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BEACONS OF THE WEEK
The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.

Lindesnes Lighthouse, Kristiansand, Norway
This lighthouse is a coastal lighthouse located at the southernmost tip of Norway. The current structure was built in 1915 and was automated in 2003. The original lighthouse was built in 1656.
California Lighthouse, Aruba
This lighthouse was constructed in 1916 and automated in 1970. The lighthouse stands at 30 meters tall. The lighthouse power source changed from kerosene to gas in 1965 and to electricity in 1970.
Ackman’s dream
Billionaire and fund manager Bill Ackman has grown quite a reputation across the world of finance over the last 25 years. The investor is well-known to industry professionals globally. Ackman founded and led Pershing Square Capital Management, a successful hedge fund management company. Ackman is one of the most successful modern-day investors known for his successful bets on easy-to-understand companies. Ackman’s portfolio is highly concentrated, and all the names operate in simple-to-explain industries. He claims this allows him to better analyze business models and financials.
We bring Ackman up this week because it seems he wants to reach the next level. Ackman wants to level up and reach a new level of notoriety, something very few in finance have done. Ackman unveiled plans to form a new business that would be a modern-day Berkshire Hathaway that will acquire controlling interests in companies. This would be a big change for the aggressive hedge fund manager. Ackman wants to form this business out of Howard Hughes Inc., a real estate development company based in Texas. Howard Hughes is a public company that Pershing Square Capital Management owns 38% of. Ackman and Pershing first acquired Howard Hughes shares in 2010. Ackman served as the Chairman of Howard Hughes Inc. until this past May and has long voiced his displeasure with the company’s share price, claiming it was significantly undervalued.
This displeasure led to Ackman’s proposal on Monday where he would become the CEO of Howard Hughes Holdings, and the company’s current CEO would become the CEO of real estate for the company. The plan includes Pershing purchasing the remaining shares of Howard Hughes for $85/share. Howard Hughes shares closed below $72/share on Friday and shares are down 35% over the last 5 years. The buyout proposal led to shares jumping by almost 10% on Monday. Despite the premium offered by Ackman and Pershing Square relative to the stock price, the offer is well below NAV which has led to many critiquing Ackman online.
Ackman who has not been afraid to criticize the management of companies he invests in highlighted his high regard for the current Howard Hughes management team calling the group a superb team.
Ackman has been in touch with other Howard Hughes shareholders since last summer regarding this proposal.
If this reverse merger goes through the entity will still trade on an exchange like Berkshire Hathaway.
The reported buyout of other shareholders will cost $1 billion including $440 million from Ackman, $460 million from Pershing Square employees, and $100 million from external strategic investors. Ackman has also said that Howard Hughes will be buying back stock to decrease the float as a part of this proposal. Pershing Square’s reported ownership of Howard Hughes will reportedly be between 61% and 69% after this deal closes.
Howard Hughes’s shareholders can elect to receive the entire payment in cash or “rollover” all or a portion of their shares into the post-merger company, Ackman said in a letter.
We like this deal for Howard Hughes, Pershing, and Ackman. Ackman has been a highly successful investor who is looking for his next venture. We think this venture could bring forward a mini version of Berkshire Hathaway that buys cheap companies and turns them around. If Ackman is successful, we think many will follow him into this industry by utilizing his strategy. However, we will say that Ackman is nowhere near Warren Buffett and Charlie Munger and will most likely never reach that pinnacle.
It is important to note that we have highlighted Ackman’s terms on this deal. We are not sure what Howard Hughes board members think of the offer, nor its shareholders. There have also been some rumblings of displeasure from certain Pershing Square investors as this deal could not be advantageous for them, and that Ackman is reaching with this venture. We will also note that Ackman will charge shareholders of Howard Hughes 1.5% in management fees, quite the fee for a public company that does real estate and will buy controlling interests in other companies. We know Ackman is use to charging high fees as a hedge fund manager but this seems high even for him.
We will be waiting on the sidelines on this deal.
