Bill Ackman, Founder and CEO of Pershing Square, discussed taking Pershing Square Holdings public and U.K. companies he was considering with Bloomberg TV’s Francine Lacqua and Guy Johnson today. He said oil’s drop is a “huge boon” to the U.S. consumer and helps “the vast majority” of the economy.
Ackman revealed he considered investing in Tesco in the last six months: “We did look at Tesco, I’ll have to admit that. But we’ve had our difficulties with retail and a lot of structural changes going on that make that a more difficult business. We look occasionally at companies in the U.K.
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On purchasing companies in the UK and whether Ackman called Warren Buffet for advice on Tesco, he said “No, but when Warren Buffett is giving up, there’s got to be a lot of negative sentiment. But he’s probably giving up for a good reason. But a lot of assets, et cetera. But we look on a very rare occasion. We were a shareholder of Cadbury prior to the Kraft deal. But, other than that, we’ve done nothing here. And we’ve not been active in any way here.”
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Ackman: Looked at Tesco, Did Not Talk With Buffett
GUY JOHNSON: Now, 2014, a rough year for hedge funds with firms on average returning just 2 percent. Some of the passive funds did a little better than that, but that wasn’t the case for activist investor Bill Ackman.
FRANCINE LACQUA: It certainly wasn’t. He went from managing $11.5 billion to more than $18 billion last year, and that put his hedge fund at the top of Bloomberg Market’s annual rankings.
Now we’re joined by Bill Ackman, founder and CEO of Pershing Square Capital Management. Bill, great to have you on the program. Thank you so much for joining us. Give us a sense — you have $18 billion now — what is the next thing on your list? What are you looking at?
BILL ACKMAN: We’re looking for what we normally look for, which is we’re looking for very high quality companies, usually very large businesses, dominant, simple, predictable, free cash flow-generative companies that have, I guess as Buffett would describe them, a moat around them. Brand, unique assets, long-term contracts, things that protect the business from new entrants. Businesses that are not exposed to commodity prices, fortunately.
So that’s what we’re looking for. And we’re looking for a business like that that’s lost its way. Perhaps the costs are now out of line; they’ve not allocated capital effectively. They might have hidden assets that are misunderstood by the market. And we can buy a large stake and sit down with management and help make the business more successful.
JOHNSON: So the question everybody is asking themselves is what is Bill Ackman doing on this side of the pond wearing a suit and a tie and not on vacation?
BILL ACKMAN: That’s a good question. So I’m here because we took a company public here called Pershing Square Holdings, listed on Euronext. I think no one knows it actually exists even though it has almost $7 billion of capital. I think it was the largest IPO in Europe last year, interestingly enough, about a $2.7 billion IPO.
But it’s — I would call it the best-kept secret. If I came to you and I said we have an investment holding company with an 11-year record of compounding at 23 percent — compounding its equity at 23 percent for 11 years and you can buy at a discount to book value, people would say, well, there must be something wrong. And, in fact, Pershing Square Holdings today trades at about a 10 percent discount to book value. And pro forma for the lower incentive fees of Pershing Square Holdings, it’s part of a group of funds that have earned 23 percent for a long time.
LACQUA: Bill, I have a great piece of PR advice.
BILL ACKMAN: Please.
LACQUA: Buy a big company in the U.K., make a bang, go after it, and people will know instantly about it. Is that something you are thinking about?
BILL ACKMAN: We did look at Tesco, I’ll have to admit that. But we’ve had our difficulties with retail and a lot of structural changes going on that make that a more difficult business. We look occasionally at companies in the U.K. We’ve —
LACQUA: When did you look at Tesco? In the last six months?
BILL ACKMAN: Yes.
JOHNSON: Did you ring up Warren Buffett and ask his advice when you were looking at it?
BILL ACKMAN: No, but when Warren Buffett is giving up, there’s got to be a lot of negative sentiment. But he’s probably giving up for a good reason. But a lot of assets, et cetera. But we look on a very rare occasion. We were a shareholder of Cadbury prior to the Kraft deal. But, other than that, we’ve done nothing here. And we’ve not been active in any way here.
JOHNSON: You sat down in the break and you said there’s still plenty of opportunity at home. Do opportunities exist over here? It’s just that there are enough over there and they keep you occupied?
BILL ACKMAN: This is a time-consuming strategy. You find yourself in a situation, a proxy contest. Again, very vast majority of what we do, we end up in a consensual arrangement with a board or a management team. But if it goes otherwise, it gets complicated and you have to get on a plane and spend your life away from home. So I think that causes us to focus a lot more on what’s close to home. Don’t need a passport.
