While value investors continue to read through Seth Klarman (Trades, Portfolio)’s most recent partnership letter, others are tracking his latest filings to see what the guru has deemed worthy of buying.
Some of his earlier picks suggest interest in the energy, pharmaceutical and tech industries. He’s shown a particular focus on small-cap biotech stocks like Akebia Therapeutics (AKBA, Financial).
According to the latest filings, Klarman has kept a similar focus, purchasing shares of multibillion-dollar pharma companies and consumer entertainment conglomerates. Curiously, several are merger candidates.
Here are four picks from the guru’s most recent public filings.
Celgene Corp. (CELG, Financial) and Bristol-Myers Squibb Co. (BMY, Financial)
Celgene comprises roughly 3.2% of Klarman’s publicly-reported portfolio, while Bristol-Myers is around 1.6%.
Notably, the two companies are in the midst of a long-running merger attempt.
Bristol-Myers is working to acquire Celgene for one share of stock and $50 cash, plus a contingent value right worth up to $9 based on the outcome of future regulatory milestones.
When the deal was first announced in January, the buyout offer was valued at $74 billion (not including the contingent value right). Today, Celgene’s market cap has fallen to $67 billion.
If the deal closes, Bristol-Myers shareholders will own roughly 70% of the combined entity, while Celgene shareholders own the remainder.
In January, some analysts estimated the deal had an 80% chance of closing. Those estimates appear a bit optimistic today.
Within weeks, Bristol-Myers voluntarily withdrew its pre-merger notification and report form after talking with the Federal Trade Commission. On Feb. 20, the company announced plans to refile the form, reiterating that the deal “remains on track” to close in the third quarter.
In April, the odds looked a little better after shareholders of both companies approved the deal. There had been earlier chatter that some shareholders would put up a fight.
Today, Bristol-Myer’s stock is around $46. Adding in $50 of cash results in a takeover price of $96, plus a potential contingent value rights worth up to $9. Celgene trades at roughly $95 per share, meaning the contingent value right is currently receiving little to no value.
Klarman appears to be hedging his bets by investing in both sides of the equation.
The Walt Disney Co. (DIS, Financial) and Fox Corp. (FOX, Financial)(FOXA, Financial)
Klarman previously amassed a sizable position in Twenty-First Century Fox. When Disney moved to acquire the company, his interests were split.
When the deal closed earlier this year, Twenty-First Century Fox shareholders (including Klarman) received roughly $38 per share in cash or Disney stock, plus one-third of a share of the new Fox.
It’s tough to tell exactly how Klarman converted his holdings, but it appears as if he opted to maintain his bet mostly on Fox. Following the acquisition, Klarman’s Disney position is just 0.4% of his portfolio, while Fox composes 10.1%.
This could be an interesting way to play Klarman’s bet on Fox. Since the new Fox was created in March, shares have fallen by 10%. Disney stock, meanwhile, is up nearly 20%.
Perhaps the asymmetry can be attributed to forced selling as all investors were given a one-third share of the new Fox regardless of whether they wanted it.
Typically, the stock of the smaller entity is what is sold off. With Disney’s $242 billion market cap easily outweighing Fox’s $23 billion valuation, it’s easy to see that occurring here.
Now trading at less than 15 times forward earnings, Fox is one of the cheapest stocks in Klarman’s portfolio based on absolute valuation.
Read more here:
- Seth Klarman Keeps Buying This Biotech Stock
- 3 Stock Picks From Seth Klarman
- 5 Lessons From Seth Klarman's 2019 Investor Letter
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
