Bill Ackman Is Done Losing Money on Valeant
By my math, based on public filings, Bill Ackman's Pershing Square Capital Management had spent a bit more than $4.6 billion on Valeant Pharmaceuticals International Inc. shares and options as of yesterday afternoon. Of that, Pershing Square had gotten back about $574 million when it sold shares at the end of 2015 and 2016, leaving it with about a $4.1 billion basis in its position. Yesterday it closed out that remaining position, selling the remaining shares, some 27.2 million of them, through Jefferies Group LLC for about $300 million (or about $11 per share). 1 So out of a $4.6 billion investment, Pershing Square got back about $874 million.
But that math omits one final indignity. Ackman only owned 18.1 million of the 27.2 million shares that Jefferies sold. The other 9.1 million shares were underlying some stock options that he had traded with Nomura Global Financial Products Inc. 2 Those options had been restructured various times, but as of the most recent filing they were put/call combos 3 : Ackman bought call options with a $60 strike price and sold put options with the same strike price (all expiring in January 2019). That works out to be more or less a forward purchase of the stock for $60. 4 So when Pershing Square announced yesterday "that it has sold its investment in Valeant," presumably that means it also closed out those options. 5 Ignoring time value and assuming that it closed them out at $49 per share, that means that Pershing Square owed Nomura about $447 million.
So when it got the check from Jefferies for $300 million for selling its stock, it had to turn around and write another check to Nomura for $447 million to get fully out from under Valeant. 6 That is: As of yesterday, Pershing Square's Valeant position, for which it had paid about $4.1 billion, was worth about negative $147 million. That's an impressive, though arbitrarily calculated, loss of almost 104 percent.
Perhaps fairer: Depending on how you count, Pershing Square's total outlays on Valeant, including yesterday's trades, were over $5 billion, 7 of which it got back $874 million, for about a $4.2 billion loss. Here's a chart of its transactions 8 :
That too is somewhat arbitrary, though. Pershing Square's Valeant investment came out of its joint bid, with Valeant, to buy Allergan PLC. That ended very well: They didn't end up getting Allergan, but Pershing Square made about $2.2 billion on its Allergan toehold, leaving it down only about $2 billion on the overall Valeant relationship. It is fun to imagine how things would have gone if they had bought Allergan, though: Would its business have propped up the combined Valergan even after all the creepy revelations about Valeant's pharmacy practices, or would Valeant have dragged the Allergan business down with it?
I tell you all of this mostly because, one year ago tomorrow, I wrote a post titled "Ackman's Valeant Investment Keeps Getting Worse," in which I attempted to calculate how Pershing Square was doing on Valeant. The answer was bad, and that's back when the stock was trading at $33.51. Today the answer is, I suppose, three times as bad. 9
Ever since I wrote that post, people have occasionally asked me to update it for new Valeant news, and I have occasionally complied. Now I can stop. Pershing Square is out of Valeant, or almost: Ackman and Pershing Square Vice Chairman Steve Fraidin "will remain on the Valeant board until the upcoming annual meeting but will not stand for re-election." 10 I am sure they are at least as happy to be done with Valeant as I am. 11 The losses are crystalized; there are no more breakevens to worry about. Just for giggles, though, here's one more: As of yesterday, Pershing Square would have broken even on its overall Valeant investment (ignoring the Allergan profits) if it had sold the stock for $169.15 a share. 12 Instead of $11. It got $11.
I don't know what the lessons are here. "Don't buy stock that is going to go down." Don't do it with options to get leverage, either.
There is also a sort of strange story about activist investing. When Ackman arrived at Valeant, it was a perfect masterpiece of hedge-fund activism: run by a former McKinsey consultant, supported by activist fund ValueAct Capital Management, with a rigorously performance-based incentive compensation scheme that was a model for other companies, a leveraged capital structure, and a lean, aggressive, efficient approach to acquisitions and pricing. What was Ackman going to do, except stand back and admire the company? Ackman and Pershing Square "think highly of the Issuer’s management team, strategy, and track record," said their sunny first filing about Valeant, two years ago. They weren't buying Valeant to do activism on it; they were buying Valeant to enjoy the fruits of perfected activism.
And then everything went bad -- in most tellings, precisely because Valeant was so purely a creature of modern shareholder capitalism. The focus on ruthless efficiency led to pricing decisions that were political and public-relations disasters. The compensation scheme seems to have incentivized shenanigans. The leverage didn't help. Rather than finding an undervalued company with a good business but a shoddy management team and pushing it to extract value from its business more efficiently, Pershing Square found a hyper-efficient value extractor and watched the wheels fall off. That's not the ideal approach.
