Tuesday, May 01, 2012
By Pete Gallo
One of the most spectacular payoffs in public stocks so far this year has been Chilton Investment Co.’s incorrigible portfolio bet on a smaller-cap pharmaceutical specialist called Vivus, whose share-price trajectory has surged from burgeoning to ballistic, thanks to recent regulatory approvals for its experimental weight-loss drug, Qnexa.
Chilton is the largest shareholder in the drugmaker, boasting a gargantuan 9.7 percent stake. That said, Vivus isn’t exactly new to the Chilton portfolio. Regulatory filings with the Securities and Exchange Commission reveal that the hedge fund has steadily upped its share holdings in the company from 5.9 million at the start of 2011 to 8.6 million by the start of 2012. Notably, records show that Chilton added a portion of that stake back in 2010 at recession-battered prices: The stock dipped to as low as $4.98 in July of that year, off a previous high of $12.50.
But things are looking much brighter of late. Vivus began 2012 at about $9.90 and on March 19 closed its trading day on the Nasdaq at $21.13. By April 11, the stock was trading at $22.22 per share. The overall gain bolstered Chilton’s 8.6 million-share stake in value from $85.1 million to $191.1 million — strong medicine for any large fund investor. (Other significant stakeholders include hedge funds managed by Caxton Associates, OrbiMed Advisors, Passport Capital and Europe’s Meditor Group, according to regulatory filings.)
The moves have been a big boon for Vivus, which has seen its market cap swell in a short span. The company specializes in specific strata of pharmaceuticals, with an emphasis on treating sexual dysfunction and obesity, giving it a strong consumer bent. (The company also produces drugs to treat diabetes and sleep apnea.)
For Chilton, piling into the stock may seem to have been a classic buy-low investment strategy. But that may be an oversimplification of the stock’s strategic allure in recent years. Having a pharma investment cycle that is less correlated to broader consumer spending seems to have given Vivus a strong strategic edge, as it used the depths of the recession to focus on research and prepping regulatory endeavors.
That strategy came to recent fruition in the third week in February, when the company won another round of approval from the U.S. Food and Drug Administration, which paves the path for the eventual marketing of Qnexa, Vivus’s primary product in clinical development. Company management seemed to exude a cool confidence that Vivus was poised for better days when in mid-February they unveiled plans to raise growth capital through a public offering of about 10 million shares at $22.50 apiece.
The hedge fund doesn’t seem to have participated in the offering. However, the result was rapid as the market reacted, sending the value of Chilton’s existing stake soaring. Following the announcement of FDA findings on February 22, the stock surged from $10.55 to a recent high of $23.78 on February 27.
But will Qnexa’s promise make it worthwhile for Chilton and other investor heavyweights to stay parked, waiting for further returns from actual sales revenues? Vivus’s recent public offering suggests the company is aiming to press ahead at prudent speed in marketing its obesity drug. Still, that may take time to produce results, even with strong interest from the medical industry and cultural interest in shedding unhealthy fat.
Certainly, Chilton has showed a steady hand and patience with its long-term Vivus stake, but it may want to wait a bit longer. Even given Vivus’s renewed share price and commensurate boost in market capitalization, it is still a smallish midcap, which might make it a prime candidate for acquisition down the line. Filings show the company has upward of $140 million in cash and minuscule debt.
What’s more, the vast bulk of its shares are institutionally held with a handful of big names — including Chilton — on the investor marquee. Surely, as its largest shareholder, Chilton’s preferences would carry substantial weight.
Even if a merger offer eludes, Chilton’s team can’t easily ignore that some Wall Street analysts have put a target share price of $40 on the stock, although much of that assumes sales projections that wildly reach out to the year 2020.
Still, such projections, and other empirically driven guesses or wishes, are perhaps helpful in representing how Wall Street estimates voracious demand in the weight-loss-drug arena and how much growth it foresees for the sector.
