Investments that drove up Pershing Square’s return in the third quarter included Herbalife Ltd. (NYSE:HLF), Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP), Allergan, Inc. (NYSE:AGN) and Burger King Worldwide Inc (NYSE:BKW). Howard Hughes Corp (NYSE:HHC) and Platform Specialty Products Corp (NYSE:PAH). Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) contributed negatively to the third quarter returns according to the most recent investor letter, a copy of which was obtained by ValueWalk.
Bill Ackman still strong on Fannie and Freddie
A number of Bill Ackman’s holdings have been in the news lately, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have brought serious damage to hedge funds who had holdings in the GSEs. In the shareholder letter, the hedge fund said that it is not worried about the dismissal of lawsuit in the federal court. In fact, Bill Ackman was so confident about the future of these mortgage giants, that he was buying more shares while others were unloading,
“We believe the U.S. District Court ruling will ultimately be overturned on appeal, and similar lawsuits in other jurisdictions will yield a more favorable outcome. The adverse court ruling resulted in a large decline in Fannie and Freddie’s respective share prices, which we used as an opportunity to purchase additional shares in both companies. We voluntarily withdrew our case in the U.S. District Court and are devoting our legal resources to reversing the Federal Government’s improper seizure of common shareholders’ property by prosecuting our Constitutional takings claims in the U.S. Court of Federal Claims.”
The letter said that this will be prolonged battle and the stock is likely to stay volatile until a consensus resolution is reached. The fund’s exposure to Fannie and Freddie accounts for just 3% of its asset base, which is small considering that Pershing is known for holding large concentrated stakes in companies. Bill Ackman strongly believes that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) earnings should be used to build well-capitalized companies. The reformed GSEs will give affordable access to mortgage credit and are also of value to taxpayers through Treasury’s ownership in Fannie and Freddie’s common stock via warrants.
Pershing Square stands to gain billions from Allergan
Bill Ackman discusses profits from the fund’s investment in Allergan, Inc. (NYSE:AGN) in the investor letter. The fund now holds 26.6 million shares of Allergan after selling 2.24 million shares of the company earlier this month. Pershing Square used the proceeds from the sale to transfer $344 million to Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX). Bill Ackman stands to make a 77% profit on this position based on the $227/share Actavis plc (NYSE:ACT) has offered for Allergan, Inc. (NYSE:AGN). Pershing’s remaining stake is worth $5.6 billion, $3.4 billion in cash for AGN shares and 9.81 million shares of Actavis, which are approximate worth $2.6 billion at current price. Pershing said that they are doing due diligenece on Actavis to decide whether they would hold on to its shares once the transaction is closed in April next year.
Zoetis is a scarce asset, says Bill Ackman
Pershing Square’s only new investment in the last quarter was Zoetis Inc (NYSE:ZTS), a maker of animal health products. Zoetis is a co-investment of Sachem Head Capital and Pershing Square and makes up for 10% of the company’s equity.Pershing said that Zoetis has a highly durable business and a dominant role in the market. Since its spin-off from Pfizer Inc. (NYSE:PFE), the company has become the only large and publicly traded animal health company. Zoetis has very little competition in the sector, judging by the fact that majority of its products are sold without patent protection. Pershing called Zoetis a scarce asset, and it appears has plans to look for a buyer for the company to maximize value for shareholders.
This was Pershing Square’s first letter to its shareholders after its IPO on October 1 of this year.
PSCM also welcomed Charles Korn to its investment team in September; he has previously worked at KKR & Co.