My top 10 $PSTH targets follow up

On Tuesday, I posted My Top 10 PSTH targets. On the heels of that post, I got a lot of great feedback and a lot of suggestions for other companies that could be the target. So I wanted to do a quick follow up post highlighting some of the possible targets and feedback on my own targets (while again acknowledging that there are hundreds of businesses out there that could be the target, and calling the specific deal is a long shot…. though by the end of this point I’ll have thrown out ~25 targets, so I’m starting to cover a pretty wide swath of the potential targets!).

Let me start with a reminder: in a recent interview, Ackman said he’s been discussing a deal since November with an iconic company, and the hold up with announcing a deal has been a non-valuation issue on the seller’s side. So any potential target needs to have an “iconic” brand and needs to have some lingering issue that would cause >6 months of negotiations / delays to overcome.

Ok, let’s turn now to the feedback I got on my top 10 target list.

The two suggestions that I threw out that got the most pushback were on a NYC real estate (my #6 target) and my Heb / Trader Joes / Wawa suggestion (my number #10 target). On the later (grocers), a bunch of people pointed out that Ackman said he didn’t like grocery stores in his WSJ interview. I heard that too, but I don’t think it precludes these as targets. It would make for a nice story on deal announcement “I don’t buy grocery stores…. but I don’t view these as grocery stores. I view them as great brands with a bright future that will be worth more ten years from now than they are today.” PSTH’s cash would also match up nicely with those brands, as it could be used to fund big expansion plans and/or some type of localized delivery play. I’m not saying any of that is likely (again, these were the last picks on my list!), but I don’t think they can be fully written off either! On real estate, I’d pretty much knock it off the list; I forgot that, as a foreign company, PSH (Ackman’s London listed fund which controls PSTH) would face seriously adverse tax issues from buying real estate (PSH has historically had to structure most of their HHC ownership through swaps to dodge that issue). I doubt Ackman would do a deal that would immediately disadvantage his holding company so much! Thanks to several readers who pointed that out!

My top pick was Mark Anthony. I got a lot of feedback on that as well. I said I couldn’t remember Ackman investing in alcohol before, and a few people pointed out that he had owned Beam after they were spun off from Fortune, which I had forgotten. Some suggested that White Claw was too young / upstart for Ackman’s traditional investment; I respect that opinion but I think he’d have an open mind. Recent consumer trends shows that the first brand into a new market can create a dominant and durable brand and realize huge returns with years of tailwinds (think of Monster Energy and Red Bull in the energy drink space! Or Fireball in whatever area of the alcohol space it plays in!). Personally, I’d bet on white claw if given the chance.

Speaking of Red Bull, Red Bull was probably my favorite suggestion of all the suggestions I crowdsourced on Twitter. I don’t think it quite fits the fact pattern of the delay since November, but other than that I think it would hit a lot of the qualities Ackman looks for (iconic brand, consumer focused, monster cash flow). I’d be a little questionable on Red Bull’s future, but that’s just my personal opinion. So, while I don’t think it’s Red Bull, I thought it was a really good suggestion!

Aside from Red Bull, below is a list of the best recs that I got. I’ve tried to order them in relation to what they do (i.e. all of the food companies are grouped together) in the list below, and then below that I have my thoughts on why/why not that deal would be likely. At the bottom of this article, I have my favorite five targets from the suggestion list.

Best reader suggestions for PSTH targets

  • Red Bull (discussed above)

  • In-n-out / Five Guys / Whataburger (any of the three)

  • Inspire brands (sonic, arby’s, buffalo wild wings, dunkin, arby’s, jimmy johns)

  • Panera (or something JAB owns)

  • Panda Express

  • J.C. Penny

  • Ikea

  • Hallmark

  • Lego

  • New Balance

  • S.C. Johnson

  • Fidelity

  • A sports team

My thoughts on the above deals below

In-n-out / Five Guys / Whataburger: All popular responses (well, except for Whataburger!), and In-n-out had been on an earlier draft of my top ten list. I think all three brands would make sense based on Ackman’s investing style (remember, Ackman’s first SPAC took Burger King public), and the cash from PSTH could help them to expand and create a lot of value (particularly In-n-out), but I don’t think these are the targets. Ackman owns too much of a competitor (QSR / Burger King), and I’m not sure why a deal would have taken so long if any of these are the targets.