LACQUA: So that you know the directors better? You get a feel for the business better? Because it seems like opportunities in the U.K. may be more rife than actually in the U.S.
BILL ACKMAN: Actually, I’m not sure that’s true. We have the benefit of I would say a very favorable governance environment where directors are more in tune to what their shareholders have to say than they were 10 or 15 or 20 years ago. You have much larger companies, generally. Very big, liquid stocks, so we can buy big stakes in companies. And then, of course, it’s a shorter plane ride to go visit headquarters. And that I think is probably the biggest driver for us. So we really focus on the S&P 500, Canada to some extent. And that’s really where we spend our time in the last 11 years.
JOHNSON: Do you think that there are opportunities for activism over here? When I talked to money managers, and I remember sitting downstairs not that long ago listening to a bunch of managers saying activism doesn’t work over here. These guys want to come over from the States and they want to influence management by the company — don’t take stakes and think that they can push us around. Is there a different attitude over here?
BILL ACKMAN: I’m not sure because we haven’t really tried at this point, but I would say, what ‘ interesting is large cap private equity in the U.S. is almost a business that’s disappeared. And the reason for that I think is because of shareholder activism. If you’re a shareholder of a company that’s underperforming, your alternative was to sell the stock or hope that private equity would show up and buy the business. I think what has changed and I think what’s great about shareholder activism is we’ll buy 8 or 10 percent of the business and we won’t tell the person selling that we’re buying.
But, after we own it, any value created goes to all of the shareholders. And the value that a private equity investor can create can also be created in the public markets. And we think many of the techniques used by private equity in terms of management change or cost structure or strategy change, capital structure change, no reason why the public shareholder shouldn’t benefit. Why shell out a 20 percent premium and leave multiples on the table?
JOHNSON: Their (INAUDIBLE) would be we’ve invested in this management team already; we’re pretty comfortable with what they’re doing. We are — we’re investing in that management and we put our money in in good faith. Why should a guy who’s only 10 percent of the business come in and take a stake? I’m — that is the argument that gets articulated here.
BILL ACKMAN: I could see — the argument I would make is we only step into situations where a business has underperformed its potential and we don’t know a shareholder who wouldn’t want to see a business perform at its potential. And if you think about the ownership of corporate America, it’s not that different from the ownership of corporate U.K. The BlackRocks, and Fidelitys, and Vanguards and their equivalents own a pretty high percentage of the companies here. and I think investors are looking for returns. The kind of changes we make to businesses are not ones that create short-term value; they’re ones that create enduring value. And I think they’ll be supported by shareholders generally.
But no plans to come to the U.K.
LACQUA: Not yet. But you did look at Tesco, so you may look at it again?
BILL ACKMAN: We did. We did look at Tesco, it’s true. We did.
LACQUA: Talk to us a little bit about some of the plans in the States. You’re invested in 3G, am I right ?
BILL ACKMAN: I personally have an investment with 3G. These are people I have enormous respect for. That’s on a personal side. That’s a tiny part of my — the vast majority of my investments are in Pershing Square. And we have an investment with 3G in that we own Restaurant Brands International, formerly Burger King. We own 11 percent. I guess now more like 8 percent.
LACQUA: I think, before Christmas, you mentioned something about McDonald’s needing to get shaken out. Is it something you are looking at?
BILL ACKMAN: At this point, we’re a Burger King shareholder. Burger King I think is taking very meaningful market share away from McDonald’s. We have a lot of confidence in the Burger King management team. So I think it’d probably be unlikely for us to be competing with ourselves. And I think McDonald’s stock is not cheap. I think that can be a serious issue because there’s a very strong balance sheet, pays almost a 4 percent dividend yield. I think that supports the stock price. So I think it’s not as interesting because the dividend supports a value that I think is maybe not justified based on the current performance of the company.
JOHNSON: When you’re looking at the array of opportunities that are in front of you, how much are you thinking about the sort of macro backdrop right now? Like, oil getting crushed. Copper this morning down massively. Treasuries back below 3 percent. And people are wondering whether the fed raises rates this year at all.
When you look at the economic story at the moment, what signals are you getting? And which ones in particular are you listening to?
BILL ACKMAN: I think I’m very bullish for most industries and for the economy. You have a very unusual period of time where unemployment is heading down, it’s in the mid-5 percent range. You have GDP growing at a pretty nice clip. Yet you have long-term interest rates that are very low. So it’s like an ideal environment for most of corporate America.
