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Activist Insight is reporting live from 13D Monitor’s 10th anniversary conference. Check back throughout the day for insights.
Pershing Square Capital Management‘s Bill Ackman talked life, compounded returns, and the pursuit of happiness following his decision to stop marketing the fund and dedicate his attention to investing the permanent capital of his publicly traded vehicle, Pershing Square Holdings. “We hit what can euphemistically be called a rough patch,” Ackman said. “Our public vehicle is now 80% of our capital… if we compound it at a nice rate, we’re going to do well.”
Ackman said he would find it hard to sell one of his current investments to make room for a new one. He did not rule out future capital raises through co-investment vehicles but said they often introduced arbitrary return deadlines, citing Air Products.
Glenn Welling of Engaged Capital touted Rent-A-Center, reminding attendees that the stock had de-levered, turned same-store-sales from negative to positive, and could gain from unresolved litigation over its breakup fee from the spurned merger with Vintage Capital that has hung over the stock. Rent-A-Center now represents more than one-fifth of Engaged’s main fund, he added.
Advertised interviews with ValueAct Capital Partners‘ Jeff Ubben and Elliott Management‘s Jesse Cohn were off-the-record.
Four activists made lightning round pitches during lunch. Praesidium Investment Management‘s Kevin Oram said his firm plans to engage financial advisers to push Instructure to split its education and corporate-focused businesses and explore strategic options. The company could be worth $2.5-3 billion, he said, up from $1.6 billion before it disclosed its 5% stake yesterday in a nondescript regulatory filing.
Land & Buildings‘ Jonathan Litt gave a strong hint that he is gearing up for a proxy fight at Brookdale Senior Living this summer, saying he hasn’t modified his view that the company should separate its real estate and operating businesses. The nomination deadline closes on July 6.
Alex Denner of Sarissa Capital Management pointed to the benefits of healthcare stocks, citing pipelines with low margins but high potential strategic value, research-heavy segments that obscure value, and unoptimized sales channels. As examples he touted Biogen, Ironwood Pharmaceuticals, and The Medicines Company.
Legion Partners Asset Management gave an insight into next week’s operating plan launch at Bed Bath & Beyond, with Chris Kiper saying the fund would focus on nonworking SG&A, direct sourcing, and an aggressive inventory turn. The company will not be getting rid of its discount coupons, he promised.
The second activist presenter is Corvex Management‘s Keith Meister, who opens by saying activism has opened up companies to accountability and traditional investors are “in the early innings” of finding their voice. “It may be the later innings of needing hedge funds to promote it.”
Corvex is pitching Diamondback Energy, one of its largest positions and the acquirer of its last pitch at the conference, Energen. Meister likes the “activist” management team, calling it “best-in-breed,” and says a surplus in oil and gas relative to its infrastructure means it is undervalued. He sees a “clear path to a re-rating,” with asset monetization and a bond upgrade before the company reaches $6 billion in EBTIDA. “If you’re going to be in the oil and gas business, this is where you want to be,” he said.
Last week’s announcement of Chevron’s acquisition of Anadarko could force generalists to return to energy stocks, Meister said. Diamondback, Pioneer Natural Resources, and Concho Resources could be among the future targets of Big Oil. “I would be shocked if any of these companies are independent five years from now,” he said.
First up is Starboard Value CEO Jeff Smith. The activist presented on Cerner and shared a new name from its portfolio, KAR Auction Services. “We were honestly surprised when analyzing KAR with how low it was trading given its ownership of two leading businesses,” Smith said. The activist owns “a bunch of stock,” bought after a recent conference call caused confusion, he added.
With one of those businesses – KAR’s salvage offering – being spun off in the next few months, Starboard believes the remaining used-car business could be trading cheaply. According to Starboard, KAR is behind rival Copart, with 158% underperformance, 800 basis points of margin gap, and a price-to-EBITDA ratio of 10 to Copart’s 18. “We love this,” Smith exclaimed.
“How often do you get to buy a market-leading business with margin-improvement opportunities, for under three-times EBITDA?” Smith concluded.
The activist said Cerner, as a founder-led business until last year, “falls right into Starboard’s wheelhouse.”
“Starboard loves companies that struggle as they mature,” Smith said. “We often find companies can bloat as they get more comfortable.”
A profile of Starboard Value is available to Activist Insight Monthly subscribers in April’s edition.