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The Morning Brief: Good News and Bad News for Pershing Square

It was the best of times, it was the worst of times on Wednesday for Pershing Square Capital Management’s William Ackman.

The good news came from overseas, where Ackman raised a total of $3.07 billion in an initial public offering for a new public fund to be listed on Euronext Amsterdam on October 13. At an offering price of $25 a share, the fund, Pershing Square Holdings, will have an initial market capitalization of $6.2 billion. The offering netted $2.73 billion from issuing new shares; $212.5 million from the private placing of new public shares to certain existing investors in Pershing Square International, who agreed to an exchange; and $129 million from the management team of Pershing Square Capital Management for a separate class of management shares. It could raise another $272 million from an over-allotment of shares. The offering provides Ackman, a major activist investor, permanent capital that is not subject to redemptions from quarter to quarter or year to year. “The completion of the offering of Pershing Square Holdings is a seminal event in the history of the firm,” says Ackman in a press release.

However, Ackman and other investors were dealt bad news back at home when a federal judge late Tuesday rejected their bid to require Fannie Mae and Freddie Mac to share most of their profits with investors in the two mortgage giants, which were seized by the U.S. government in 2008 amid the financial crisis. The ruling enables the U.S. Treasury to continuing receiving the bulk of the profits. Speculative investors such as Richard Perry’s Perry Capital and Bruce Berkowitz’s Fairholme Funds had been buying up the preferred stock and Ackman bought the common stock of the two companies, hoping the court would rule in their favor. Ackman, for example, has more than an 11 percent economic exposure to both Fannie and Freddie. The common stocks of the two mortgage companies closed down around 37 percent, while their preferred stock plummeted more than 50 percent.

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Thomas Sandell’s Sandell Asset Management sent a letter to the board of directors of JDS Uniphase Corporation, calling on the maker of optical components to begin a formal auction of its communications and commercial optical products business, which the company has proposed spinning off. “We believe that there are several strategic buyers who would be interested in an outright acquisition of the CCOP business,” says Thomas Sandell in the letter. He also stresses that the company’s stock value does not reflect the value of its “substantial tax assets.”

The New York-based activist hedge fund firm points out in the letter that the company has federal, state, and foreign tax net operating loss carryforwards of about $6.1 billion, $1.8 billion, and $1 billion, respectively. The hedge fund values the company’s various business segments and tax assets at between $19 and $26 per share. The stock closed Wednesday at $13.15, up 2.73 percent on a day the overall market tanked. Sandell also points out he has submitted a shareholder proposal that formally requests that the board “evaluate further strategic alternatives, in addition to the previously announced intended spin-off of the company’s CCOP business, to maximize the value of these assets.”

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Daniel Loeb’s Third Point lost just 0.3 percent in September, much less than the 1.55 percent loss posted by the S&P 500. As a result, the fund, managed by the New York-based hedge fund firm of the same name, is up about 5.5 percent for the year. The results were reported by Third Point Reinsurance, whose investment account is managed by Third Point.

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Ricky Sandler’s Eminence Capital eked out a 0.5 percent profit in September, boosting its gain for the year to 8 percent.

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Another activist hedge fund feels vindicated. Babcock & Wilcox Company announced that its board of directors is mulling the separation of its power generation business and government and nuclear operations business into two publicly traded companies.

“The board’s goal is to determine whether a separation creates the opportunity for enhanced shareholder value and business focus,” the company states in a press release. In early May, Clifton Robbins’s Blue Harbour Group disclosed that it owned more than 6.6 million shares, or 6 percent, of Babcock & Wilcox. At the April Active-Passive Investor Summit in New York, Robbins described the industrial conglomerate with five businesses as “a sum-of-the-parts play,” suggesting it could be broken into several companies. The stock surged 8 percent on Wednesday’s announcement, to $29.90, down from $35 when Robbins made his presentation and well below the roughly $50 he thinks it would be worth once the company makes certain changes.

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Darden Restaurants, locked in a proxy fight with Jeffrey Smith’s Starboard Value, sent a letter to shareholders detailing why they should continue to support the company’s slate of directors, emphasizing recent changes to its Olive Garden chain and company-wide cost-cutting. It also noted that eight of its 12 independent director nominees would be new to the board this year.

“We are concerned that ceding total control of Darden’s board to Starboard and its preferred nominees would be disruptive to the company and to the value of your investment in Darden,” Darden asserts in the letter. “Further, we do not believe that it is in the interests of all shareholders to have 86 percent of the board be composed of directors selected and nominated by a single minority shareholder who holds 8.8 percent of the shares.”

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