JANA Partners Fund Gains 0.4% in 2Q; Rise Hampered by Visteon, Hess

   By Amy Or 
 

NEW YORK--JANA Partners LLC's flagship event-driven fund rose 0.4% in the second quarter, though gains were restrained by a pair of underperforming stocks Visteon Corp. (VC) and Hess Corp. (HES), according an investor letter detailing first-half performance.

JANA Master Fund's performance beat the 2.8% decline in the Standard & Poor's 500 index, including dividends. For the first half, the fund rose 11.2%, outperforming the benchmark index's 9.5% gain.

The activist hedge fund managing $3.2 billion in assets also disclosed investments in Coca-Cola Enterprises Inc.(CCE) and recent short strategies.

"Now, European macro fears have given us the opportunity to return CCE to JANA's top 5 positions," according to the correspondence.

JANA owned 0.9% of Coca-Cola Enterprises at the end of March, according to a regulatory filing. The company is the "monopoly distributor" for all Coca-Cola beverages in the U.K., France, Belgium, the Netherlands and Luxembourg, according to the JANA letter.

"In spite of the Eurozone recession, bottled beverage consumption has healthy secular growth across the continent and Coke benefits from dominant share in all its markets. Furthermore, CCE is currently evaluating an option to acquire the German bottling operations from Coke," the letter said.

Describing executives at Coca-Cola Enterprises as "smart capital allocators," JANA said they will only buy a highly earnings-accretive business, than spend the firm's cash flow to buying back shares.

"Either way, we expect earnings growth will lead to expansion of the multiple currently at 11 times forward earnings," it said.

During the second quarter, JANA scored windfalls, as shares of Inergy LP (NRGY), Expedia.com (EXPE), Barnes & Noble Inc. (BKS) and Energizer Holdings Inc. (ENR) rose on corporate actions, like asset disposals and formation of strategic partnerships.

Visteon and Hess, however, were the "detractors," the hedge fund manager said. Visteon, which emerged from bankruptcy in October 2010, posted a 29% decline in share price in the three months ended June 30 after missing first-quarter earnings estimates, while Hess shed 26% during the period as analysts cut ratings on the company, believing its share price will continue to struggle amid production disruptions and losses from its refineries.

JANA, which has successfully pushed for changes at companies--including TNT Express's (TNTEY) sale to United Parcel Services Inc. (UPS) in March and McGraw-Hill Cos.'s split into two companies last summer--wrote that it intends to begin a campaign against an unidentified "major integrated global supply company" to split up its "unrelated, non-synergistic business."

Code-named "Position A," JANA said the unidentified global-supply company "trades at the multiple of its more-volatile commodity-based business, failing to realize the value of its more stable business."

"The Company's integrated structure fails to create value and has resulted in suboptimal shareholder returns, poor capital allocation and weak operating performance," the letter said. "We have discussed strategic direction with management and we look forward to telling you more about Position A in the near future."

The hedge fund manager also detailed in the letter some of its "favorite" short positions and themes. Without giving names, JANA said it is betting against "certain tobacco companies that have relied for too long on the stickiness of price increases against falling volumes;" "a big box retailer whose category is being entered by Amazon;" and, "a hyped-up software company with very opaque accounting."

It is also going short on "companies in the natural gas liquids distribution chain suffering from supply-glut pricing pressures," and "a social networking company with decelerating growth and difficulties monetizing traffic."

The Boston-based firm also said in the letter that it has hired Brandon Levin as its head of trading and syndicate to start in the fall. Mr. Levin was most recently chief trading officer and a member of the management committee of New York-based investment manager Plural Investments LLC.

JANA declined to comment.

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