Ackman Q1: Fraidin And Herbalife Out, Fannie Still InJacob Wolinsky
PSH has made significant progress since the end of the first quarter. NAV per share has increased by
9.4%, compared with the S&P 500’s performance over the same period of 2.9%.
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was generated from approximately 720 basis points of net investment performance, and 220 basis points
of accretion from the company tender offer. While 45 days is much too short a period to judge
investment performance for a long-term strategy, we believe recent progress is reflective of actual
business progress at PSH, and at our portfolio companies during this period. We highlight certain recent
business and portfolio company developments below:
The completion of a $300 million company tender which reduced public shares outstanding by
9.5% at a discount to NAV of 20.5%;
The removal of PSH’s 4.99% ownership limit which creates the potential for additional demand
for PSH shares;
The election of two new independent directors, Bronwyn Curtis and Richard Wohanka, to the
The addition of Dawn Lepore to the Pershing Square Advisory Board;
The acquisition of two new core investments: United Technologies, and a new, as-yetundisclosed
The recruitment of Brian Niccol, formerly CEO of Taco Bell, as CEO of Chipotle; and
Strong quarterly earnings reports and business progress at our portfolio companies.
Now that the company tender offer is completed, and subject to applicable Dutch restrictions (including
art. 7 page 7 of the Dutch Decree on Public Takeover Bids), members of the management team of
Pershing Square Capital Management, L.P. and affiliates may acquire additional shares of PSH in open
market and privately negotiated transactions when permissible. I plan to finance the substantial majority
of my own potential share purchases with the proceeds of deferred compensation that vested on
September 30, 2017 that I reinvested in Pershing Square International, Ltd. pending the potential use of these funds to acquire PSH shares. I may also use personal cash on hand, proceeds from borrowings,
liquidity from the sale or financing of other non-Pershing Square assets that I own, and, to a lesser extent,
potential future redemptions from the other Pershing Square funds to finance future acquisitions of PSH
shares. Over time, I intend to increase my exposure to the Pershing Square strategy as I generate liquidity
from other sources.
You should view these potential purchases (when consummated) as a further indication of management’s
commitment to the success of PSH. While stock prices tend to reflect intrinsic value over the long term,
in the short term, supply and demand for shares, so-called “technical factors,” can overwhelm
fundamental factors. The large supply of sellers of PSH has depressed the stock’s current valuation. The
completion of the company tender will help address this problem by reducing free float – the supply of
freely tradable shares outstanding – by 9.5%. With reductions in free float, a substantially increased
investment from the investment manager, and improvements in investment performance, we would expect
the discount to NAV to narrow.
While long-term investment performance will drive the substantial majority of long-term PSH
shareholder returns, where the shares trade relative to NAV can meaningfully affect shareholder returns in
the short-term. Our strong preference is for shareholders to be able to buy and sell PSH shares at prices
that are closely banded around PSH’s intrinsic value. While NAV is a reasonable proxy for intrinsic
value, we remain hopeful not only to reduce the discount to NAV, but also to regain our track record for
substantially exceeding market returns over the long term. We are working diligently to do just that.
Platform Specialty Products Corporation (PAH)
Platform reported continued earnings growth this quarter as the combination of organic revenue growth,
lower interest expense and a strong tailwind from foreign exchange more than offset temporary margin
pressures from input cost inflation. Platform’s organic revenue grew 5% as Performance Solutions grew
4%, and Ag Solutions grew 6%. The growth in the Performance Solutions segment continued to be
driven by the positive results of the electronic materials business it acquired from Alent, and overall
strength in its industrial business. The growth in Ag Solutions was driven by strength in the Latin and
North American markets.
Despite positive organic sales growth, Platform’s organic EBITDA decreased 3% due to input cost
inflation in Ag Solutions, which the company expects to mitigate through future price increases.
Performance Solutions organic EBITDA grew 2% as positive revenue growth was somewhat offset by the
increased proportion of sales from lower-margin products. Ag Solutions organic EBITDA declined 8%
due to input cost inflation resulting from supply shortages of key active ingredients and a higher level of
sales from lower-margin products. Platform’s overall EBITDA grew 7% due to a 10% tailwind from
foreign exchange. EPS increased 30% due to lower interest expense from the company’s recent debt
On Platform’s earnings call, management reiterated that it remains on track to separate its two businesses
in the second half of this year, and stated that it is evaluating various execution alternatives for the
separation in order to maximize shareholder value.
Fannie Mae (FNMA) / Freddie Mac (FMCC)
Fannie and Freddie reported modest underlying earnings growth in the first quarter, including improved
fundamentals in their core single-family guarantee businesses. After drawing funds from Treasury for the
first time since 2012 earlier this year to fund one-time charges related to corporate tax reform, Fannie
plans to resume dividend payments to Treasury this quarter while Freddie continues to rebuild its capital
towards the $3 billion limit for each entity that became effective at the start of the year. Absent a further
change in policy from Treasury and FHFA, we would expect Freddie to resume dividend payments to the
Treasury in the third quarter. While increasing the amount of capital each entity is allowed to hold from
zero to $3 billion was a step in the right direction, current capital levels are still woefully inadequate in
light of their more than $5 trillion of outstanding guarantees and other liabilities.
Despite continued business progress and corporate tax reform which will materially enhance the GSE’s
profitability, Fannie and Freddie’s common stock prices have declined about 50% year-to-date. We
attribute this decline to investor frustration at the lack of progress on housing finance reform efforts in
Congress, which seem to have stalled in the run-up to the midterm elections, and, we believe, forced
selling from certain large investment firms that have recently begun to wind down their operations.
Treasury Secretary Steven Mnuchin stated in late April that he would focus on housing finance reform
after the elections in early 2019. The administration will soon have the ability to appoint a new director
of the FHFA, Fannie and Freddie’s primary regulator, in January. Since Congress has been unable to put
forth a viable plan since conservatorship began nearly a decade ago, we believe it is increasingly likely
that the administration and FHFA will soon take the lead on housing finance reform. While the exact
timing of a resolution is difficult to predict and continued stock price volatility is likely, the per-share
intrinsic value of each entity continues to grow along with their core businesses. We continue to believe
that Fannie and Freddie offer a highly attractive potential reward relative to risk for the patient investor, particularly at current share prices, near their lowest since we made our investment in 2013.
As previously disclosed, we exited Herbalife and Nike during the first quarter of 2018.
Steve Fraidin has served on Pershing Square’s advisory board since its inception in 2004, and joined the
firm in 2015 as Vice Chairman. Recently, Steve has decided to return to private practice to re-launch his
M&A practice while continuing to remain a member of the Pershing Square Advisory Board. Steve has
been a brilliant advisor and partner to Pershing Square, and we look forward to continuing to benefit from
his wise counsel.
We are delighted that Dawn Lepore joined the Advisory Board this quarter. Over the course of her
career, Dawn served in a number of executive roles including CEO of Drugstore.com. She spent most of
her career in leadership positions at The Charles Schwab Company where she played a key role in
launching and then building Schwab’s highly successful e-commerce business. In her 21 years with
Schwab, she held a wide variety of roles and responsibilities including Vice Chairman of Active Trader, Technology, Operations, Administration and Business Strategy from August 2003 to October 2004.
Dawn has served on numerous public boards including The New York Times, Walmart, and eBay.
Please contact the investor relations team if you have any questions. We greatly appreciate your support.
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