Notes from Delivering Alpha 2014, Part III

Thanks for dropping by for the third and final part of my notes from today’s Delivering Alpha conference. What follows below will be insights from John Paulson, a few of the younger, up and coming superstars of the hedge fund industry (we shall see), a discussion with Nelson Peltz and Ken Moelis, followed by Carl Icahn and a special mystery guest (everyone seems to know it’s Bill Ackman). 


2:20 – 2:50 p.m. KEYNOTE

John Paulson, Founder and Managing Partner, Paulson & Co. Inc.
Interviewed by: Melissa Lee, Host of “Fast Money” & “Options Action,” CNBC

Paulson: It’s a great time to be doing merger arbitrage. Companies need to do acquisitions or they themselves will become targets. That means a lot of opportunity.

“We’ve been involved in merger arbitrage for 20 years. We’ve built up core expertise in this. We monitor every deal announced globally that’s above a billion dollars.”

Several ways to do arbitrage, John explains:

1. Standard arbitrage – an announced deal where you’re long the target, short or uninvolved with the buyer.

2. Hostile takeovers are different than traditional arbitrage. Much riskier (like Pfizer dropping its bid with AstraZeneca), but can be much more profitable (like the bidding war for Pinnacle Foods).

3. Anticipating M&A can be even more profitable.

4. Investing in strategic acquirers (like Valeant) is another way to do it. “In many cases, you make even more money by staying in the stock of the acquirer.”

(editor’s note: John seems lighter and happy this year. Last summer he was plagued by poor performance and a rotten media attitude toward him. Last May, I lambasted the press on a few occasions for the way they were piling on him – see Lay Off Paulson Already. I like to see the guy smiling and making money for his LPs again. Good for him.)

Paulson likes Valeant a lot and the way he takes costs out of great businesses. He’s very involved in the Allergan deal and confirms to Melissa Lee that he will communicate with fellow investor Bill Ackman about it. He notes that Allergan can still fight off Valeant by rejecting the bid and taking the same actions that Valeant is proposing and creating that shareholder value themselves.

Paulson thinks there are three options for Allergan and he wins, as a shareholder, either way: One, Allergan is sold and Valeant succeeds. Two, Allergan buys another company and the shares rally. Three, Allergan refuses and Bill Ackman launches a proxy battle to unseat the board.

Paulson: “What’s going on in the oil sector in the US is just amazing.” He’s involved in some Bakken shale players that are merging, Whiting and Kodiak. He also has a stake in a third player in the same shale, Oasis, which has not been acquired or merged yet. “We became the largest shareholder in each of these three large independents.” Melissa mentions that Paulson made $360 million yesterday when the news broke that the two companies were merging.

On the Time Warner bid from Fox: The bigger the acquirer relative to the target, the greater the ability to pay a higher price. In this case, they’re about the same size, so there’s a limit to how much higher Fox could go. This will not be a 30% higher like what we saw with Shire Pharmaceuticals. Are there other bidders? “At this size range, there’s not a lot of potential acquirers.” Are there any major anti-trust issues? “Surprisingly, given the size of the proposed transaction, not really.” Especially given that Murdoch has agreed to sell CNN up front.

“It’s a large deal, it’s exciting, but because of the dynamics, it’s not a slam dunk what the outcome will be.” He sees this as a risky arb to be involved with.

Paulson says, as an owner occupier, the best investment is still a home. Locking in mortgage rates here, and you’re going to live there, is the most attractive thing to do.


Moderator: Michael Peltz, Editor, Institutional Investor Magazine Group
• Josh Birnbaum, Chief Investment Officer, Tilden Park Capital Management
• Deepak Gulati, Chief Investment Officer, Argentière Capital
• Jeffrey Smith, Managing Member, Chief Executive Officer and Chief Investment Officer, Starboard Value

Jeffrey Smith pitches us MeadWestvaco (MWV) as a value / activist play. It’s a packaging company, global, everything from aerosol cans to corrugated cardboard boxes. “Extremely stable and defensible”. Company also has a specialty chemicals unit, a large, overfunded pension plan and lots of real estate. Starboard has 5.6% of the company.

Company has been run by the same family for over 100 years, even though that family owns less than 1% of the company. Smith thinks the company suffers from a 50% discount to peers because of its conglomerate structure. The stock is currently trading at 44, he thinks it could be worth 59 on its own or get taken over.

What should the company do:

Step one, spin off or sell the specialty chem business. “Even though it’s a great business, it’s non-core.” He thinks it can get a premium, robust price, and the sale could even be tax-free. MWV has publicly acknowledged that they’re open to selling it. $3 billion is the number it could fetch, which is the equivalent of half the company’s market cap.