And just like that suitors show up
A little over a week after the Biden Administration rejected a deal between Nippon Steel and U.S. Steel, new suitors showed up to buy the American producer. We have held shares of U.S. Steel for quite some time due to its strategic positioning and attractive valuation. We have mentioned that it is an attractive acquisition candidate since the rumblings a few years ago began in the industry. The Biden Administration rejected the Nippon deal over national security reasons (Nippon Steel is a Japanese firm). The deal has been in limbo for over a year. Biden and his administration have been highly critical of corporate deals during their reign. It is important to mention that the Trump administration also reportedly opposes the acquisition.
The deal being rejected is not new news. We reported on the potential for rejection last spring and updated our prediction in the late summer / early fall. We said this deal would not go through, U.S. Steel shares would pull back and new domestic producers would circle back and make an offer to U.S. Steel. Not even a week after the deal was rejected by the outgoing President, U.S. Steel has a domestic suitor, Cleveland-Cliffs. Cleveland-Cliffs CEO held a press conference on Monday stating that his company is interested in acquiring U.S. Steel when the Nippon Steel deal officially falls through. This sent U.S. Steel shares upward by more than 10% on Monday. U.S. Steel shares are down 21% over the last year as the Nippon deal looked more and more unlikely. The Cleveland-Cliffs CEO stated that Japan is evil and that the country helped build the Chinese steel industry which has gutted the U.S. industry. The CEO is also trying to get in the good graces of the incoming President (perhaps for when Cleveland makes an offer) stating that he “wants to make American steel great again”. The U.S. Steel has done similar things while also being critical of Biden and his administration. The stars could be aligning for a deal between these two American companies.
Cleveland-Cliffs reportedly was circling U.S. Steel in the summer of 2023 before Nippon Steel made a tender offer. Cleveland-Cliffs offered U.S. Steel $35/share in August 2023, they raised that bid to $54/share before the board accepted Nippon’s $55/share offer. U.S. Steel rejected Cleveland-Cliff’s offer as they were likely to receive antitrust scrutiny (ironic how it unfolded). A combination of U.S. Steel and Cleveland-Cliffs would dominate the industry and would create a steel maker that would account for close to 40% of the domestic market share.
We are happy to hear the CEO’s remarks after the Nippon deal has seemingly fallen through. We think the deal will be a mix of stock and cash and that negotiations will begin somewhere between the original $35/share offer and the final $54/share offer that Cleveland Cliffs made. As of this writing, U.S. Steel shares are trading at just over $37/share.
If this deal were to go through, it would give birth to an American steel conglomerate that could compete with the largest firms globally.
Regardless of whether Cleveland-Cliffs acquires U.S. Steel, there is interest and numerous parties could emerge as suitors for U.S. Steel. The next presidency will be much more business-friendly and will support acquisitions rather than rejecting or delaying them.
We think the risk-reward for U.S. Steel at this level is highly attractive. The downside is limited while the upside potential is quite high. We like the multiple that U.S. Steel trades at. We like the trends in the industry to move domestically and the potential for more deal-making / M&A during the next Presidency. We think all these factors will benefit U.S. Steel and its shareholders moving forward.
Disclaimer: MacNicol & Associates Asset Management holds shares of U.S. Steel (NYSE:X) across various client accounts.
Starbucks reverses policy
The new Starbucks leadership team is wasting no time mixing things up. They already altered the company’s strategy to focus on staples and halt exploring new options and products which have often failed. This week they announced that patrons not purchasing products will not be allowed in Starbucks locations moving forward. This open-door policy reversal aims to improve customer safety, and experiences as well as ban harassment, violence, smoking, and panhandling. Starbucks opened its doors for 7 years to everyone.
Starbucks will also offer certain customers free refills depending on the cup purchased or brought in by the customer moving forward.
The policy changes seek to address a decrease in customer traffic and falling sales by making Starbucks locations more hospitable. Free water at Starbucks will also be limited to paying customers as of January 27th.
In 2022, Starbucks closed 16 U.S. locations across major cities over employee and customer safety concerns.
Starbucks will also bring back its condiment bars which disappeared during COVID-19. The CEO has mentioned returning Starbucks to its roots and making the chain a place you can linger as major goals of his moving forward.