Exuberance aside, the stock could be poised for a pullback if the FDA blinks and Vivus faces a regulatory setback next time around. Either way, Vivus is a potential volatility play that could add further upside for Chilton, its largest stakeholder. AR
Thursday, March 01, 2012
If hedge fund managers wrote motion picture scripts, they might pen a story like this recent market tale.
Tremblant Capital Group is a New York–based hedge fund firm whose filings with the Securities and Exchange Commission reveal a thematic interest in the growth of consumer spending in China. More specifically, Tremblant’s investment team is banking on growing box office receipts for movies in China — not just dubbed retreads imported from Hollywood, but homegrown blockbusters made possible by increased access of Chinese film companies to global capital markets.
Tremblant is a major shareholder in the Bona Film Group, the largest private distributor of motion pictures in China. Filings show that Tremblant owns an 8 percent stake in the Beijing-based company, which went public in late 2010. Mind you, the holding has yet to prove a blockbuster for Tremblant; shares have been trading in a tight range for some time. On February 21, the Nasdaq-traded stock closed at $4.56. (Filings show Tremblant owns 4.7 million of shares of the ADRs, which puts the value of its stake at just below $21.5 million.)
Some analysts think Bona has been overlooked because revenues took a dip, post IPO. Still, profits are up, and there are other reasons to be optimistic long-term. There is room for upside with shares trading at only about 11 times earnings. That said, Bona’s hits are names you likely have never come across — such as the animated Pleasant Goat and Big Big Wolf and a current hit, the 3-D martial arts movie Flying Swords of Dragon Gate, starring Jet Li.
In recent weeks, the latter has managed one of the best-grossing openers in Chinese box office history, thanks to its release in native 3-D IMAX format, the first such Chinese-language movie shot to take advantage of that format. Though the movie’s opening gross of $2.5 million might be laughable by Hollywood standards, Tremblant likely sees the growth potential.
Still, betting on motion pictures and even distributors can be a risky proposition due to cyclical swings in box office sales. It’s here that Tremblant’s investment team perhaps deserves kudos for its foresight. In addition to betting on the “software” side of the equation with distribution in China via Bona, the hedge fund has also taken a stake on the “hardware” side through a major investment in IMAX itself.
Filings with the SEC show that Tremblant owns roughly 3.1 million shares in IMAX. That makes the hedge fund one of IMAX’s largest shareholders with a 5.1 percent stake. The stock has been a solid performer of late, hitting a recent high of $24.93 and putting the value of Tremblant’s portfolio holding at roughly $77 million.
As a major stakeholder, Tremblant must have been aware that IMAX was not only planning to expand internationally but had teamed up with Bona to do so in the Chinese market. (This was precipitated by the motion picture company establishing local subsidiaries IMAX China and IMAX [Shanghai] Multimedia Technology Co.)
Again, Tremblant saw both the forest and the trees in this investment and wisely bet on both. The wider market was either oblivious to or skeptical of this China–silver screen synergy. In mid-February IMAX shares surged over the course of two days, gaining almost $2.50 per share when the company announced a big jump in box office sales during the quarter and the opening of new theaters in China. Since the start of 2012, the value of Tremblant’s IMAX stake has appreciated by $29 million. So why not lock in profits?
There are compelling reasons for Tremblant to hold IMAX as a global consumer play: The motion picture company plans to grow the number of theaters it has in China from about forty to eighty in 2012, making it IMAX’s No. 2 market after the U.S. What’s more, China is offering tax breaks to both cinema builders and domestic filmmakers in an effort to steal some of the cultural and financial thunder that emanates from LA.
Tremblant seems well positioned and must like that IMAX’s effort to globalize its franchise isn’t just a simple China play. IMAX has been looking wide and far for growth, and recently announced that its first Russian-language film, based on the siege of Stalingrad, is expected to be released in 2013.
One would hope that Tremblant uses its large-stake position to urge IMAX to continue this methodical expansion. After all, IMAX is unique in that it is both a maker of specialized motion picture equipment and an owner of theaters that use a proprietary projection technology that maximizes the strengths of large-screen cinema. In a competitive environment, there’s nothing like being your own vertical. Investments in both IMAX and Bona Film Group show Tremblant gets this lesson.
