Billionaire Dan Loeb Bullish on Mergers and Acquisitions Players

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.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

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.

Third Point Likes Anheuser Busch Inbev SA (ADR) (NYSE:BUD)

– Number of shares held by Third Point as of December 31: 1.40 Million

– Value of Third Point’s holding as of December 31: $175.00 Million

Dan Loeb’s New York-based fund held unchanged its position in Anheuser Busch Inbev SA (ADR) (NYSE:BUD) during the last quarter of 2015 at 1.40 million shares, which were valued at $175.00 million on December 31. In the second half of 2015, the world’s largest beer maker reached an agreement to acquire its closest rival, SABMiller plc, which would “create an unrivaled player with strong pricing power in an increasingly consolidated global industry” according to Third Point. The combined company’s brands will include Budweiser, Corona Extra and Stella Artois, as well as Blue Moon and Fosters. Third Point believes that the shares of Anheuser Busch Inbev will “grow nicely over the next several years as the true earnings power of the new company is revealed”. Precisely, a portion of the gains are anticipated to come from enhancing the underlying profitability of SABMiller, while another portion of gains “will come from the capture of deal-related cost and revenue synergies”. Moreover, Third Point believes that more gains could “come from financial engineering as BUD’s under-levered balance sheet is monetized to help finance the transaction”. Ken Fisher’s Fisher Asset Management reported owning 5.29 million shares of Third Point Bets on Anheuser Busch Inbev SA (ADR) (NYSE:BUD) through the latest round of 13Fs.

Third Point Bullish on Molson Coors Brewing Company (NYSE:TAP)

– Number of shares held by Third Point as of December 31: 2.00 Million

– Value of Third Point’s holding as of December 31: $187.84 Million

The AB InBey-SABMiller merger is also anticipated to transform Molson Coors Brewing Company (NYSE:TAP) into a stronger regional competitor following the acquisition of SABMiller’s interest in MillerCoors LLC, a joint venture in the U.S. and Puerto Rico between Molson Coors and SABMiller, and SABMiller’s portfolio of Miller brands outside the United States. Third Point LLC trimmed its stake in Molson Coors by 150,000 shares during the December quarter to 2.00 million shares, which were worth $187.84 million at the end of December. As stated in Third Point’s letter to investors, Molson’s purchase of assets from SABMiller “gives the company full control over its most important market, something that ought to improve operational effectiveness and increase the long-term strategic value of the company to a potential acquirer as the global beer industry continues to consolidate”. The shares of Molson Coors, one of the world’s largest brewers, are up 29% in the past 12 months. Stephen Mandel’s Lone Pine Capital had 2.35 million shares of Molson Coors Brewing Company (NYSE:TAP) in its equity portfolio at the end of 2015.

Third Point Bullish on Time Warner Cable Inc. (NYSE:TWC) Ahead of Takeover Approval

– Number of shares held by Third Point as of December 31: 1.40 Million

– Value of Third Point’s holding as of December 31: $259.83 Million

Dan Loeb’s Third Point upped its stake in Time Warner Cable Inc. (NYSE:TWC) by 100,000 shares during the final quarter of 2015, ending the year with 1.40 million shares worth $259.83 million. In May 2015, Time Warner Cable and Charter Communications Inc. (NASDAQ:CHTR) sealed a merger agreement under which Charter will offer $100.00 in cash and shares of a new public parent company, to be called New Charter, equivalent to 0.5409 shares of CHTR for each share of Time Warner. Just recently, the U.S. Federal Communications Commission approved the multi-billion-dollar takeover of Time Warner Cable subject to several conditions aimed at enhancing competition among Internet service providers, as well as increasing the number of homes with high-speed broadband connection; the deal will create the nation’s second-largest cable provider. Third Point believes that the New Charter will enjoy substantial free cash flow per share growth due to “accelerated revenue growth, margin expansion, synergies, lower capital intensity, significant tax assets, and substantial share repurchases”. All in all, Charter’s share price could advance 25%-to-30% within two years according to Dan Loeb.

Third Point Discusses Freshly-Completed ACE Limited-Chubb Merger; Chubb Ltd (NYSE:CB)

– Number of shares held by Third Point as of December 31: 1.50 Million

– Value of Third Point’s holding as of December 31: $175.28 Million

Third Point LLC acquired a new stake of 1.50 million shares of ACE Limited during the fourth quarter of 2015, which was valued at $175.28 million on December 31. In the January of 2016, Swiss insurer ACE Limited completed its previously announced acquisition of Chubb for $62.93 in cash and 0.6019 shares of ACE stock, creating the world’s largest publicly-traded property and casualty insurance company called Chubb Ltd (NYSE:CB). Third Point considers Chubb as “a highly-quality compounder in the financials space, with double-digit earnings growth potential over the next few year”. “Chubb’s scale and focus on growth could not come at a better time as certain competitors scale back operations to satisfy shareholder demands”, said the New York-based hedge fund in its first-quarter letter to investors. The newly-completed combination is expected to achieve annual expense savings of roughly $650 million by 2018, but Dan Loeb and his team are “willing to forego short-term cost cuts or buybacks to own a franchise that is a long-term winner with the premier franchise in US high-net-worth insurance”. Beech Hill Partners, founded by Paul Cantor, Joseph Weiss, and Will Wurm, acquired a new stake of 3,800 shares of Chubb Ltd (NYSE:CB) during the March quarter.

Disclosure: None