Ackman steps up effort to reduce PSH discount

Pershing Square Holdings, the Amsterdam and London listed vehicle of Pershing Square Capital, ended the year at a 21.5% discount to the underlying fund’s NAV. On January 2nd, Ackman announced his boldest step so far aimed at reducing the discount. Through the newly formed PSCM Acquisition CO LLC which received 300million funding by Ackman and some of his associates, a tender offer has been filed with the Dutch financial markets authority. Under the offer terms, the acquisition company will buy up to USD 300,000,000 value of PSH shares at a discount of between 10 and 16%, the exact price to be set by a Dutch auction mechanism. It corresponds to a 7% to 15% premium to where the shares ended 2017.

The money for this 300,000,000 tender offer will come from Ackman’s holdings in his private fund, shifting the alignment more in favor of the shareholders of the listed vehicle.

In an additional effort to reduce the discount, the Board is seeking to remove the fund’s restriction that no person may own public shares in excess of 4.99% of the value of the public shares. While it means the fund can no longer directly invest in certain companies (USRPHCs), the fund could still get the economic exposure through swaps and similar instruments. For this reason, and in order to facilitate the tender offer, Ackman has already switched the current exposure to Howard Hughes Corporation into a total return swap. As the Chairman of Howard Hughes’ Board, Ackman will still be in a position of influence. If the limit of 4.99% does no longer apply, the fund can increase its buyback program, without forcing large investors out at a discount (for the part above 5%), something that put a tight maximum on the effort so far.

It has been a busy December for Ackman. Before announcing the tender offer on January 2nd, the fund announced the settlement of a pending lawsuit between Pershing Square Capital Management, Valeant Pharmaceuticals International and Allergan shareholders. It concerned the Insider Trading lawsuit that Allergan investors filed against Pershing Square and Valeant who made a coordinated bid for Allergan in 2014. Pershing Square booked over 3bln in profit from the Allergan position and has now settled for $193mln, causing a 1.3% negative NAV impact. Pershing believes the case to have “absolutely now merit” but made a business decision to close the chapter. They are compensating investors for the settlement by reducing the management fee for the next quarters. From an investor perspective we are happy that this case is behind us (although the settlement remains to be confirmed by the judge) and the manager can move on. For a good understanding of the case we refer to this article.

In terms of the underlying portfolio of Pershing, we are looking out for the following events:

• What is the new position they have been buying over the last few months and will they get to their target size with equity markets ripping?
• Who will be announced as the new CEO of Chipotle Mexican Grill, a hiring process in which Ackman is closely involved. The new CEO could make a big impact given the turnaround the company is in.
• Will Automated Data Processing’ management live up to the ambitious goals expressed during Pershing’s recent proxy fight or will Ackman have a second go at the board seats in the case they do not deliver.
• Will Mondelez be taken over (by Kraft Heinz)?
• Will Herbalife (finally) collapse over the new rules it now has to live by in the US?
• How much will be left on the table for Freddie Mac and Fannie Mae common shareholders once the GSEs have been restructured?

Most of all, we are looking for a comeback of this manager who we continue to believe is a highly talented investor who runs a very robust operation. The ingredients for a strong performance in 2018 are certainly there.