5 Ways To Play These ‘Special Situations’

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Pentwater Capital Management is a hedge fund founded and managed by Matthew Halbower in 2007. He employs an event-driven investing strategy, with an equity portfolio valued at a little over $2.7 billion. During the first quarter of 2013, Halbower has made some important changes to his holdings, particularly in special situations plays. It’s important to track hedge fund sentiment because it has been found that retail investors can outperform the market if they know where to look.

Top dog

The top pick of Halbower is Sprint Nextel (NYSE: S). Pentwater Capital increased its ownership of Sprint Nextel by 66% in the first quarter (compared to the end of 2012), and currently owns a little over 31 million shares with a reported value of $195 million. The stock’s price has advanced 27% in 2013, and it did beat the Street’s expectations in its latest earnings report. The telecom posted a loss of $0.21 per share and revenues of $8.8 billion, versus estimates of EPS of -$0.27 and revenues of $8.7 billion for the second quarter.

In case you’ve been living under a rock, in October 2012 Japanese telecommunications company SoftBank declared their intention to acquire 70% of Sprint Nextel for $20.1 billion. On April 15, 2013, a higher preliminary offer of $25.5 billion was made by DISH Network, and rumors now say that Sprint is planning on delaying shareholders’ SoftBank vote until Dish can work out a binding offer.

This makes sense, just as it does for investors to consider following Pentwater into Sprint. Wall Street sees the stock as a merger arbitrage play, with its average price target representing a 3.5% upside from current levels. Someone will lose this bidding war, but it will not be Sprint--regardless of what happens, though, there’s potential for more appreciation in the future.

Number two

Virgin Media (NASDAQ: VMED) has been a very popular stock lately, with many hedge funds opening massive positions in the British entertainment and communications provider in the past two quarters. Pentwater Capital joined them, acquiring 3.8 million shares valued at $186 million in Q1. The company posted earnings of $0.48 per share and revenues of $1 billion in its latest quarter, and on February 6, US cable company Liberty Global announced an agreement to takeover Virgin Media for a reported $15.8 billion. On April 15, the European Commission gave the deal the green light, and like Sprint it’s clear that Pentwater was optimistic that no regulatory fears were warranted in the deal.


One stock that has seen its position in the fund’s equity portfolio decrease is Coventry Health Care (NYSE: CVH), a US health insurer. Halbower decreased his investment by 20,000 shares last quarter, with the rest of 3.6 million shares valued at approximately $170 million. Shares of Coventry Health Care has been in a clear uptrend since the start of 2013, gaining 11.5% before being officially acquired by Aetna--another merger that Pentwater Capital was playing, though this one’s too late for piggybackers to mimic.


Another takeover candidate among the top picks of Pentwater Capital is Dell (NASDAQ: DELL). The founder of the company, Michael Dell, announced in February a leverage buyout of Dell together with Silver Lake Partners. The deal, worth $24.4 billion, would ensure investors to receive $13.65 per share, and is pending shareholder approval. There’s still a slight 1.7% profit to be had in this merger arbitrage opportunity—if Dell’s buyout goes through without a hitch.

Halbower and his team have opened a 9.98 million-share position, reportedly worth $143 million for the first quarter, though unlike the aforementioned situations, Dell seems like a bit of a tossup. Carl Icahn and Southeastern Asset Management have issued a rival proposal to Michael Dell’s, offering shareholders “$12 a share in cash or stock while letting them retain stakes in a public company,” according to Bloomberg. The outlet also reports that Icahn would consider other options besides Michael Dell at CEO in the event of a shareholder approval.

Gardner Denver

Ending the fund's top picks for the summer of 2013 is Gardner Denver (NYSE: GDI). The management team has increased their stake in the producer of industrial machinery by 35% in the latest quarter, with the entire investment valued at a little over $105.7 million.

Though it doesn’t make up the majority of its business, pressure-pumping services related to hydraulic fracturing represents a significant growth driver moving forward, accounting for about 20-25% of Gardner Denver’s revenues. The company’s highest-margin segment, pumping is expected to be driven not by land-based plays, but by renewed rig counts in the Gulf moving forward (at least through 2014).

On March 8, the company announced an agreement to be taken over by KKR & Co. (KKR), a private equity firm, for a reported $3.7 billion; if the deal holds, all of the merger arbitrage opportunity has essentially dried up. In Pentwater Capital’s case, the fund was likely bullish on Gardner Denver earlier this year, when multiple companies were rumored to be interested in a buyout; shares of Gardner Denver are up a nice 10.1% year-to-date.

Final thoughts

It’s no surprise that Pentwater Capital is invested in many equities with pending or potential M&A activity. While the hedge fund world sure has its fair share of value and growth investors, money managers like Matthew Halbower must have a keen eye for predicting the future. In many cases, it’s quite simple: if a deal goes through, the merger arbitrage opportunity is profitable. If not, there is a potential for losses.

Whether it’s Gardner Denver, Coventry Health Care or Virgin Media—three companies that don’t have much arbitrage profit left—or Dell and Sprint Nextel—two more with considerable upside—we’ll keep a close eye on this top five. Continue learning about hedge funds’ favorite stock picks on an aggregate level.

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This article is written by Andrei Braghis and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty. Meena has a long position in Dell.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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