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Rupert Hargreaves
Rupert Hargreaves
Articles (687)  | Author's Website |

Merger Arbitrage Positions Dominate Seth Klarman's Equity Portfolio

Klarman is betting on several deals to complete

Over the past few days, hedge fund investors with more than $100 million have been filing their 13F reports with the SEC, updating the regulator on their positions' movements during the first quarter of 2018.

These filings are an exciting guide to what some of the world's best investors are buying and selling, and where they see value in today's market.

However, as they are backward-looking documents, they should not be used for trading purposes. They do not accurately reflect the current portfolio. Also, without knowing the thesis behind every investment, it is difficult to tell why precisely these investors own individual positions. They could also be part of a more comprehensive investment strategy.

Still, for longer-term investors such as Seth Klarman (Trades, Portfolio), these guides are fascinating. While the SEC filing only lists publicly traded positions and excludes items such as cash and real estate, it is not an exact reflection of Baupost's portfolio, but it's still interesting to see what the "Margin of Safety" author bought and sold during the period.

Baupost buying and selling

Klarman made many portfolio changes during the quarter. He dumped small holdings in Express Scripts (NASDAQ:ESRX), Cascadian Therapeutics (NASDAQ:CASC) and Sunrun (NASDAQ:RUN), and substantially reduced holdings of AmerisourceBergen (NYSE:ABC), Forward Pharma (NASDAQ:FWP) ChipMOS TECH (NASDAQ:IMOS) and PBF Energy (NYSE:PBF).

This is the second consecutive quarter the investor has reduced his holding in PBF, which was once one of the most substantial holdings in the Baupost equity portfolio accounting for nearly 5% of equity assets at its peak. The holding is down to just 2.6% after recent sales.


Interestingly, only one position was added to the portfolio during the quarter, 3.2 million shares of PG&E Corp, (NYSE:PCG) which now takes up 1.4% of the overall equity portfolio.

This acquisition pales in comparison to Baupost's ownership of 21st Century Fox (NASDAQ:FOXA).

Klarman increased his stake in this business by 19.3% during the first quarter, taking the holding to 26.6 million shares, worth just under $1 billion. He also owns $415 million of shares in another share class, Twenty-First Century Fox CL B (NASDAQ:FOX), which when combined make this holding by far the largest in the equity portfolio at around $1.4 billion. The second largest holding is Cheniere Energy (LNG) worth just over $1.1 billion.

It would appear that this is a merger arbitrage play from Klarman. Fox has agreed to sell most of its cable and studio assets to the Walt Disney Company (DIS) in a transaction at $66.1 billion, including $13.7 billion in 21st Century Fox debt. While still subject to regulatory review, which is expected to take as long as 18 months, is seems Klarman expects this deal to eventually complete and shareholders to benefit significantly from the transaction and synergies created by Disney. This isn't the only merger arbitrage position included in the portfolio. In addition to Fox, Baupost owns around $750 million of Time Warner (TWX), as I have covered before.

The other significant addition Klarman made to his portfolio in the first quarter was a doubling of his stake in Pioneer Natural Resources (PXD), the shale oil producer he first started buying during the third quarter of 2017. Baupost now owns 4 million shares of this company, worth just $700 million according to the pricing data in the filing.


As I have stated before, this seems to suggest Klarman believes, with oil prices rising, this company is set to benefit significantly in the years ahead as it doubles down on its goal of becoming one of the best oil producers in North America. In addition to Pioneer, Klarman also owns Antero Resources (ANTO), another shale producer engaged in exploitation, development and acquisition of Appalachia Basin natural gas.

Disclosure: The author owns no stock mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website

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