John Paulson (Trades, Portfolio), president and manager of Paulson & Co., disclosed this month that his firm gained a holding in ViacomCBS Inc. (VIAC, Financial) following a merger and established five new positions during the fourth quarter: Pretium Resources Inc. (PVG, Financial), Tech Data Corp. (TECD, Financial), Tiffany & Co. (TIF, Financial), LogMeIn Inc. (LOGM, Financial) and Innophos Holdings Inc. (IPHS, Financial).
A former mergers and acquisitions banker, Paulson established his New York-based firm as a merger arbitrage hedge fund, seeking to make money from situations when one public company announces plans to take over a second company. The fund manager detailed a seven-criterion checklist for a strong merger, as Table 1 illustrates.
| Definitive merger agreement between the two companies |
| Strategic rationale behind the merger |
| No financing conditions |
| No due diligence conditions |
| Solidly-performing target |
| Reasonable valuation |
| Limited regulatory risk |
Table 1
As of quarter-end, Paulson’s $4.63-billion equity portfolio contains 37 holdings with a turnover ratio of 8%. The top three sectors in terms of weight are health care, communication services and basic materials.
ViacomCBS
Paulson gained 6 million Class B shares of ViacomCBS as a result of a merger between CBS and Viacom Inc. (VIAB, Financial). Shares of ViacomCBS averaged $38.79 during the quarter; the position represents 5.44% of the equity portfolio.
CBS and Viacom completed their merger on Dec. 4, 2019, combining into a premium content company that operates brands like CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV and Comedy Central. The New York-based company reported last week that revenues for 2019 increased 2% year over year, driven by growth in advertising, affiliate and content licensing revenues.
GuruFocus ranks the company’s profitability 9 out of 10 on several positive investing signs, which include net profit margins and returns outperforming over 86% of global competitors despite operating margins contracting over the past five years.
Pretium Resources
Paulson purchased 2,588,600 shares of Pretium Resources, giving the stake 0.62% weight in the equity portfolio. Shares averaged $10.61 during the quarter.
The Vancouver, British Columbia-based company acquires and explores precious metal resources in the Americas. GuruFocus ranks Pretium’s financial strength 5 out of 10: Although the company has a solid Piotroski F-score of 6, its interest coverage and cash-to-debt ratios are underperforming over 85% of global competitors.
Tech Data
Paulson purchased 133,426 shares of Tech Data, giving the position 0.41% weight in the equity portfolio. Shares averaged $129.24 during the quarter.
The Clearwater, Florida-based company brings products from technology vendors to market and provides retailers with logistics services. On Nov. 27, 2019, Tech Data entered into a definitive merger agreement in which an affiliate of Apollo Global Management (APO, Financial) will acquire all outstanding shares of Tech Data for $145 per share in cash, $15 higher than the previous offer of $130 per share. Meanwhile, Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) offered a merger at $140 per share in cash yet backed out following Apollo’s superior offer.
GuruFocus ranks Tech Data’s profitability 9 out of 10 on several positive investing signs, which include expanding operating margins, a four-star business predictability rank, a high Piotroski F-score of 8 and a Joel Greenblatt (Trades, Portfolio) return on capital that outperforms 80.88% of global competitors.
Other gurus with holdings in Tech Data include Jeremy Grantham (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio).
Tiffany
Paulson purchased 134,030 shares of Tiffany, giving the holding 0.39% weight in the equity portfolio. Shares averaged $119.09 during the quarter.
Bound to a merger with Paris-based LVMH Moet Hennessy Louis Vuitton SE (XPAR:MC), the New York-based jeweler markets and retails its products in over 300 stores across 20 countries. GuruFocus ranks Tiffany’s profitability 8 out of 10 on several positive investing signs, which include operating margins outperforming over 93% of global competitors despite contracting over the past five years. Additionally, Tiffany’s return on assets outperforms over 85% of global luxury goods producers.
LogMeIn
Paulson purchased 122,347 shares of LogMeIn, giving the position 0.23% weight in the equity portfolio. Shares averaged $74.54 during the quarter.
The Boston-based company provides cloud-based collaboration and connectivity solutions. GuruFocus ranks LogMeIn’s profitability 7 out of 10: Although the company’s three-year revenue growth rate outperforms 84.19% of global competitors, its gross margin has declined over the past five years while its operating margin underperforms 59.63% of global application software companies.
Innophos
Paulson purchased 160,412 shares of Innophos, giving the holding 0.11% weight in the equity portfolio. Shares averaged $32.18 during the quarter.
The Cranbury, New Jersey-based company manufactures and sells a wide range of ingredients used in food and beverage production. GuruFocus ranks Innophos’ financial strength 5 out of 10: Although the company has a solid Piotroski F-score of 6, its debt ratios are underperforming over 70% of global competitors.
Disclosure: No positions.
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