Finance

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Bill Ackman has had quite the year. He turned 50, lost a couple billion dollars and wagered another billion on burritos. Then, of course, there was this feature in Vanity Fair contemplating whether he's toast. 

A Few Bad Apples
...spoil the barrel. Ackman's bullish bet on Valeant Pharmaceuticals and bearish wager against Herbalife have been toxic:
Source: Bloomberg

But Ackman's still feeling good, especially now that he's had a swig of the Donald Trump Kool-Aid. Despite his reservations earlier this year, Ackman now sees the president-elect as an activist investor of sorts -- not unlike himself -- here to turn around the "under-managed" business that is America.

"I think it's very good for the companies that we own. We're long America. I have John Oliver to take care of Herbalife. I have Donald Trump to take care of the rest of the portfolio."

As you read everywhere last week, nobody really knows what a Trump administration will mean for pretty much anything. But now that third-quarter earnings results are in, we can make an educated guess as to how Ackman's hedge fund, Pershing Square Holdings, will look in the coming months and year. 

Quick recap: The fund has lost about 21 percent this year through Nov. 8. There were $10.5 billion of total strategy assets under management as of Oct. 31, down from $17.5 billion two years ago -- that was before Valeant Pharmaceuticals International Inc. plunged to a sub-$20 stock from over $250 a share, and Ackman rode it the whole way down. These are Pershing Square's long holdings as of Sept. 30:

Burgers and Burritos
Burger King's parent company and Chipotle are Ackman's biggest long investments as of now:
Source: Bloomberg
*Includes common shares and shares under purchase contracts

Ackman is a big fan of Restaurant Brands International Inc. -- created from the 2014 merger of Burger King and Tim Hortons -- and he has a history of investing in fast-food chains because he says that they're simple, predictable, cash-flow-generative businesses. True. But Burger King has its share of problems as well.

With grocery stores in a price war, fewer people are eating out, particularly at fast-food joints when healthier options are in right now. To capitalize on the burrito fad sparked by Chipotle, Burger King started offering a "Whopperrito", but that hasn't offset a decline in same-store sales at its North America locations. Tim Hortons is doing fine, and Burger King is doing really well internationally, but North America accounts for more than 80 percent of total sales. So the question is, can the stock price grow much if the domestic operations are holding it back? Analysts are split on this:

Mixed Feelings
On the one hand, Restaurant Brands' overseas growth is compelling, but the U.S. market is tough right now
Source: Bloomberg

Ackman also seems optimistic about his latest activist position, Chipotle Mexican Grill Inc., which he disclosed in September. But Shelly Banjo and I have detailed why this campaign is a head-scracther and wondered what assistance an activist investor can bring to a restaurant whose biggest problem is brand damage in the wake of a food-safety crisis. Will he go all Jeff Smith and personally sterilize Chipotle's food-prep counters? Methinks no.

While Chipotle's revenue is projected to recover next year after a 13 percent drop in 2016, there still sure are a lot of analyst sell ratings. Efforts to bring back the business just haven't been successful yet

Back In Business?
A sales resurgence is forecast for Chipotle early next year, although these estimates have continued to shrink some:
Source: Bloomberg

In the third quarter, Pershing Square exited Canadian Pacific Railway Ltd. and reduced its stakes in animal-health company Zoetis Inc. and Air Products and Chemicals Inc., according to a filing released Monday evening. Of what remains in the portfolio, Oreo manufacturer Mondelez International Inc., Zoetis, Air Products and real estate owner Howard Hughes Corp. all look relatively solid.

But if you're hoping for excitement, the one with the greatest potential is Mondelez -- will it try again to acquire Hershey Co.? Or will it get bought by 3G Capital-backed Kraft Heinz Co.? Either would be good news for shareholders as foodmakers grapple with slow growth and turn to synergistic mergers to drive profit. 

It hasn't been smooth sailing for Nomad Foods Ltd., a European food company founded by dealmakers and built to make acquisitions, nor Platform Specialty Products Corp., a chemical business. Nomad says it's roaming the frozen-food aisles for a purchase or other opportunities as they come along, but it's tough to judge the stock until that happens. As for Platform Specialty, its balance sheet is stretched, but Ebitda is poised to jump 10 percent next year, so there's certainly a risk-reward trade-off.

Stabilizing
Platform Specialty's $4.6 billion of net debt is more than six times its trailing 12-month Ebitda. Given projected Ebitda growth, leverage should come down:
Source: Bloomberg

And Valeant. Valeant, Valeant, Valeant. The embattled drugmaker may change its name, which would probably be a good thing, a fresh start. And it's been selling what it can to pay down debt, which is also good (although simultaneously revealing how much it's overpaid in the past for some assets). Gadfly's Max Nisen says not to cheer for the company just yet and that the situation could get uglier still.

Painful
Valeant is in talks to sell its Salix gastrointestinal drugs business for as much as $10 billion, a discount to what Valeant paid for it in 2015. Other parts of the company are faring even worse:
Source: Valeant investor presentation

On a positive note, Ackman's short bet against Herbalife Ltd. could actually start to pay off. The company's financials are looking less compelling -- revenue has slowed tremendously and operating income is down 27 percent during the past 12 months from the prior period -- and the stock is down slightly for the year.

It may only get tougher to sign people up after John Oliver featured Herbalife in his Nov. 6 episode of "Last Week Tonight" about pyramid schemey multilevel marketing companies. He noted that the Federal Trade Commission walked "right up to the line of outright calling" Herbalife one. Where ABC News's 2014 investigation did little to get the public to care about Herbalife, Oliver -- a comedian on HBO whose short, digestible shows go viral on social media -- could bring more attention to it. 

Overall, the outlook for Pershing Square's portfolio is mixed, but leans more negative than positive for now. At least the worst seems out of the way. Better luck next year, Bill, and hopefully you're right about Trump.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. But remember, Ackman had high hopes for Ron Johnson and Mike Pearson, too. Johnson, who Ackman recruited to fix J.C.Penney, made the department store worse. Pearson is the former Valeant CEO responsible for the overpriced,  debt-laden deals that are helping to drive the pharmaceutical company into the ground.

  2. Try as Ackman has to get investors more interested in Fannie Mae, they just aren't. He believes Pershing Square and other firms that own the small bit of shares that trade will reach a deal with the Trump administration over the mortgage entity. The stock popped 60 percent last week after the election, but it will be a while before we have clarity on that.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net