Rehan Jaffer‘s H Partners Management has disclosed in a new filing with the Securities and Exchange Commission that it has sent a letter to Tempur Sealy International Inc (NYSE:TPX), in which it demanded production of certain books and records of the company. The fund owns 6.075 million shares of the company, which represent 9.97% of the company’s outstanding stock. At the end of 2014, the company represented the second-largest stake in H Partners’ equity portfolio. According to the filing, the demand is pursuant to Section 220 of the Delaware General Corporation Law. Moreover, the demand states that H Partners requested access to books and records, because it plans to discuss with other shareholders regarding a withhold campaign that the investor intends to conduct with respect to the election of directors at the 2015 Annual Meeting of Stockholders.
The fund’s latest demand to access Tempur Sealy International Inc (NYSE:TPX)’s records comes only a month after it disclosed a letter sent to the company’s board of directors. In the letter, H Partners stated that they have been holding shares of the company since 2012 and have previously attempted to discuss with the company’s Chairman P. Andrews McLane regarding the company’s weakening financial performance and the shortcomings of CEO Mark Sarvary. However, since the board refused to engage in constructive negotiations and to offer a board seat to H Partners, the investor decided to make public its concerns. Therefore, as a first step, the fund requested the change of the CEO. In a definitive proxy statement filed with the SEC, Tempur Sealy International Inc (NYSE:TPX) stated that H Partners’ claims are misleading and its proposals could lead to value-destructive changes, such as the change in leadership.
Tempur Sealy International Inc (NYSE:TPX) is a $3.50 billion manufacturer and seller of matresses and other bedding products. The stock of the company is down by 32% over the last three years, after a significant slump in 2012, following which it has been slowly recovering and although it appreciated by 9% in the last 52 weeks it has significantly underperformed in comparison with the industry average of 20%. Another shareholder of the company among the funds that we track is Robert Joseph Caruso‘s Select Equity Group, which holds 5.77 million shares as of the end of 2014, up by 20% on the quarter.
H Partners is an activist fund that was founded by Mr. Jaffer in 2005. Mr. Jaffer is a former employee of Dan Loeb’s Third Point. The fund provided annualized returns of 30% since its inception and it has a track record of increasing the shareholder value of several companies where it got involved. More recently, the fund signed a support agreement with Remy International Inc (NASDAQ:REMY), under the terms of which, the investor received non-voting observer rights regarding all meetings held by the company’s board of directors. At the end of 2014, the fund held around $1.25 billion in equities and its portfolio contains only five positions.
Let’s take a further look at other large positions in H Partners equity portfolio. Following the moves of activist hedge funds is a great strategy that can provide solid returns, especially when the fund has a good track record and therefore has high chances to succeed. Moreover, the majority of H Partners’ equity positions are represented by small-cap companies, which are also they key of our strategy that we have been sharing in our newsletters since 2012. We have determined that by investing in 15 most popular small-cap picks among hedge funds, one can beat the market by as much as 1.0 percentage point per month. Our strategy returned around 132% in aggregate since August 2012, and beat the S&P 500 ETF (SPY) by 79 percentage points.
On the first spot in H Partners’ equity portfolio is Six Flags Entertainment Corp (NYSE:SIX), which is another activist target of the fund. During the financial crisis, H Partners initiated a stake in the bankrupt company. Mr. Jaffer and two of his partners, Usman Nabi and Arik Ruchim, played a major role in Six Flags Entertainment Corp (NYSE:SIX)’s exit from Chapter 11 by participating in a debt-for-equity swap that landed H Partners with a 25% stake in the company. As of the end of 2014, H Partners held 16.42 million shares of the company, valued at $708.50 million, equal to 56% of the total equity portfolio. Meanwhile, the stock of Six Flags Entertainment Corp (NYSE:SIX) surged by over 400% in the last five years. H Partners is the largest shareholder of Six Flags among the funds that we track, followed by Pasco Alfaro and Richard Tumure’s Miura Global Management with 1.0 million shares, held as of the end of 2014.
W. R. Grace & Co (NYSE:GRA) is a succesful investment made by H Partners. At the end of 2014, the investor held 1.05 million shares worth $100.23 million. The fund first disclosed holding shares of W. R. Grace & Co (NYSE:GRA) in its 13F filing for the last quarter of 2008, the position containing 1.2 million shares with an aggregate value of $7.16 million, which rougly translates into $6.00 per share. The fund obtained an impressive return over the years, taking into account that W. R. Grace & Co (NYSE:GRA) currently trades at $96 per share. In its latest 13F filing, David Cohen and Harold Levy’s Iridian Asset Management, reported a $509.98 million stake in the specialty chemicals company, which contains 5.35 million shares.