John Paulson (Trades, Portfolio), portfolio manager and founder of Paulson & Co., disclosed last week he established 13 new holdings during the fourth quarter. The top five positions in terms of portfolio weight were Red Hat Inc. (RHT, Financial), Travelport Worldwide Ltd. (TVPT, Financial), Imperva Inc. (IMPV, Financial), Tribune Media Co. (TRCO, Financial) and Stewart Information Services Corp. (STC, Financial).
Managing a portfolio of 51 stocks, Paulson established his firm as a merger arbitrage hedge fund, which seeks to make money from situations where one public company announces plans to acquire a second. The fund manager introduced a checklist containing seven key criteria for successful mergers: definitive agreements, strong strategic rationale, no financing condition, no due diligence condition, solidly performing target, reasonable valuation and limited regulatory risk.
Red Hat
Paulson invested in 377,200 shares of Red Hat, a company tied to a planned merger with International Business Machines Corp. (IBM, Financial). Shares of Red Hat averaged $159.61 during the quarter; the fund manager dedicated 1.59% of his equity portfolio to the position.
Red Hat announced on Oct. 29 it had reached a definitive agreement with IBM in which the Armonk, New York-based company will acquire all shares of Red Hat for $190 per share, representing a total enterprise value of approximately $34 billion. The companies listed several strategic initiatives for the merger, which include IBM expanding into the second chapter of the cloud and Red Hat accelerating its expansion of Linux to a wider audience through the use of IBM’s scale and resources. The merger is expected to close during the second half of 2019, subject to shareholder approval and other customary closing conditions.
GuruFocus ranks Red Hat’s financial strength 7 out of 10 and profitability 9 out of 10, suggesting a solidly performing target with a strong balance sheet. Red Hat’s positive investing signs include expanding profit margins, a strong Piotroski F-score of 7 and a business predictability rank of 4.5 stars.
Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) also invested in Red Hat during the quarter.
Travelport
Paulson invested in 3.55 million shares of Travelport for an average price of $15.21 per share, giving the position 1.33% equity portfolio space.
Travelport operates distribution, technology, payment and mobile services for the travel and tourism industry. GuruFocus ranks the company’s profitability 7 out of 10: even though revenues have declined 7.40% per year over the past three years, a rate that underperforms 81% of global leisure companies, Travelport has expanding profit margins and a strong Piotroski F-score of 7.
Imperva
Paulson disclosed a 610,000-share stake in Imperva, a provider of cybersecurity products for enterprises and governments. Shares averaged $54.51 during the quarter.
On Jan. 10, the Redwood Shores, California-based company announced private-equity firm Thoma Bravo LLC had completed the acquisition of Imperva. Shares ceased to trade on the Nasdaq as of Jan. 22, according to filings from the U.S. Securities and Exchange Commission.
Tribune Media
Paulson invested in 560,000 shares of Tribune Media, a company tied to a merger with Nexstar Media Group (NXST, Financial) as of Dec. 3, 2018. Shares of the Chicago-based media and entertainment company averaged $40.61 during the quarter.
Irving, Texas-based Nexstar announced it entered a definitive agreement in which Nexstar will acquire the shares of Tribune Media for $46.50 per share in cash. Unlike the IBM-Red Hat merger, Nexstar also announced Tribune Media shareholders are entitled to an additional 30-cent cash consideration per month if the transaction is not closed by Aug. 31.
GuruFocus ranks Tribune Media’s profitability 7 out of 10: although the company’s net profit margins are outperforming 94% of global competitors, Tribune Media’s profit margins have contracted over the past five years, suggesting declining profitability.
Baupost Group manager Seth Klarman (Trades, Portfolio) closed his position in Tribune Media during the quarter.
Stewart Information Services
Paulson invested in 600,000 shares of Stewart Information Services for an average price of $41.91 per share, giving the position 0.60% equity portfolio space.
Houston-based Stewart offers residential and commercial title insurance as well as closing and settlement services to the mortgage industry. GuruFocus ranks the company’s financial strength 6 out of 10 primarily due to debt ratios outperforming two-thirds of global competitors.
See also
Paulson’s other new holdings for the quarter included Sprint Corp. (S, Financial), a telecom company tied to a planned merger with T-Mobile US Inc. (TMUS, Financial), and Twenty-First Century Fox Inc. (FOXA), an entertainment company tied to a merger with Walt Disney Co. (DIS).
Disclosure: No positions.
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