Five Companies to Benefit from Activist Starboard Value’s Involvement in 2017

Jeffrey Smith‘s Starboard Value, one of the biggest and most famous activist hedge funds, has recently filed its 13F, in which it reported an equity portfolio worth $3.39 billion as of the end of 2016, slightly down from $3.68 billion a quarter earlier. The portfolio is focused on tech, healthcare and consumer stocks. During the fourth quarter, the investor initiated stakes in six companies and exited seven positions. In this article, we are going to take a closer look at Starboard’s largest bullish moves and new positions in five stocks, including Perrigo Company plc (NYSE:PRGO), Baxter International Inc (NYSE:BAX), Rockwell Collins, Inc. (NYSE:COL), Cognizant Technology Solutions Corp (NASDAQ:CTSH), and Tribune Media Co (NYSE:TRCO).

Starboard is known for a number of successful campaigns, such as the one in Darden Restaurants, Inc. (NYSE:DRI) which ended with the overhaul of the company’s entire board of directors. The fund also pushed Office Depot Inc (NASDAQ:ODP) and Staples, Inc. (NASDAQ:SPLS) to merge, although the deal was blocked by regulators. In addition, it was one of the investors that pushed for the separation of Yahoo! Inc. (NASDAQ:YHOO)’s core business from its equity investments in Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo! Japan. Last year, Yahoo! agreed to sell its core assets to Verizon. For these and other activist investments, Starboard was named the top second activist fund of 2016 in The Activist Investing Annual Review 2017, published by Activist Insight and Schulte Roth & Zabel.

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After having initiated a stake in Perrigo Company plc (NYSE:PRGO) during the third quarter, Starboard boosted the position by 61% to 9.51 million shares worth $791.22 million during the fourth quarter. Moreover, earlier this month, the fund filed an amended 13D filing, in which it disclosed ownership of more than 9.64 million shares, which represent 6.7% of the company’s outstanding stock. The activist also announced having entered into an agreement with the company, under the terms of which Perrigo Company plc (NYSE:PRGO) appointed Jeff Smith, Brafley Alford and Jeffrey Kindler to its board of directors. Starboard also has the right two appoint two more independent directors.

Perrigo, a manufacturer of over-the-counter pharmaceuticals, has seen its stock price drop by over 13% since the beginning of the year, mainly due to the 11% hit it took on February 27, when the company reported its preliminary 2016 results and guidance for 2017. The company posted revenue of $5.63 billion for the year, up by 5.6% on the year. Net loss is expected between $28.85 and $29.00 per share due to goodwill and asset impairment charges, while adjusted EPS is between $7.10 and $7.25. For 2017, the company is currently expecting adjusted EPS of $6.30 to $6.65. The company also said that Ernst & Young is evaluating its historical revenue recognition practices related to Tysabri, royalties from which Perrigo Company plc (NYSE:PRGO) recently has agreed to sell. Overall, there were 31 funds from our database which amassed nearly 11% of the company’s outstanding stock at the end of 2016.

Baxter International Inc (NYSE:BAX) is another healthcare company in which Starboard raised its stake last quarter. As of the end of December, the fund owns 2.45 million shares (up by 30% on the quarter) worth $108.68 million. The fund has held shares of Baxter since the second quarter of 2015 and has seen the stock advance by 31%. At the end of 2016, Starboard was one of 48 funds tracked by us bullish on the company, down by two over the quarter.

At the beginning of February, Baxter International Inc (NYSE:BAX) posted fourth-quarter EPS of $0.57 on revenue of $2.65 billion, which beat estimates by $0.05 and $10 million, respectively. In fact, the company managed to post better-than-expected results for the last 10 quarters. In other news, in February 28, Baxter announced a strategic partnership with ScinoPharm Taiwan, under the terms of which the companies will develop and sell five injectable drugs for the treatment of a range of cancers and chemo-induced nausea and vomiting. The products are expected to be launched in 2020.

On the next page, we will discuss three companies in which Starboard initiated stakes during the October-December period.

In Rockwell Collins, Inc. (NYSE:COL), Starboard held 1.10 million shares worth $102.04 million heading into 2017. Back in November, Bloomberg reported, citing people familiar with the matter, that Starboard was trying to convince Rockwell Collins to review the previously-proposed deal to buy B/E Aerospace Inc (NASDAQ:BEAV) and to consider other options, including a potential sale. However, earlier this month, Rockwell Collins, Inc. (NYSE:COL) and B/E Aerospace announced that they would hold special meetings of stockholders on March 9, where the deal valued at $6.4 billion will be discussed. Investors seem to be excited about Rockwell Collins, Inc. (NYSE:COL)’s prospects, as the number of investors from our database with stakes in the company jumped to 38 from 15 during the fourth quarter.

Cognizant Technology Solutions Corp (NASDAQ:CTSH) was also included in Starboard’s equity portfolio last quarter, with the fund having reported ownership of around 1.48 million shares worth $82.64 million in its latest 13F filing. Starboard’s move into the stock coincided with the involvement of another activist, Paul Singer’s Elliott Management, which sent a letter to the company at the end of November. Elliott said that the company is undervalued and suggested a number of measures to enhance shareholder value, include buybacks and acquisitions. The investor considers that the implementation of its Value-Enhancement Plan could result in Cognizant Technology Solutions Corp (NASDAQ:CTSH)’s stock reaching $80-$90 per share by the end of 2017. A total of 55 funds tracked by us held $1.96 billion worth of Cognizant Technology Solutions Corp (NASDAQ:CTSH)’s stock at the end of 2016, up from 47 funds with stakes worth $1.36 billion a quarter earlier.

Last but not least, Tribune Media Co (NYSE:TRCO) was Starboard’s 13th largest position at the end of 2016, as the fund initiated a $70.04 million position that contained 2.0 million shares. However, in February, Starboard filed a 13D with the Securities and Exchange Commission, in which it disclosed ownership of 5.79 million shares, which includes 1.66 million shares underlying forward purchase contracts and which represents 6.6% of the company’s outstanding stock. The move made Starboard one of Tribune Media Co (NYSE:TRCO)’s largest shareholders and was made at a time when the company was about to enter into a management transition phase, as its CEO Peter Liguori will resign in March, with the replacement not being named. Earlier today, Reuters reported that Tribune Media was approached by Sinclair Broadcast Group Inc (NASDAQ:SBGI) about a potential merger, according to people familiar with the matter. There were 24 investors in our database that held over 36% of Tribune Media Co (NYSE:TRCO)’s outstanding stock heading into 2017.

Disclosure: none