Seeking ValueAct Holdings' Next Huge Buyout

by: NakedValue

ValueAct Holdings is a value oriented investment manager with around $5 billion in assets under management. The company prides itself on its concentrated portfolio of out of favor names. Based on the most recent SEC filings, ValueAct Holdings was the largest shareholder of Immucor (NASDAQ:BLUD), which agreed to be bought out by a private equity firm for a more than 30% premium. Earlier this year, another one of their major holdings, Cephalon Inc. (NASDAQ:CEPH), was purchased for a major premium.

Here are ValueAct Holdings' other large positions. Could one of these stocks be the next big buyout?


Adobe Systems Inc. (NASDAQ:ADBE)

March 31, 2011 Position: 625,000 shares.

The software maker's products are fundamental to the current internet experience and as such, some may be surprised by the company's reasonable valuations. Trailing P/E is 16.88, forward P/E is 12.26 and PEG ratio is 1.04. Not only has the company generated more than $1 billion in free cash flow annually, they also have a profit margin of more than 23%.

Based on the importance of the company's software and based on the cheapness of the valuations, it is not hard to envision a buyout. While Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) are rumored suitors, the list of potential strategic acquirers is sizeable.

CR Bard, Inc. (NYSE:BCR)

March 31, 2011 Position: 4,611,139 shares.

The New Jersey based company designs and manufacturers healthcare products worldwide. In 2010, 28% of revenues were generated by Vascular products, 26% by Urology products, 27% by Oncology products and 16% by Surgical specialties. While the company is not obviously cheap based on trailing performance, the company could be an attractive buyout candidate for a strategic partner with broad distribution channels and low cost facilities. The company trades at a trailing P/E of 20.09, a forward P/E of 15.79 and a PEG ratio of 1.58. The company has profit margins of nearly 19% and generates a substantial amount of free cash flow.

Gartner Inc. (NYSE:IT)

March 31, 2011 Position: 7,090,013 shares.

The company provides research and analysis for the technology industry. Based on trailing earnings, it is an unlikely holding for a value oriented firm. The company has a trailing P/E of 38.89, a forward P/E of 23.16 and a PEG ratio of 1.39. But if the company's own research is accurate, the company stands to benefit from exceptionally strong secular trends that Inc.lude 7.1% global growth in IT spending.

The company is clearly an attractive asset in a growing industry, but the most important questions regard price and fit. Current valuations appear rich for a company whose revenues have stagnated over the last few years. In addition, the independent nature of the company's research and analysis may preclude potential buyers because of possible conflicts of interest.

Sara Lee Corp. (SLE)

March 31, 2011 Position: 27,404,523 shares.

The food conglomerate is trading close to its 52 week highs after dipping a bit in the weeks following the announcement of the company's looming reorganization. Spin-offs are a well known method of unlocking value, in large part because it makes business segments easier to acquire. Following the spin-off, current SLE shareholders will own shares of two separate companies, an international tea and coffee business and a North American food company with brands such as Hillshire Farm and Jimmy Dean.

This could very well make Sara Lee the most likely takeover candidate in the ValueAct portfolio.

Snap-On Inc. (NYSE:SNA)

March 31, 2011 Position: 2,874,180 shares.

The Wisconsin based tool maker is a leading global brand. In 2010, the company reported sales of $2.62 billion. While revenues bounced back from 2009 levels, they are still below 2008's peak sales of $2.85 billion.

The company has a trailing P/E of 18.03, a forward P/E of 13.08 and a PEG ratio of 1.27. SNA may be an especially attractive buyout candidate because it is a pure play company with international exposure. The company has a price/sales ratio of 1.33, which is roughly in line with that of Stanley Black & Decker (NYSE:SWK), who coInc.identally could be a possible acquirer.

Valeant Pharmaceuticals International (NYSE:VRX)

March 31, 2011 Position: 19,593,482 shares.

Ironically, Valeant was the unsuccessful bidder for Cephalon Inc.., one of ValueAct's largest holdings. Despite their unsuccessful bid, VRX remains one of the health care industry's . VRX should continue to be a more likely acquirer than a target in large part because of its rich valuations. For example, the company is not expected to make money in the coming year. In addition, it trades at around 10x its trailing sales. A large part of the company's valuation premium is embedded in investor enthusiasm over the CEO Michael Pearson and their ability to make smart acquisitions. This was evident when the stock rallied following news that they were willing to pay a sizeable premium to purchase CEPH for $5.7 billion [CEPH was ultimately acquired by Teva Pharmaceuticals (NYSE:TEVA)].


While ValueAct is a reputable fund with great managers and investment methodology, investors should not blindly attempt to mimic ValueAct's positions. Not only are smart money funds like ValueAct capable of making investment mistakes, investors do not have transparency about real time entry and exit prices. As such, investing in the same stocks can yield very different performance results.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLE, ADBE over the next 72 hours.

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