Now, if you’ve got a lot of exposure to the energy sector, if you make drill bits, it’s probably not a good time. But I think if you’re — put aside — I mean, I think if energy prices were up, people would be complaining about the implications of high energy prices. It is a huge boon to the American consumer.
JOHNSON: Right, and that feeds (ph) through into what kind of asset prices in particular?
BILL ACKMAN: The vast majority of the economy. And so I think it is a very, very positive factor. I think the reason for some market disruption is more because of portfolio managers having energy exposure being forced to reduce overall risk because they’re losing money in a big chunk of their portfolio. And I think that creates some interesting opportunities where businesses that benefit by the lower energy prices become cheaper because of technical factors.
JOHNSON: Will there be opportunities in the energy sector for — do you know enough about that sector? Is that an area that you’d be looking at? There’s going to be a lot of moving parts over the next six months as prices sort of feed through. And so what might —
BILL ACKMAN: My guess is that opportunities will appear. I’m not sure that we’re the ones that pursue them. We spend most of our time looking at macro factors to determine which macro factors — we like businesses where energy prices can go up and down that won’t have a material impact on the companies we own. So we look for these very, very resilient businesses.
But getting back to my Pershing Square Holdings, perhaps that is why Pershing Square Holdings is trading at a discount. Can I give you a pitch for Pershing Square Holdings while I’m using your time?
LACQUA: Go for it. Go for it.
BILL ACKMAN: I think it’s one of the cheaper stocks out there. So you have a company. If you look at the universe of companies that have earned —
LACQUA: And it’s cheap because people just don’t — haven’t really realized the potential? Or —
BILL ACKMAN: I think it’s cheap for short term technical (ph) factors. We took the business public about — almost — a little more than a quarter of the stock was bought by event driven hedge funds, September 30. If you remember October, very difficult month for those funds. Most of those investors are exiting, causing an overhang in the stock.
But the way I think about is if you look at the universe of companies in the world that have earned 23 percent on equity over the last 11 years, there are about 300 who’ve earned between 20 and 25 percent. You can type in — figure this out on Bloomberg, in fact. And they traded an average or something approaching high-2s times book value, 2.7, 2.8 times book value. You can buy Pershing Square Holdings at 0.9 times book value.
LACQUA: Bill, you also had a great 2014, right, in terms of returns? How are you going to do that in 2015? Are you looking at similar returns in 2015? Or is that going to be impossible? You’ll have to be pretty aggressive if you’re going to repeat 2014.
BILL ACKMAN: That’s why I’m not predicting — it’s hard to predict short-term performance. But we are not traders, so we begin the year with 70 percent of the portfolio in investments that we’re very likely to own over the course of the year and 30 percent in Allergan that’s being acquired by Actavis. So we’re going to have a large amount of cash that we take in in the next, you know, call it 6 weeks, 8 weeks, when this transaction closes. And I think a big driver of our returns this year will be a function of what we do with that capital. And we are looking, scouring the North America, principally, for a place to put that capital. And if we can find some interesting new investments —
LACQUA: Big names?
BILL ACKMAN: Yes, the focus is large companies.
LACQUA: Something like Coca-Cola, Pepsi perhaps?
BILL ACKMAN: I’m not a fan of Coca-Cola or Pepsi. Kind of I don’t like sugar. I think it’s bad for children and bad for people. So I don’t like the fake sugar either. So I’m not a fan of either of those — even though they’re great companies, I don’t like the products, so I like to invest in things where I like the product.
JOHNSON: Do you feel slightly like the beat is on the other foot when you have to come and explain why this company is worth more?
BILL ACKMAN: It’s an interesting spot. But, look, we are — I feel an obligation to the investors who participated in the IPO for them to get the benefit of what they purchased. I do think with the passage of time, as Pershing Square Holdings becomes a more publicly known entity — it’s unusual in that the regulations in the U.S. prohibited us from taking Pershing Square Holdings in the U.S. You can’t take a hedge fund public. So we had a choice of taking it public in London or taking it public in Amsterdam. And actually our first choice was the London Stock Exchange. But the London Stock Exchange said you’re a fund and we’re going to put you on the specialist funds market. All the other funds are several hundred million market cap. This is almost $7 billion. Whereas on Euronext, we’re on the list with Unilever. I think we’re the 24th largest company on the Eurnoext. The theory was people are going to think about us more. It really is an investment holding company. We’ve chosen the closed end fund structure because of favorable tax attributes.
