October 22, 2015 / 12:05 AM / 2 years ago

RPT-UPDATE 2-Valeant meltdown costs investors billions; Ackman ups stake

(Repeats to additional subscribers)

By Svea Herbst-Bayliss

BOSTON, Oct 21 (Reuters) - A precipitous plunge in the stock price of Valeant Pharmaceuticals International Inc cost some of Wall Street’s top names billions of dollars on Wednesday but hedge fund manager William Ackman took the meltdown as a buying opportunity.

The billionaire, famed for his brash bets, swept up 2.1 million additional shares as the Canadian-based company plunged as much as 40 percent on a report from an influential short-seller that it may have fraudulently inflated revenues.

The purchase means Ackman’s Pershing Square Capital Management is now the company’s second-largest shareholder, leapfrogging asset manager T.Rowe Price. Pershing Square Holdings confirmed late on Wednesday that the company acquired in excess of two million shares of Valeant

Ackman lost about $500 million in Wednesday’s rout and the source familiar with Ackman’s fund said his Valeant bet is down about $1.4 billion so far this year.

“The guy eats nails for breakfast,” one investor said of Ackman, who last year was among the hedge fund industry’s top performing portfolio managers.

Valeant’s market capitalization decline on Wednesday was $9.62 billion.

Ackman, renowned for betting $1 billion against nutrition company Herbalife and waging a public campaign to see his gamble through, is now, indirectly, on the receiving end.

Short seller Citron Research published a report on Wednesday, accusing Valeant of failing to disclose ties to specialty pharmacies which helped create “phantom sales” of its products.

Valeant denied the allegations.

Overall, Valeant’s top five investors could have lost a combined $2.76 billion on Wednesday based on their holdings as of June 30.

Activist fund ValueAct, a top five shareholder, lost an estimated $422 million but because it was an early investor in Valeant, it is still sitting on significant gains.

The fund declined to comment on the Valeant meltdown but ValueAct warned in a second quarter letter to investors that its Valeant holding was more than 20 percent of the firm’s portfolio, nearing the “upper limits of our comfort zone.”

ValueAct said in the second quarter letter that it was “right sizing” its Valeant holdings but it was unclear how many shares the firm held as of Wednesday.

Investment firm Ruane, Cunniff & Goldfarb, Inc has an even larger exposure to Valeant - both in terms of actual shares owned and in terms of the percentage of the fund’s portfolio.

According to Thomson Reuters data, investment firm Ruane, Cunniff & Goldfarb owned 9.9 percent of Valeant shares as of June 30, comprising one-third of the fund’s portfolio.

Hedge fund Paulson lost an estimated $253.97 million based on its holding as of June 30.

Ruane, Cunniff & Goldfarb and Paulson did not return calls seeking comment.

UNCOMFORTABLE TWIST OF FATE

The Valeant losses could cement Ackman’s fund’s place as firmly in the red for 2015, an uncomfortable twist of fate for a fund that in 2014 yielded 40 percent returns and bested a field of high-profile rivals.

Pershing Square was down nearly 13 percent for the year by the end of September, according to investors, after market turmoil struck several of its holdings.

Other hedge funds with big bets on Valeant include Nehal Chopra’s Tiger Ratan Capital Management, Brave Warrior Advisors, Lone Pine Capital and Viking Global Investors.

By the end of June, Goldman Sachs estimated that hedge funds owned 22 percent of Valeant’s stock.

“Hedge fund managers with great track records have stood by their conviction that Valeant is a great company despite a growing list of questions about its business model, its pricing policies, its pile of debt and the determination of potential acquisition targets to stay out of Valeant’s clutches,” said Erik Gordon, a professor at the University of Michigan’s law and business schools.

Ackman had announced his gamble on Valeant in March, after quietly collecting a 5.7 percent stake at a cost of about $3.3 billion. That position was a huge winner in the first half of 2015, but started to falter in recent weeks, and was pummeled after the report from Citron.

Ackman’s tendency to stick with bets that are beaten up by the markets has hurt him on occasion in the past, including in losing bets on J.C.Penney, but his fund rarely loses money. The last two times Pershing Square sunk into the red were in 2011, down 1.1 percent, and 2008, down 13 percent.

The gamble against Herbalife, which he has accused of being a fraud, is hurting Ackman as its stock is up about 48 percent this year. Herbalife has vehemently denied Ackman’s allegations that it is running a pyramid scheme. (additional reporting by Jennifer Ablan, Michael Flaherty and Rodrigo Campos in New York.; Editing by Carmel Crimmins, Richard Valdmanis, Nick Zieminski and Bernard Orr)

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