Although Dan Loeb’s Third Point LLC has not submitted its 13F filing for the first quarter of 2016, this widely-scrutinized hedge fund issued a letter to investors discussing the fund’s performance and positions. The letter disclosed that Third Point flipped its “corporate credit book from net short to net long by covering shorts and aggressively adding to our energy credit positions” after concluding that oil reached a bottom and the Chinese government was “unwilling to devalue the RMB and was instead signaling that additional fiscal stimulus was on deck”. As a result, Dan Loeb’s asset management firm avoided huge possible losses from shorts, but “largely missed the rally on the upside”. The New York-based hedge fund lost 2.3% in the first quarter of 2016, compared to the gain of 1.3% for the S&P 500. Even so, the fund has generated an annualized return of 15.8% since inception in 1996, significantly above the 7.3% return for the S&P 500 over the same time span.
More importantly, Third Point reveled that redemptions and liquidations from poorly-performing “event-driven” and activist strategies have created one of the most interesting environments seen in many years for classic event situations such as risk-arbitrage and transformative mergers. Mr. Loeb and his team said in the letter that “many investors are ignoring companies in the midst of deals because catalysts are longer-dated (well into 2017)”, so investors could buy outstanding enterprises at bargain valuations on 2017/18 earnings. So let’s proceed with the discussion of some of the most interesting situations outlined by Third Point LLC in the letter.
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Dan Loeb Bets on Dow Chemical Co (NYSE:DOW) Amid Mega-Merger
– Number of shares held by Third Point as of December 31: 25.25 Million
– Value of Third Point’s holding as of December 31: $1.30 Billion
Third Point LLC upped its position in Dow Chemical Co (NYSE:DOW) by 1.75 million shares during the December quarter, ending 2015 with 25.25 million shares valued at $1.30 billion. In December 2015, the Boards of both Dow Chemical and E. I. Du Pont De Nemours and Co (NYSE:DD) announced the approval of the all-stock merger between the two companies, which is anticipated to reshape the chemical and agricultural industries. The soon-to-be created behemoth, to be called DowDuPont, intends to achieve $3 billion in cost synergies before splitting into three independent companies: a pure-play agriculture company, a pure-play material science company, and an innovation-driven specialty products company. Third Point believes that “there is potential for operational improvement at Dow that would be incremental to the $3 billion announced synergy target”, so approximately $5 billion of earnings improvement “could be unlocked” on aggregate. Additionally, “re-jiggering the split structure” may unlock even more synergies “as more specialty product businesses would benefit from being managed together”, said Third Point. Ray Carroll’s Breton Hill Capital owns 40,889 shares of Dow Chemical Co (NYSE:DOW) as the end of the March quarter.