JOHNSON: Yes. But do you feel that you are — you are a guy that spends his time explaining to people why there is value in a business. How much of — how hard has it been to explain to people why there is value in this business?
BILL ACKMAN: Well, I’m just starting to do it. I did it on the road show. I think I was effective. We raised $2.7 billion in capital. Now I’m back in the U.K. to let people know that it’s —
JOHNSON: What’s the feedback you’re getting?
BILL ACKMAN: Feedback has been very favorable. I think most people don’t know the entity exists.
JOHNSON: Because they’re not doing their work properly or is it because you’re not doing your work properly?
BILL ACKMAN: I blame it on us. We’re restricted in the U.S. I can’t go on Bloomberg in the United States and talk about Pershing Square Holdings. If I could, the natural buyer is a U.S. investor. Now, interestingly, I think U.S. has favorable tailwinds from an economic point of view. I think it’s a very favorable environment for shareholder activism. So for an investor who can only invest in European stocks, this is actually an interesting way to invest in the United States through a publicly listed liquid —
JOHNSON: A U.S. investor that can only invest in Europe buying U.S. exposure.
BILL ACKMAN: I would say European investors who could only invest in Europe —
JOHNSON: Sorry, I’ve switched it.
BILL ACKMAN: — buying U.S. exposure, this is one of the few ways to do it. And you can invest in shareholder activism. It’s quite transparent. We own ten investments; you can figure out what they are over time.
LACQUA: Going back to the oil price, are you concerned about your stake in Canadian Pacific?
BILL ACKMAN: No. We think Canadian Pacific — we think the energy price going down is probably neutral for Canadian Pacific. It has as much benefit for the company as — there will be less goods transported, probably less oil sands, less drilling, but this is one of the great industrial turnarounds ever. Management has done a fabulous job. It continues to be a very long runway. We’ve owned the company —
LACQUA: But prices, I mean, what’s your estimate for the price of oil? I know it’s the big unknown, but if it sticks at $50 to $60, it’s a problem going forward.
BILL ACKMAN: It’s not a problem for CP. CP makes less money from transporting oil than almost any other commodity. It’s a relatively — it’s single digits percentage of revenue. I think the expectation is it’s going to be part of the company going forward, so does it have some impact on growth? But it’s the least profitable growth that we have. And obviously the benefits to the economy of energy prices being halved I think overwhelm the — we make a lot more money on intermodal transportation, retail and businesses that are big beneficiaries, than we’ll lose in terms of — at least, our CEO’s point of view.
JOHNSON: I get the sense you really see the U.S. economy as isolated at the moment. Does it feel that way? Over here, I — maybe not in the U.K., but certainly elsewhere in Europe, it feels really doom and gloom at the moment. You could say the same thing about Japan. You’re exuding quite a lot of confidence about the U.S. economy. Is it capable of being isolated from what else is happening and the problems that exist elsewhere?
BILL ACKMAN: I would say to some degree. One of the factors that really people are not talking about, if you want to get optimistic about America, just spend time talking to a venture capitalist. The rate of new business formation and the rate of growth of companies that you’ve never heard of is probably the fastest ever in the history of the global economy. And there really is only one Silicon Valley. So I think we have a number of attributes that are very, very favorable.
Now, what’s interesting, in an economy performing as well as the U.S. is right now, and I think expected to perform, you’d normally see rates rise fairly quickly. So the combination of very low cost of capital plus a meaningful improving economy is an unusual event. And I think stock prices in light of that are actually attractive.
LACQUA: Apart from getting more PR for your firm —
BILL ACKMAN: Not for the firm; for Pershing Square Holdings.
LACQUA: What is your biggest firm for 2015?
BILL ACKMAN: In terms of my job, I need to find a place to put a big chunk of capital. We’ve got $6 billion lying around — or soon to be lying around, and we’ll find — at least $4 billion, perhaps as much as $6 — so we have to find a place to put that capital. We’ve always been able to find one or two new things. But there aren’t — I do think it’s a very favorable environment for what we do.
LACQUA: Despite the volatility.
BILL ACKMAN: Volatility is a good thing. If you’re a long-term investor and you don’t have margin leverage and your capital base is stable, then volatility is a positive.
LACQUA: All right, Bill, thank you so much for joining us. Bill Ackman there, CEO and founder of Pershing Square. His rise to the top is the cover story in the February issue of “Bloomberg Markets” magazine.