Water Island Capital is a merger-arbitrage fund that was founded in 2000 by John Orrico. In its latest 13F filing, the firm revealed an equity portfolio valued at nearly $3.0 billion, which contains 106 stocks. The majority of the companies from the portfolio are in line with the fund’s strategy and represent companies that have been recently acquired. However, in this article we will focus on three-largest stakes in terms of value, which are represented by non-arbitrage companies: B/E Aerospace Inc (NASDAQ:BEAV), Yum! Brands, Inc. (NYSE:YUM), and T-Mobile US Inc (NYSE:TMUS).
Since its foundation, Water Island managed to successfully gather around $3.5 billion in assets and it currently employs around 40 people, with a significant level of expertise. Among tits portfolio managers are Gregg Loprete, a former employee of Ramius Capital (the former parent company of Jeff Smith‘s Starboard Value) and Ted Chen of Jefferies Group. Currently, Water Island manages three funds: flagship Arbitrage Fund, which has a value of around $2.9 billion, Arbitrage Credit Opportunities Fund, and Arbistrage Event-Driven Fund, which have some $9.0 million and $90 million respectively.
As it was mentioned above, the majority of equity positions in Water Island’s 13F portfolio are represented by companies that have either been acquired or are in the process of a merger. The largest portion of the portfolio is allocated towards the healthcare sector, which amasses over 30% of the total value, followed by finance, consumer discretionary, and technology stocks. One of the stocks on which Water Island has been bullish on during the last three months of 2014 is B/E Aerospace Inc (NASDAQ:BEAV). The fund revealed ownership of around391,800 shares, up by 93% on the quarter. The stake is valued at $22.73 million. In December, B/E Aerospace Inc (NASDAQ:BEAV)completed the spin-off of its aerospace consumables business KLX Inc (NASDAQ:KLXI). In its latest 13F, Mr. Orrico’s fund reported ownership of 8.31 million shares of KLX. Another shareholder of B/E Aerospace Inc (NASDAQ:BEAV) is Mario Gabelli‘s GAMCO Investors, which owns some 626,900 shares as of the end of 2014.
In Yum! Brands, Inc. (NYSE:YUM), Water Island initiated a $11.20 million stake, which contains around 153,800 shares. The $32 billion quick service restaurant company has recently reported its financial results for the fourth quarter of 2014, posting a loss of $86 million, on the back of $361 million charge related to Chinese fast-food chain Little Ship that was acquired by Yum! Brands, Inc. (NYSE:YUM) in 2012. Nevertheless, the company is expected to turn around by 2016. However, at the moment, on the back of the news, analysts have downgraded the stock. For example, TheStreet has downgraded the stock to ‘Hold’ from ‘Buy’ and Zacks reiterated their ‘Neutral’ rating and a price target of $79.00. Among other shareholders of Yum! Brands, Inc. (NYSE:YUM) are Phill Gross and Robert Atchinson’s Adage Capital Management and Ken Griffin’s Citadel Investment Group, both of which reduced their stakes during the third quarter of 2014 to 666,000 shares and 322,000 shares respectively.
Moreover, a couple of weeks before the company reported its financial results, an insider unloaded a significant amount of shares. Jingshyh Su, the chairman and CEO of Yum! Brands, Inc. (NYSE:YUM)’s China division sold 65,039 shares converted from stock options and 25,000 shares, cutting his holding to 76,740 shares.
T-Mobile US Inc (NYSE:TMUS) is the third stock on our list. During the fourth quarter Water Island sold some 6,800 shares and cut its stake to 297,700 shares, valued at $8.02 million. Mr. Orrico’s fund initiated a stake in T-Mobile during the second quarter of 2014, as the company was amid talks to be acquired by French low-cost telecoms operator Iliad SA. During the third quarter, the fund further raised its stake by 33,800 shares to 304,500 shares. However, in October, Iliad announced that it had given up on the idea to acquire T-Mobile US Inc (NYSE:TMUS), because of resistance from the company’s main shareholder, Deutsche Telekom. Another investor that was betting on T-Mobile US Inc (NYSE:TMUS)’s acquisition was John Paulson’s Paulson & Co., which during the July-September period raised its stake in the company by 1.86 million shares to 15.02 million shares. On the other hand, Larry Robbins’ Glenview Capital Management cut its stake during the same period by 500,000 shares to 7.95 million shares.
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