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The actual sale price is a little unclear. Bloomberg reports:
Jefferies Group LLC offered offered Pershing Square’s 27.23 million Valeant shares Monday, pricing them at $11.10 apiece, at the bottom of the marketed range of $11.10 to $11.40, according to a person familiar with the process who asked not to be identified discussing private information. It’s not clear how many of the shares on offer were allotted.
Presumably Jefferies got paid something to take the risk, and $11 is a nice round number, so it's plausible to guess that Jefferies paid Pershing Square $11 for shares that it was planning to reoffer at $11.10-$11.40. And that is what CNBC's David Faber reported. The risk seems to be real, by the way:
Sources tell Business Insider that Jefferies is indicating interest on half the stock and is on the hook for the balance that doesn't get paid.
And the stock traded as low as $10.50 this morning.
Actually Nomura was the counterparty to the over-the-counter put options that Pershing Square wrote; the call options that Pershing Square purchased were listed options. I assume that Nomura was on the other side of the full combo, though, which is a much less risky trade than naked puts or calls.
Actually the most recent filing about the options is this one, from December, when Pershing Square paid $91,200 to close out some $165-strike call options that it had sold. (Originally, Pershing Square had sold puts, bought calls, and sold higher-strike calls.) At the time, the stock was trading at around $14.68, and the options expired in January 2017, so honestly even a penny a share seems a little high to close them out, but whatever. In any case the bulk of the option action, by that point, was at the lower strikes.
That is: If the stock ends up at $75, the puts expire worthless, and Pershing Square exercises the calls and buys stock worth $75 for $60. If the stock ends up at $11, the calls expire worthless, Nomura exercises the puts, and Pershing Square buys stock worth $11 for $60. In all cases, Pershing Square buys the stock in January 2019 for $60 a share. So it's a forward.
Mechanically one assumes it's something like:
- Pershing Square owns 18.1 million shares and sells them to Jefferies.
- Nomura owns 9.1 million shares to hedge its option position, and sells them to Jefferies.
- Jefferies sells 27.2 million shares to the public.
- Pershing Square pays cash to settle the options with Nomura.
There are equivalent ways to get there. (For instance, Nomura and Pershing Square could have agreed to let Nomura exercise the put options early, bought the shares for $60, and sold the full 27.2 million to Jefferies, etc.) The key point is that the options are delta-one -- one put/call combo precisely corresponds to one share -- so (1) the shares and options are, from Pershing Square's perspective, interchangeable and (2) Nomura presumably held 9.1 million shares to hedge them. (Or had economic exposure to someone else who held 9.1 million shares, etc.)
I mean, not literally; presumably the options were collateralized and the final transfer was smaller or even the other way.
Ignoring everything (legal fees, etc.) other than publicly reported stock and options purchases and sales.
This is based on various Pershing Square filings, particularly:
- The original Schedule 13D and trading annex, from March 2015.
- The first amendment and annex, from November 2015.
- The second amendment and annex, from December 2015.
- The third amendment and annex, from February 2016.
- The eighth amendment and annex, from June 2016.
- The ninth amendment and annex, from December 2016.
- Various news reports about yesterday's sales.
Calculations are mine. The other Schedule 13D amendments were about board seats, etc., rather than trading.
Counting outlays and inflows is pretty arbitrary here, by the way; some of those option restructurings involved selling options and buying other ones, and I count only the net values of those trades rather than gross. (Whereas I count yesterday's share sale and presumptive option close-out separately.) There's nothing especially magic about saying that Pershing Square put out about $5.1 billion and got back about $874 million, as opposed to some other combination of numbers with the same net result. But those are the numbers that seem intuitive to me.
It's all relative, though: When I wrote that post, Valeant had lost 83 percent of its value in a year (and 51 percent in a day). As of yesterday's sale, Valeant had lost only 67 percent of its value in a year. The rate is slowing, anyway.
A fun disclosure: Fraidin taught my mergers and acquisitions class in law school.
As of yesterday, Pershing Square had spent about $4.6 billion, had gotten back about $574 million, and owed about $547 million for the $60 strike price on its 9.1 million put/call combos, for a net of about $4.6 billion. So if it had cleared $4.6 billion yesterday it would have broken even, which works out to about $169.15 per share on 27.2 million shares.
If you count $2.2 billion of Allergan profits you get a breakeven of about $88 per share, which is only ... well, eight times what they actually got.
Again, this omits time value, legal fees, etc., so is not to be taken as any sort of science.
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