Steven Cohen Buys 5.2% Stake in Validus, John Paulson Reduces American Capital
Steven Cohen founded hedge fund SAC Capital Advisors in 1992 with $25 million, and today they manage $14 billion. He focuses on fundamentals of companies, as well as technical analysis, when investing. SAC’s website says that, “SAC's initial investment style was ‘trading’ oriented. However, we have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds and Emerging Markets.”
Cohen’s new position in Validus represents 5.2% of the company. Validus Holdings Ltd., through its principal operating subsidiary Validus Reinsurance Ltd., is a global provider of short-tail lines of reinsurance including property catastrophe, property pro-rata and property per risk, marine and energy, and other specialty lines. Validus was formed in December following the significant natural catastrophes of 2005 with an experienced management team and an unencumbered capital base of approximately $1 billion. Validus Holdings Ltd. has a market cap of $3.13 billion; its shares were traded at around $31.64 with a P/E ratio of 23.4 and P/S ratio of 1.7. The dividend yield of Validus Holdings Ltd. stocks is 3.2%.
Through the latter half of this year, Validus has been involved in a dramatic battle to take over Transatlantic Re, an international reinsurance organization with an emphasis on specialty risks. Validus faced both the resistance from Transatlantic, as well as other competitors that had designs on it, Alleghany Corporation (Y) and Allied World (AWH). In July, around the time that Validus made its first offer to Transatlantic, Validus’ stock price fell significantly. Validus offered Transatlantic stockholders 1.56 Validus voting common shares and $8.00 cash per share pursuant to a one-time special dividend immediately prior to the closing of the merger. The total price would be $55.95 per share, a 14% premium to that day’s closing price.
Transatlantic turned Validus down on November 21 after going back and forth with them for several months, eventually agreeing to merge with Alleghany Corp. (Y). By early November, when Transatlantic officially rejected Validus’ offer, Validus’ stock price had begun to rebound. Cohen could be catching the company as it trends back up to its price before the temporary acquisition-related depression.
Since going public in 2007, Validus has raised its book value from $26.08 per share to $31.52 per share. It has cash of about $1.4 billion on its balance sheet, as well as about $600 million of long-term liabilities and debt. Cash flow has been positive each year, growing from $486 million in 2008 to $630 million in 2010.Earnings also declined from $897 million in 2009 to $403 million in 2010.
John Paulson, on the other hand, has been reducing his stake in American Capital Ltd. (ACAS), which he has held since second quarter of 2010, when he bought 43,725,000 shares at about $5.50 per share. In the third quarter of 2011, he sold 4,914,141 shares at about $9 per share. From November to date he has made six additional sales.
American Capital Ltd. is the only private equity fund and the largest alternative asset management company in the S&P 500. American Capital Ltd. has a market cap of $2.43 billion; its shares were traded at around $7.035 with a P/E ratio of 8.7 and P/S ratio of 4.
Year to date, the company’s stock price has declined over 9%, and over the past five years, it has dropped 85%, most markedly during the credit crisis of 2008 or 2009, from which the stock has not yet recovered. In tandem, its revenue has been declining each year from $1.2 billion in 2007 to $600 million in 2010. From the beginning of the decade to that point, the company had been growing revenue each year. Though it has generated positive cash flow each year of the last ten years, as of the third quarter 2011, it has $272 million in cash on its balance sheet, along with about $1.7 billion in long-term liabilities and debt. The company has paid down its debt significantly from the $4-$5 billion range it was in from 2007 to 2009, including $1 billion just over the last year.
The third quarter indicated that the company might not be strongly into recovery mode Paulson might have hoped for just yet. Its return on equity dipped from 36.1% in the second quarter to negative 46.2% in the third quarter; return on assets fell from 47.3% in the second quarter to negative 69.8% in the third quarter.
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