareholder (~6%) in the company. Following the 6.2% ownership of Fred Smith, the next 10 largest holders own 43.3% of FDX and several of these positions have been held for many years. It seems reasonable to believe that a number of longer-term holders might be inclined to continue supporting the existing management team.
FedEx Corporation (NYSE:FDX): More and faster cost cuts or Express/ Ground integration are potential arguments for change.
FDX is in the early innings of the implementation of its operating improvement plan (unveiled in Oct. 2012 at their analyst meeting) targeting $1.65 bn of improvement in operating income. An activist could argue for faster and greater cost / capacity takeout vs. FDX’s plan or, if that is not compelling enough, they could take a position to argue for a more aggressive (and risky) step of combining the Express and Ground networks.
Is there a Hunter Harrison of small package?
Considering the analogy of what PSCM did at Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP), it would be necessary to identify a compelling leader to support as part of a proxy fight. While there are possibilities, we do not see an obvious candidate in small package who has the reputation and compelling track record in small package that Mr. Harrison at Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP) does with rails.
Wadewitz concludes regarding FedEx Corporation (NYSE:FDX):
Given a nearly equal mix of positives and negatives it is difficult to form a strong view on the likely outcome, but on balance we are somewhat more skeptical that FedEx Corporation (NYSE:FDX) is the name in focus for PSCM.