We like all these strategy changes by senior management over the last few months. After being beaten down for a few years, Starbucks shares found a bottom last summer and rebounded as the Board announced a CEO change and its strategy changed through the fall. We scaled into Starbucks after these changes were made and have waited for another entry point in this beaten-down favorite. We like the multiple that Starbucks trades at, however, we are watching their growth as that has become an issue in recent years. Even if a company trades at an attractive valuation, it still needs to grow revenue and earnings, and those have seemingly plateaued for Starbucks recently. However, we are bullish on the new CEO and his changes. The new CEO was the CEO at Chipotle for over six years and is known for the recent success of the company.
We will have to see how much change Brian Niccol made last quarter in Starbucks’s next earnings report. He officially became Starbucks CEO in late September of last year.
Disclaimer: MacNicol & Associates Asset Management holds Starbucks (SBUX) shares in various client portfolios.
A picture is worth 1000 words
Everything worked last year except long-term bonds for investors. Now do you see why we have not been interested in bonds for a few years? Despite the FED slashing rates, long-term bonds were down 8% last year and have been down in 3 of the last 4 years.
We wanted to highlight this picture as a reminder to our investors but also our network that bonds have a higher risk than their historical averages. We think this elevated risk will remain present for bonds moving forward.
If you want some yield, pick up some very short-term instruments. We think yields will continue to rise and will be quite volatile from here.
Potential deal-making in energy
It’s no secret that deal-making will increase under Trump. We highlighted the potential for M&A activity under Trump earlier in this edition. However, we also see a boost in IPOs, direct listing, and other corporate transactions. We expect this trend to hit most industries including the energy industry which could get a real boost from Trump. Investors in this sector could be rewarded handsomely for holding onto these deep-value energy stocks if a deal occurs or Trump installs policies that grow revenue and earnings for domestic producers.
We bring this all up this week due to an article that we read this week in Barrons. The article looks at a potential IPO in the energy industry. Research shows this pending IPO could be the biggest in years for the energy industry.
However, the timing of the IPO and size could depend on some Trump administration decisions over the next few months.
The firm, Venture Global is a Virginia-based company that specializes in processing and exporting liquified natural gas (LNG). The company is reportedly looking to raise $2.3 billion in a deal that would value the company at $110 billion according to insiders. That valuation is about twice as much as the market value of the leading pure-play LNG provider in the U.S. today. Venture Global’s two founders who still lead the company control approximately 97% of the company through their holdings of special Class B shares.
If this deal goes through, this would be the largest energy IPO in more than a decade (not bad for a left-for-dead industry).
Venture already has 2 LNG plants running and three others that are in various stages of development.
LNG has become a huge business globally and in the U.S. over the last decade. The industry is expected to continue to grow rapidly. LNG is the cleanest form of fossil fuels. Demand has soared for the energy source due to its reliability and other factors.
U.S. LNG has been in extreme demand in recent years as Europe and other Western nations decrease their reliance on Russia or outright ban imports sourced from Russia. U.S. LNG production is also cleaner than LNG production in other countries.
These trends have led to the U.S. becoming the worlds largest LNG exporter in 2023. The U.S. exported less than one million tons per year in 2015, last year they exported 87 million tons, quite the 9-year growth rate.
Back to Venture Global, the company already is a dominant exporter, however, their production could eventually lead them to account for 15-20% of total U.S. production. Last September, they announced they expect total contracted revenue from already signed contracts to be $107 billion over the life of the contracts. However, we will warn progress is still in the early stages for Venture, many of its competitors have been and are expected to in the short term report stronger revenue and earnings numbers. Venture plans to grow organically and plan to be vertically integrated where they own the pipelines, ships, and LNG infrastructure. The company will use a repeatable model to limit cash outflows.
One factor that could speed up this IPO or the growth of Venture Global is a lift of the Biden administration’s pause on approvals for new LNG projects by Trump and his administration. Many expect that to happen quite quickly.
The one risk factor we will mention for Venture Global, and the entire LNG industry is buyer beware, numerous analysts forecast the industry to be in oversupply by the end of this decade. This will seriously impact many producers. This oversupply will dramatically decrease European LNG prices which are quite elevated versus U.S. prices. However, do not expect an oversupply for at least a few years.
We are not blankly stating that you should buy Venture Global when it’s IPOs. We would need to see the details before discussing the company in depth. However, it could be an interesting play if it goes public at the right multiple and the macro factors are aligned. For now, wait on the sidelines with us there are numerous other LNG prices that are already public.
MacNicol & Associates Asset Management
January 17, 2025