Step two: reduce corporate spending. SG&A of $13.4% is $270 million more than it should be (peers are at 8%).

Step 3: Improve margins in all segments – food & beverage, industrial and home health & beauty. “Mead needs to do more than the $100 million in cost-cutting they’ve already promised.” Next step would be to explore alternative strategies for their real estate.

They have $400 million worth of Charleston real estate and timberlands in Brazil worth $300 million – both non-core to operations.

Next, CapEx allocation has a lot of room for improvement.

Lastly, the pension is overfunded by more than $1.5 billion dollars. Value can be extracted by merging with a company with an underfunded pension plan.

“There are many levers to pull,” he thinks the company’s sum of the parts is worth $59 per share. “We at Starboard will be actively involved if significant value isn’t unlocked.”

Josh Birnbaum of Tilden steps to the podium. He wants to talk about bank settlements (aka mortgage put-backs). BRB, taking a coffee break during this one…

Okay I’m back. I also had a cookie, full disclosure.

Deepak Gulati is up now. He sees a big opportunity in volatility. He sees volatility as a distressed asset. He sees the volatility of Asian stock indexes, US tech stocks and energy stocks, European financials as offering a lot of opportunity. He cites the chase for yield for why we’re at a 20 year low in the S&P 500’s Vix.

“You’re actually being paid to buy protection. We haven’t seen anything like this since 2000.”

3:30 – 4:00 p.m. THE ACTIVIST AGENDA

Moderator: Andrew Ross Sorkin, Co-Anchor “Squawk Box”, CNBC
• Ken Moelis, Chairman and Chief Executive Officer, Moelis & Company
• Nelson Peltz, Founding Partner and Chief Executive Officer, Trian Fund Management

Andrew Ross Threenames kicks it off by recapping the news Peltz made last year in DuPont and PepsiCo. He asks Nelson for an update. Peltz has met with 100 top shareholders of Pepsi over the last year. “The stock has moved up dramatically (60-90 per share), but it’s not because of earnings. It’s because our message is resonating with shareholders. We’re not done, I would tell you to watch this space.” He still wants to split the company up.

Peltz thinks the company is not spending money well, points to the $21 billion spent on acquiring the Pepsi bottlers – he cannot get a straight answer on the ROIC of that decision.

Sorkin goes to the banker on the panel, Nelson’s friend Ken Moelis chimes in and says something totally PC about the situation.

Peltz takes full credit for the rally in Pepsi stock. “It’s not earnings or performance, it’s because we’re here and people are listening to us.”

Sorkin asks about Bank of New York Mellon, which Peltz has invested a billion dollars into. “We like to meet with management and the board, walking them through our whitepaper, before we go public. Other activists go the other way around. We give management the chance to respond out of the public eye – although the public knows we’re there.” Peltz has helped turnaround companies like Lazard and State Street in the same space. “We have a lot of credibility in the sector.”

Sorkin to Moelis the banker, who is typically playing defense against activists, about what happens when shareholders follow the wrong activist down the rabbit hole. Moelis is like “Look, some of them talk strategy quietly and effectively, some of them choose to run straight to the megaphone.” It feels like a dig at Bill Ackman, as Moelis advises Herbalife. He admits that the CEO is a personal friend.

Moelis says Herbalife is not equivalent to an activist situation. Activists argue that your children are even better looking than you think they are, but here’s what they should do as a career. Ackman, on the other hand, holds a short position, “it’s an entirely different debate.” he says “Ackman is saying that thousands of people should lose their jobs and a company should be shut down.”

Peltz on the difference between him and activists like Bill Ackman: “We’re very different, as you know. I haven’t spent my career staring at a Bloomberg screen.” As to the difference between he and Carl, Peltz says they are friends, but “Carl has a very different MO than I do.”

Peltz says he would bet on Carl Icahn longer term over Buffett (editor’s note: not that it will matter, they’re both 100 years old). He criticized CNBC for asking Buffett his opinion about what Pepsi should do twice without even once mentioning that he’s the largest shareholder in Coke. The audience laughed.

He says what’s interesting about Murdoch’s bid for Time Warner is that there’s been a big sea change in corporate attitudes toward leveraging and “using their balance sheets”. He thinks the M&A environment we have now will be here for a while.

4:30 – 5:15 p.m. KEYNOTE

Carl Icahn, Chairman, Icahn Enterprises
Interviewed by: Scott Wapner, Host, “Fast Money Halftime Report,” CNBC

Scott Wapner brings Carl Icahn out, says “we’re gonna try to live up to last year.”

