Third Point Partners is one of the more prominent activist investor hedge funds in the market. Founded by Dan Loeb in 1995, Third Point has become one of the more successful hedge funds. Loeb has not shied away from the criticism of management and business practices in his widely read letters. Loeb has successfully made investments in troubled companies and helped to turn them around, making substantial profits for himself and his investors.

Loeb Background

Loeb was raised in Santa Monica, California. He showed an entrepreneurial streak early by starting a skateboarding company. Loeb graduated from Columbia University with an economics degree. After having made a substantial amount of money in the stock market during school, he lost it on a failed business investment that proved to be a formative experience.

Loeb began his career working at Warburg Pincus, a private equity firm. He then worked in the music industry as a director of corporate development. He later had stints in distressed debt and bank loans, as well as high-yield debt sales.

Loeb founded Third Point with $3.3 million from friends and family in 1995. The fund has a portfolio value of around $10.6 billion as of the third quarter of 2015, and around $17 billion in assets under management (AUM) as of late 2014. Third Point has had stellar returns in its history. It was estimated the fund had returns of around 21% in 2012, making it one of the best-performing hedge funds that year. Third Point has a number of smaller funds under its umbrella, including Third Point Reinsurance, based in Bermuda.

Dow Chemical Company

Third Point has seen a lot of action in 2015. One of the fund’s major investments is in Dow Chemical Company. Third Point owns 23.5 million shares with a market value of $996 million as of the third quarter of 2015. This position represents a 2% ownership interest in the company.

Third Point revealed a large position in the company in early 2014. Loeb, in a letter to the company, criticized its underperformance especially considering a shale oil boom. He called for the company to spin off its petrochemicals business. The split would allow Dow to maximize profits for that business, while allowing the main company to transition to a specialty chemicals company.

Loeb initiated a proxy fight against the company in November 2014. This led to Dow agreeing to give Third Point two seats on the board. Third Point and Dow also agreed to a standstill agreement under which Third Point would hold off any further public criticism of the company.

Dow announced a major merger with E. I. du Pont de Nemours and Company in mid-December of 2015. The deal is valued at around $68 billion. The merger plan calls for the two companies to combine, and then cut substantial costs. The new company will then break up into three new companies focused on the agriculture, plastics and materials, and specialty-chemicals businesses.

However, despite supporting the merger deal, Loeb was unhappy with the timing of the announcement of the merger. Loeb called into question the announcement of the merger only a few days prior to the expiration of the standstill agreement. He also called for the Dow CEO to be removed and not serve as the CEO of the newly combined company. He cited past fraud allegations against the Dow CEO regarding the use of company funds for personal travel and expenses. Thus, it remains to be seen how the merger will play out in 2016 as it is reviewed by antitrust regulators. There are strained relations between Loeb and Dow.

Baxter International, Inc.

Third Point also began a new activist investor campaign against Baxter International, Inc. in 2015. Loeb unveiled a stake of around 53.8 million shares with a market value of $1.7 billion in August, 2015. This represents around a 9.8% ownership interest in the company. Loeb is seeking two seats on the board of directors. Loeb called for changes to corporate governance, citing an archaic structure that has board members up for election only every two years.

Baxter is a medical products company. It spun off its pharmaceutical business into a new company, Baxalta, Inc., in June 2015. The CEO also announced a search for a new CEO. The company has a number of products focused on hemophilia. Baxalta received an offer from another company to be acquired for $30 billion in stock, which was rejected. Third Point has previously targeted other pharmaceutical companies including Amgen and Ligand Pharmaceuticals, Inc. The new position in Baxter is clearly a major focus for Third Point in 2016.

Yum Brands, Inc.

Third Point disclosed it had taken a large position in Yum Brands, Inc. in May 2015. The fund has a position of 11.6 million shares with a market value of $927 million according to its 13-F filing for the third quarter of 2015.

Loeb cited a turnaround in the company’s business in China as one of the main driving factors for the investment. He predicted a major profit recovery in the next 12 to 24 months for the Chinese restaurants. Loeb stated the Kentucky Fried Chicken (KFC) brand still has major support among consumers despite previous food-safety issues.

Unlike other activist campaigns, Loeb is generally supportive of management. He noted the new CEO had visited operations in China to review marketing plans, with Chinese leaders visiting Taco Bell operations in California. Third Point stated it could see the potential for growth to around 20,000 KFC and Pizza Hut restaurants in China.

The company also remains focused on improving its Pizza Hut performance, which lags the other restaurants. Loeb noted Pizza Hut was operating at a significant disadvantage to its competitors. He said the restaurant needs to refocus on performing better with its delivery service, as well as with speed and convenience. Lower profit margins when compared with other restaurants provided a drag on overall earnings.

Loeb further praised management for its prior statements on enhancing shareholder value with greater leverage, more refranchising and perhaps even an alternative ownership structure. Investors will see in 2016 whether the prediction for a recovery in China bears out.

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