By Guan Wang
Hedge fund manager Tom Steyer had been off the Forbes World Billionaires list for three years. Like most other hedge funds, his Farallon Capital Management suffered major losses during the tough financial period in 2008, but it was also the first year the fund finished with a loss since its inception in 1986. Farallon almost reversed its 2008 losses the following year, and things just kept getting better. Thanks to a rebound in the fund's performance, Steyer recently rejoined the ForbesWorld Billionaires list. As of March 2012, he is ranked the 960th richest person in the world with an estimated net worth of $1.3 billion.
Recently, Farallon released its holdings as of March 31, 2012 in a 13F filing. In this article, we are going to take a closer look at the fund's most bullish bets.
El Paso Corp (EP) was the largest position in Farallon's 13F portfolio at the end of the first quarter. Steyer had initiated a new $387 million stake in El Paso during the fourth quarter last year. During the first quarter, he further boosted his El Paso stakes by 54%. By the end of March, his fund had $665 million invested in this stock.
On October 16, 2011, Kinder Morgan Inc (KMI) announced that it had reached an agreement with El Paso to purchase the company for $21 billion, or $29.61 per share. The transaction is expected to be completed by the end of June this year. El Paso was up from a closing price of $19.59 on October 14, 2011, to a closing price of $29.23 on May 14, 2012. It is now trading at 1.28% discount to its merger price, indicating that the market is optimistic about the acquisition. Hedge funds also view this potential acquisition positively. There were 53 hedge funds with El Paso positions at the end of December last year, up from 35 hedge funds at the end of September. Carl Icahn is the most bullish about El Paso. His Icahn Capital LP had nearly $2 billion invested in this stock at the end of 2011 (check out Carl Icahn's top stock picks).
Over the first quarter this year, Steyer also largely boosted his stakes in Medco Health Solutions Inc (MHS) by 382%. Medco is a new feature in the top five positions of Steyer's portfolio. As of March 31, 2012, Steyer owned $491 million worth of Medco shares. Overall, hedge funds like Medco. There were 52 hedge funds with positions in Medco at the end of last year.Eric Mindich's Eton Park Capital had $200+ million invested in Medco at the end of 2011 while John Paulson's Paulson & Co had $112 million in this stock (check out John Paulson's top stock picks). Medco is also a merger arbitrage play. It was acquired by Express Scripts Holdings Co (ESRX) for about $29.1 billion on April 2, 2012. Until that day, Medco returned over 21% since the beginning of this year, versus 10.4% for the S&P 500 (SPY) index over the same period.
Steyer also owns large stakes in two other takeover candidates, Motorola Mobility Holdings Inc (MMI) and Goodrich Corp (GR). Google Inc (GOOG) offered to purchase Motorola at $40 per share, and the stock is currently trading at $39.35. Goodrich is expected to be acquired by United Technologies Corp (UTX) for $18.4 billion, or $127.50 per share; it closed at $124.88 per share on May 14. Both transactions are expected to be closed at the end of June. We think both acquisitions are likely to go through and we still see some upside potential, though relatively small, in both stocks.
Another large position in Steyer's latest 13F portfolio is Owens Illinois Inc (OI). The company recently closed several plants to reduce costs and improve margins. Though the production volume will also be reduced as a result, the company is still expected to be able to meet its customers' needs. Owens is currently trading at 6.6X its 2013 earnings, a significant discount to the industry average of 13.66. It also has a double-digit expected earnings growth rate of 11.8%. John Thaler, Charles Clough, Israel Englander, and John Burbank are also bullish about this stock (check out Israel Englander's top stock picks).