Bioverativ(BIVV) Proves Attractive To Former Valeant(VRX) Patron ValueAct Capital

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Even before Biogen(BIIB) completed its spinoff of Bioverativ(BIVV), ValueAct Capital began buying “when-issued” stock in the new company. The hedge fund has continued to buy both stock and forward contracts and has now accumulated a 7.1% position in Bioverativ. The shares were purchased at between $40 and $45 per share. As Bioverativ stock has now risen above $50, the fund has a quick unrealized gain in the position.

What is ValueAct’s goal with its investment in Bioverativ?

Bioverativ has a history of activism. In its Bioverativ 13D it uses general boilerplate to describe its intentions, but also mentions that it has already had discussions with management and may request a Board seat.

  • The Reporting Persons acquired the securities of the Issuer reported herein based on their belief that the securities were undervalued and represented an attractive investment opportunity.
  • The Reporting Persons have had and anticipate having further discussions with officers and directors of the Issuer in connection with the Reporting Persons’ investment in the Issuer. The topics of these conversations will cover a range of issues, including those relating to the business of the Issuer, management, board composition (which may include whether it makes sense for a ValueAct Capital employee to be on the Issuer’s board of directors), operations, capital allocation, asset allocation, capitalization, dividend policy, financial condition, mergers and acquisitions strategy, overall business strategy, executive compensation, and corporate governance. The Reporting Persons may also have similar conversations with other stockholders or other interested parties, such as industry analysts, existing or potential strategic partners or competitors, investment professionals, and other investors. The Reporting Persons may at any time reconsider and change their intentions relating to the foregoing.
  • The Reporting Persons may also take one or more of the actions described in subsections (a) through (j) of Item 4 of Schedule 13D and may discuss such actions with the Issuer’s management and the board of directors, other stockholders of the Issuer, and other interested parties, such as those set out above.
  • The Reporting Persons intend to review their investments in the Issuer on a continuing basis. Depending on various factors, including, without limitation, the Issuer’s financial position and strategic direction, the outcome of the discussions and actions referenced above, actions taken by the Issuer’s board of directors, price levels of the Common Stock, other investment opportunities available to the Reporting Persons, conditions in the securities market and general economic and industry conditions, the Reporting Persons may in the future take actions with respect to its investment position in the Issuer as it deems appropriate, including, without limitation, purchasing additional Common Stock or other instruments that are based upon or relate to the value of the Common Stock or the Issuer in the open market or otherwise, selling some of all of its securities of interests held by the Reporting Persons, and/or engaging in hedging or similar transactions with respect to the Common Stock.

Jeffrey Ubben, ValueAct’s CEO told Reuters that the firm has been exiting positions and raising cash as markets have risen relentlessly. What kind of investments is the company looking at?

“I really feel that the large-cap activist plays are very treacherous with high PEs (price-to-earnings) and not a lot of growth,” Ubben said, speaking at the Reuters “Future of Shareholder Activism” event in New York.

Ubben said that he was not focusing on any particular sector but instead looking for bets on idiosyncratic, mid-sized companies such as spin-offs and “weird” corporate structures.

Perhaps this is not the last spinoff we will see ValueAct in. For a fund that has had success with, for example, a stake in Microsoft(MSFT) that lead to a Board seat, a new CEO, and an excellent return, this is a big change in strategy.

We should also note ValueAct’s history with Valeant(VRX).

ValueAct was instrumental in the creation of Valeant

In 2006, ValueAct invested $200 million in Valeant, which at the time was a sleepy drug company of new particular distinction. ValueAct brought in Mike Pearson as CEO, and ValueAct Capital President G. Mason Morfit sat on Valeant’s Board from May 2007 to May 2014.  Under Morfit’s watch, Pearson began a strategy of aggressive acquisitions, aggressive cost cutting, aggressive price increases, and (perhaps overly) aggressive marketing that included ostensibly independent specialty pharmacies like Philidor. Valeant stock rocketed ever higher as it became a hedge fund darling. It took on increasing debt to make its large acquisitions. Before the music stopped and Valeant stock plummeted 90%, ValueAct took some serious profits.

Ubben’s hedge fund invested $650 million in Valeant and pocketed $1.8 billion in stock sales and dividends, which include the nearly $1 billion of Valeant stock that ValueAct sold in June 2015, mostly for $219 per share. “Mike Pearson and the Valeant team’s exceptional performance have once again caused our investment in Valeant to grow in value to well above 20% of our funds’ assets,” ValueAct said at the time. “We are again compelled to reduce our position to rebalance our overall portfolio.”

Forbes goes on to describe Valeant’s compensation plan as ValueAct’s key contribution

ValueAct’s most talked about contribution to Valeant was designing the company’s compensation plan. Mason Morfit, ValueAct’s president, was its architect. As a Valeant board member, he put together a scheme that rewarded Pearson and other executives lavishly with equity for boosting the company’s stock price by setting seemingly impossible goals like awarding three times the amount of performance share units for delivering 45% annual compounded returns over a three-year period. “Everybody told me and him we were crazy to do that, because it’s such a high bar in an era when stocks aren’t performing,” Morfit told Canada’s Globe And Mail newspaper in 2013. But Pearson loved the performance shares plan with aggressive hurdles and executed a debt-fueled acquisition strategy that resulted in Valeant’s stock soaring—before it crashed.

When Valeant began its plunge in October 2015, Morfit returned to the board. Within six months, he was gone again, and so was Pearson.  What has ValueAct learned from the Valeant affair? Should Bioverativ management and investors be wary of the potential carnage if ValueAct has not learned the right lessons?

Disclosure: The author owns shares of MSFT