Friday, December 09, 2011
By Pete Gallo
Let it be said that 2011 has proven to be the best and worst of times for activist investors. There has been no shortage of stocks beaten down during the prolonged economic crunch. At the same time, macroeconomic uncertainties make turnarounds that much more challenging to engineer.
What’s an activist investor to do in raucously bearish markets? Just ask Carl Icahn. These days the famed activist seems a bit more like a traditional opportunistic buyer, grabbing hold at lows and then waiting for recovery.
Take his stake in the medical and health information provider WebMD. Since October, Icahn funds have added 2.5 million shares of WebMD, bringing holdings to 5.7 million shares, representing a 9.99 percent stake in the Nasdaq-traded company, based on its recent filings with the Securities and Exchange Commission.
There can be little doubt that weak share prices were the immediate draw for Icahn. WebMD shares, off a 52-week high of $58 set in May, had dipped to a low of $27 in October when Icahn made his move. Shares traded at $31.75 in late November, which put the overall value of Icahn’s exposure (through multiple funds) at roughly $180.7 million. Other investors were attracted by the lower-price entry point into the stock, including funds run by Soros Fund Management. Filings with the SEC show that Soros-affiliated funds own 3.4 million shares in WebMD.
Icahn may have seen a golden opportunity. For starters, WebMD isn’t the typical Internet business: It’s not a retailer, it boasts an affluent core clientele, and it possesses the largest commercial Rolodex of medical doctors on the planet. That fact is not lost on pharmaceutical, medical device and biotech companies who provide ample advertising dollars and sponsorship for WebMD conferences aimed at reaching that audience.
Whatever Icahn’s activist plans, if any, WebMD, which went public in 2005, seems to be on solid ground long-term. Regulatory filings show the company is sitting on more than $1 billion in cash and boasts low debt, suggesting WebMD is ready and able to fund growth through acquisitions. Revenues for its web portals, mainly from advertising, weighed in at $408 million for the nine months ending September 30, up from $366 million for the same period last year.
Clearly, these factors helped draw interest from funds run by the likes of Icahn and Soros. But the famous love-hate relationship between management of web companies and Wall Street seems to have surfaced as well. Apparently fearful of a hostile takeover bid or an activist-led management shake-up, WebMD rushed to shore up its defenses. Filings with the SEC show that on November 2, immediately following the buying spree by Icahn in late October, the company issued a statement to public stakeholders informing them of a change in shareholder rights. The company’s board of directors opted for a takeover defense based on issuance of a new preferred class of shares that would be matched 1-to-1 with common stock. These “rights” would become exercisable at a set price of $153 if any investor acquired in excess of 12 percent of WebMD’s common stock. The clause sunsets in one calendar year, according to the filing.
It remains to be seen whether Icahn funds will take this as a poison pill deterrence or as a sign that a hubristic management clearly overestimates WebMD’s book value. But since Icahn’s funds already own a nearly ten percent stake in the firm, management certainly got the activist’s attention. In the special November 2 letter to investors, company management said: “The Stockholder Rights Plan is designed to guard against inadequate or coercive takeovers and other tactics that might be used in an attempt to gain control of the Company without paying all stockholders a fair price for their shares.” Strong language? Lest that sound accusatory, management added: “The Stockholder Rights Plan will not prevent takeovers, but is designed to deter coercive takeover tactics and to encourage anyone attempting to acquire [WebMD] to first negotiate with the Board.”
In the meantime, Icahn has used his shareholder girth to make one suggestion. He wants WebMD management to put its arsenal of cash to immediate use. In a filing with the SEC on November 30, the activist called upon WebMD to buy back up to $1 billion in its own stock through a Dutch tender with prices capped at $36 per share. Such an auction might be a prelude to privatization. Or it may be the activist is throwing down a gauntlet so company management won’t keep WebMD’s substantial cash reserves idle. Management may have other ideas, but attracting even a prospective suitor in a bear market can never be a bad thing.