Ackman Gains 30% With Burger King, Herbalife Wagers

By Saijel Kishan and Kelly Bit

A month after Bill Ackman’s disastrous attempt to expose fraudulent behavior by nutrition company Herbalife Ltd. (HLF), the billionaire is on his way to one of his most profitable years.
Since Ackman’s three-hour presentation in Manhattan on July 22 that sent Herbalife’s stock soaring, the company has slumped 26 percent after reporting disappointing earnings. Ackman’s $1 billion bet that the firm’s shares will collapse has helped spur the money manager to his best year since 2009.
Pershing Square Capital Management LP’s oldest fund has gained about 30 percent this year, according to a person with knowledge of the returns, compared with the
average 2.5 percent for the hedge-fund industry. He’s done it through big wagers on a small group of companies. Yesterday, Ackman’s firm made $203 million on Burger King Worldwide Inc. (BKW) after the fast-food chain said it was in talks to buy Tim Hortons Inc. (THI)
“Many investors will be surprised by how strong Bill Ackman’s and Pershing Square’s performance has been this year,” said Sean Bill, trustee on the City of San Jose Police and Fire Retirement Plan, which has $3.3 billion in assets. “His numbers are in the shadow of a very public debate on Herbalife. But he continues to deliver outstanding performance.”

Photographer: Jin Lee/Bloomberg

Bill Ackman, Founder and Chief Executive Officer of Pershing Square Capital Management LP.

Bold Wagers

Ackman, 48, is known for making bold wagers and has no shortage of confidence. Michael Milken said last weekend that Ackman told him he was as good as any tennis pro at a Hamptons charity tournament. Pershing Square, which oversees $15 billion, had at least $12.5 billion invested in six public companies at the end of the second quarter, according to a regulatory filing.
Pershing Square’s 10.9 percent stake in Burger King increased in value yesterday to about $1.24 billion, according to data compiled by Bloomberg. The company rose 20 percent yesterday to $32.40 in New York after disclosing the talks with Tim Hortons, which would create the world’s third largest fast-food chain. The two companies said today they reached an agreement to merge, with Berkshire Hathaway Inc. (BRK/B) helping finance the deal.
Ackman helped Burger King go public in 2012 after it merged with Justice Holdings Ltd., a special-purpose acquisition company co-founded by the hedge-fund manager. The stock has more than doubled since September 2012 when Pershing Square disclosed its stake.

High Stakes

Ackman has also bet against Herbalife, mounting a campaign in which he has accused the company of running a pyramid scheme. He told Pershing Square investors that he will extend his bet against the company should he need to.
Pershing Square disclosed in November that it bought stakes in mortgage companies Fannie Mae and Freddie Mac (FMCC), which have climbed at least 28 percent this year. The fund is the largest shareholder of both entities after the U.S. government, owning about 10 percent of the common stock in each. The stakes were valued at more than $689 million yesterday.
Ackman, an activist investor who pushes for management change to boost share prices, founded Pershing Square in 2004. His most profitable years include a 42.6 percent gain that year; 39.9 percent in 2005 and 40.6 percent in 2009. Fran McGill, a spokesman for New York-based Pershing Square at Rubenstein Associates Inc., declined to comment.
Ackman, who started his first hedge fund at age 26, has his money in high stakes investments.

Necessary Outcomes

Profitability of his short wager against Herbalife in part depends on the outcome of a U.S. Federal Trade Commission investigation into the Los Angeles-based company as well as the cost of the options Pershing has bought in the company, which profit from a drop in Herbalife shares.
Ackman’s investments in Fannie Mae (FNMA) and Freddie Mac may depend on him winning a lawsuit against the U.S. that he filed this month, or a change in government policy. Ackman’s firm claims that the government revised terms of the 2008 bailout of the two firms that cheat investors of profit from the mortgage-financing entities.
Another big bet by Pershing Square is backing a hostile bid by drugmaker Valeant Pharmaceuticals International Inc. (VRX) for Allergan Inc. The hedge-fund firm teamed up with Valeant in April. Pershing Square is Allergan’s biggest shareholder with a 9.4 percent stake.

SEC Review

The target, which has refused talks with Valeant, sued on Aug. 1, claiming the drugmaker colluded with Pershing Square to profit from trades ahead of the bid’s announcement, using its insider knowledge of the impending offer.
Valeant and Pershing Square called the lawsuit a “desperate attempt to delay or avoid” a shareholder meeting requested by Ackman, according to a statement in response to the lawsuit. Pershing said on Aug. 14 that it welcomes a U.S. Securities and Exchange Commission review of its takeover tactics and defended them. Allergan has risen 44 percent since the end of April.
“Activism is not a trading strategy. It requires time, patience and focus by the manager,” said Don Steinbrugge, managing partner of hedge-funds adviser Agecroft Partners LLC. “It’s really paying off for Ackman this year.”