First question out of the gates is about Carl’s reaction to the Phil Mickelson stuff that surfaced a few weeks ago. Icahn maintains he has never spoken to him ever, never met him and he’s tired of answering questions about the investigation.

On activism being short-term driven: “If you look at our record, I own a lot of stocks ten years, fifteen years, you can’t argue with nonsense.”

“I love this country. I’m not so sure I love a lot of the people…” Big laugh. “The problem you have is that the wrong guys are running these companies. We’re gonna have morons running these companies soon.” He thinks the boards are friends for years with the CEO, they don’t want to stand up and say anything. He points to Forrest Labs, which was $35, “now with a new CEO it’s a hundred bucks a share.”

On Apple: “I had dinner with Tim Cook, I was very impressed with him. He did a lot of what we said he should do. In my opinion, Tim Cook is doing a good job. But a lot of these other guys aren’t, and that’s how we make so much money.”

On his critics: “They keep saying I’m short-term oriented but I stay in these stocks for years. They don’t care about the facts, they just keep repeating it like a mantra, they’re like religious zealots.”

On his criticism of Warren Buffett: “I respect Warren Buffett, and I like him and I know him. I think he was wrong about not wanting to upset the establishment at Coke.”

His message to CEOs who are underperforming: “Get off the golf course, stop talking about what plane you have.” He explains that CEOs who are doing their jobs don’t fear him. Mentions Greg Brown at Motorola and Jeff Bewkes at Time Warner as two examples who would admit that Icahn helped them.

On Family Dollar: “All I’ll say is it’s a good long term investment. Just not with the current management. The CEO shouldn’t be the CEO, I don’t mind saying it.”

Carl’s definitely worried about the leverage in the system and derivatives specifically. “I think Bernanke is great, I think the Fed saved our country. Why they kept the same management at some of these investment banks, I don’t know. If were running things, it wouldn’t be the same management on Wall Street.” He notes that even Yellen admits she isn’t sure what the effect of all this leverage and complexity will be. “Ya gotta be worried.”

Icahn says he is being more selective about the kinds of companies he’s invested in given these concerns. He says his returns would have been double over the years without the short positions he uses to hedge. But given his nervousness, he’s not willing to take them off.

Scott asks “Why don’t you talk about Herbalife anymore.” Carl says he has a confidentiality agreement because his guys are on the board. “I will say, we haven’t sold one share.”

And then all of a sudden, Scott says “Ladies and Gentlemen, Mr. Bill Ackman.” Bill Ackman comes out onto the stage. They bring a chair out for him, he hiugs Carl Icahn and then sits next to him. Scott hands them t-shirts that were made up for them (I’m not inventing this, I swear) that read “Bill and Carl Reunited” and on the back “It Feels So Good”. Jesus.

ackman icahn

There is an agreement between the two that they share the same aims and have a lot more in common than they originally perceived.

Ackman explains the necessity of activism and the “Carl 2.0” sitting beside him. He says he’s always respected Icahn and likes the fact that when Carl wins these days, all stakeholders win too. It’s not like the 80’s when Carl could raid and win for just himself. “The major shareholders have to support the activist, otherwise the activist fails.”

Bill Ackman and Carl Icahn both agree that there’s too much separation between the owners of capital and the stewards. Ackman mentions that most of the money in the market is passive, “in some cases extremely passive – look at ETFs. Who actually is the owner of an ETF? It’s just a trading sardine.” His point is that someone has to actually stand up and act like an owner.

Icahn tells an anecdote about when he owned the Stratosphere casino in Vegas. Icahn planned to open a Copacabana nightclub until the CEO told him it was the dumbest idea he had ever heard. Icahn ripped up the plans right then and there. “Sometimes the best thing I can do is back off and let the management do its job.”

Ackman says the best test for an activist is how the company / stock does after they exit. He cites the fact that General Growth Properties has continued to go up and make shareholders money even after he sold it.

Icahn chimes in about how he’s not there to manage, he’s there to help struggling companies bring in the right guy. Uses the example of Chesapeake, where Icahn was friends with Aubrey Maclendon but knew he was the wrong guy to turn it around “You needed to change the whole culture.” He brought in Doug Lawler when the stock was 15, it’s almost 30 now. “I don’t tell him what to do, I brought him in to run it.”

Ackman goes on a rant about Valeant and Allergan and why the transaction should go through.

Scott ends it with a great question for the two men: “Who’s going to win this Herbalife thing?” We’re on the edge of our seats…

Ackman says “I would like to get Carl out of the stock and have him make a profit. I’ll make him a nice offer.”

Carl’s wolfish grin was all you needed to see.

And the day comes to a close.


Thanks for reading! If you missed parts I and II of my Delivering Alpha notes, they’re here:

Part I

Part II



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