John Paulson's Big Q2 Buys

by: Zvi Bar


John Paulson is one of the most well respected and largest hedge fund investors.

Paulson & Co.'s recent 13F indicates that in the second quarter, the hedge fund mostly stuck to a merger arbitrage strategy.

This indicates Paulson is sticking to a lower risk strategy and does not see much value available in the market other than through merger arbitrage.

John Paulson, the billionaire hedge fund manager of Paulson & Co., became well known for betting against subprime mortgages before they collapsed, and buying U.S. banks after that collapse. Since then, some of Paulson & Co.'s funds have had their issues, including a large position in gold (NYSEARCA:GLD), which is still the company's largest holding, while its merger arbitrage investments have continued to provide significant returns.

This article discusses the largest equity purchases by Paulson & Co. during the second quarter of 2014, as stated on the hedge fund's 13F. As the entity now holds roughly $23 billion in U.S. equities, composed of a significant number of equities, this list is restricted to purchases of at least $100 million. It should be noted that all new positions taken by Paulson & Co. are based upon merger arbitrage, or possibly all but one.


Allergan Inc. (NYSE:AGN)

Paulson & Co. acquired 5,602,000 shares of Allergan during the second quarter, worth about $950 million. This position was likely taken after Valeant Pharmaceuticals (NYSE:VRX) bid to acquire Allergan. This is one of Paulson's most common types of positions to take, where there is a lower possible return and risk than the broader market. This was also the largest new position taken by Paulson during the quarter.

Hillshire Brands (NYSE:HSH)

Paulson acquired 3,425,000 shares of Hillshire Brands during the second quarter. These shares were likely acquired after it became apparent that Hillshire was to be acquired by Tyson Foods (NYSE:TSN). This position was worth about $215 million at the end of the second quarter.

Covidien plc (COV)

Paulson acquired 7 million shares of Covidien during the second quarter, worth about $630 million. Covidien, which was spun off from Tyco (NYSE:TYC) in 2007, is an Ireland-based medical device company that Medtronic (NYSE:MDT) agreed to buy for $42.9 billion in one of the tax inversion schemes that has recently become all the rage.

DirecTV (DTV)

Paulson acquired 10 million shares of DirecTV in the second quarter, worth about $850 million. AT&T's (NYSE:T) acquisition of DirecTV is currently pending government approval. This stake is the second largest new position Paulson & Co. took during the second quarter, behind Allergan.

Questcor Pharmaceuticals (QCOR)

Paulson acquired 2,248,913 shares of Questcor during the second quarter, worth about $210 million. Questcor agreed to be acquired by Mallinckrodt plc (NYSE:MNK), an Irish pharmaceutical company that was spun off of Covidien in 2013. Paulson's 13F actually listed shares of not only Questcor, but also Covidien, which is also a new position, and Mallinckrodt, which Paulson already held and increased the stake in the second quarter. Further, Paulson is the largest shareholder of Mallinckrodt.

TIM Participacoes (NYSE:TSU)

Paulson acquired 5,295,3000 shares of TSU in the second quarter, worth about $154 million. This position appears a probable merger arbitrage position, even though TSU was not involved in any deals during the quarter. Nonetheless, Telecom Italia (NYSE:TI) and Telefonica (NYSE:TEF) have recently entered a bidding war over Vivendi's (OTCPK:VIVHY) Brazilian broadband unit, GTV, where TSU is Telecom Italia's Brazilian unit.


Cobalt International Energy (NYSE:CIE): Paulson has been acquiring shares of Cobalt, a petroleum exploration and production company, since the start of 2013. Paulson has bought shares in each of the last three quarters, and added 13,710,300 shares during the second quarter, taking the position to 40,966,100 shares, worth about $750 million at the end of the quarter. This position amounted to about 9.93 percent of the company. Paulson also recently reported that it increased the stake during the third quarter, to 41,864,000 shares. Cobalt shares have declined so far in the third quarter, and that decline is at least partially related to SEC scrutiny of the company's Angola operations under the Foreign Corrupt Practices Act ("FCPA"). See a recent performance chart for CIE (click to enlarge):

Dollar General (NYSE:DG)

Paulson acquired two million shares of Dollar General in the first quarter of 2014, and more than doubled it to 4,090,000 shares in the second quarter, worth about $250 million. Shares have been volatile over the last few months, jumping back and forth between the mid-50s and mid-60s, as the dollar stores battle with one another over possible mergers. Therefore, like all of the new positions taken last quarter, this was merger arbitrager related investment. See a recent performance chart for DG (click to enlarge):

Family Dollar Stores (NYSE:FDO)

Like Dollar General, Paulson bought more shares in Family Dollar last quarter. Paulson has held FDO shares since the start of 2013. Paulson had been reducing the stake over the last few quarters, but increased it from 6,470,000 shares to 8,020,000 shares in the second quarter of 2014, worth about $530 million. Shares have appreciated in the third quarter, along with merger expectations. See a performance chart for FDO (click to enlarge):

Mallinckrodt PLC

Paulson has held shares in Mallinckrodt since the third quarter of 2013. In the second quarter of 2014, after reducing the stake in the first quarter, Paulson increased the position from 5,636,800 shares to 6,724,800 shares, worth about $540 million. As mentioned earlier, MNK is acquiring Questcor, which Paulson added in the second quarter, and was spun off of Covidien, which Paulson also added in the second quarter.


Paulson has held share in Shire since 2012. In the second quarter of 2014, Paulson increased the Shire stake from 2,529,854 shares to 3,366,539 shares, worth about $800 million. Early in the third quarter, AbbVie Inc. (NYSE:ABBV) agreed to buy Shire for about $53 billion in order to do a tax inversion.

Almost every new and increased position of Paulson and Co.'s in the second quarter was some measure of merger arbitrage. The sole exception appears to be Cobalt, though Paulson may anticipate it to be a forthcoming acquisition target, or attempt to broker such a transaction. This indicates Paulson is not seeing much value in the market at current rates and is therefore limiting investments to this lower risk methodology. It appears likely that Paulson will not veer from this path in the current quarter.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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