Inspire Brands (sonic, arby’s, buffalo wild wings, dunkin, arby’s, jimmy johns)- fits up his investment history (again, his first SPAC took Burger King public), the valuation seems to loosely fit (Inspire was worth ~$3.7B when they bought back a minority stake from Wendy’s back in 2018; their value has almost certainly grown significantly since then given all the deals they’ve done, but even if they’ve 5x’d they’d be a good size for PSTH), and there’s an interesting angle given he said deal talks with their target started in November and that’s right around when Inspire announced and closed their deal for Dunkin’, so complexities around that close and their cap structure could have lead to the delays. But I’m not sure; Ackman would be involved in basically every fast casual restaurant if he bought inspire, and even with the complexities from closing the Dunkin deal, I’m not sure why a deal would take so long (in fact, given they closed the Dunkin deal in December, Inspire’s value has almost certainly changed significantly over the past few months, so that further crosses them off the list as Ackman’s interview said valuation hadn’t changed since November).

Panera (or something JAB owns)- loosely fit his criteria, and the valuation probably makes sense (Panera was worth ~$7.5B when JAB bought them in 2017), but again, if he bought them, he’d own most of the fast casual food space, and I’m not sure what would hold a deal up if Panera was the target.

Panda Express- Fits with Ackman’s investing style, and the family said last year that they’ve considered going public before / it seems like they’re planning on it at some point; seems like the size would roughly match up with PSTH as well. But, while Panda is certainly iconic to me given my love of their Beijing Beef, I’m not sure it matches with Ackman’s definition!

J.C. Penny- absolutely no shot of it happening, but wanted to make sure you were still paying attention. Plus, it’s funny just to think about.

Ikea- Along with In-n-Out, another company that was on my initial draft list. It’d be a heck of a deal, and you could see some loose parallels from his current investment in Lowe’s (really loose). Ikea’s Wikipedia page also mentions a “complex corporate structure” designed to avoid billions in taxes, which could explain the hold up since November. But I don’t think it quite fits with what Ackman’s discussed; Ikea’s brand is good, but iconic? It’s also more European focused, and I think Ackman is generally more domestic focused.

Hallmark: Definitely an iconic brand. Their PR says they are a $3.5B business in revenue, so they’d probably be big enough. And, while the core card business certainly has questions, their PR noted that they posted positive comps in 2019 and they do own other stuff (like Crayola). So I don’t think it’s crazy, but I think the headwinds here are just too much. Plus, I’m not sure why we’d have the November delay if this was the target.

Lego: Hits a lot of the boxes; iconic brand, probably worth a lot more in the future. I think the future is really interesting for them; they’ve had a lot of success with Lego video games and movies, and the brand has expanded well with Legoland parks, so even if their core “toy” product is pretty sleepy there’s lots of potential incremental growth. Their ownership is also somewhat complicated (25% is owned by the Lego foundation), which could explain the deal delay…. though I’m not sure why it would be complicated enough to drive this long of a delay. Overall, my gut tells me this isn’t the deal; it just seems a little different than what Ackman’s invested in historically, but a lot of the pieces do fit (and that’s an unintentional pun!).

New Balance- Absolutely a well known brand, though I think “iconic” would be a big stretch. And I’m not aware of any issues with selling them that would cause the November delay…. but it is a nice consumer brand, and I think their valuation would be roughly in PSTH’s wheelhouse. They do ~$4b in revenue/year; Nike trades for ~5x forward revenue. New Balance probably gets a discount, but even if the company were worth 2-3x revenue they’d be worth $8-12B and a really nice fit for PSTH.

S.C. Johnson- Family holding company with some classic brands (Glade, Raid, and Ziploc probably the headliners). Certainly possible, but seems a little too sleepy to me, and I’m not sure what would have caused the big delay if this was the target.

Fidelity- fits reasonably with iconic, and I could see some issues with change of control that caused the big delay (though I’m not sure specifically what other than taxes; maybe something like managers owning stakes in their funds and having cash out options in a change of control)? But I think there are serious headwinds to this business that don’t exist for something like Private Equity (I mentioned Bain as a target in my first post), so I’m not sure this is what he wants to get in. Also, Ackman mentioned valuation hasn’t changed since November; given the enormous run in markets since then, I’d be pretty surprised if Fidelity was cool accepting the same valuation now as they were >6 months ago.

A sports team- I view this as super, super unlikely, but the pieces would fit. Sports teams valuations have pretty much only ever gone up, and pretty much any professional sports team would hit the definition of iconic. And the big delay in getting a deal done Ackman discussed could come on the seller’s side from the league reviewing PSTH’s financials, approving a team having a publicly traded stake, etc. If I had to guess (and, again, acknowledging this is a long shot), if PSTH was going this route it would be through buying one of the major sports holding companies. Kraft Group (Patriots, Gillette stadium, a big retail center, lacrosse, etc.) would seem to fit the bill.

Conclusion: We’ve been through a lot of targets here. Of the reader suggestion, my five favorites would be (in order of likelihood):

  1. Red Bull

  2. Lego

  3. In-n-out

  4. Five Guys

  5. Fidelity

If I think back to my original list, I would probably place all of these behind Porsche (my #4 target) and ahead of Hearst / Fitch (my #5 target).

Last week, Ackman said he should be able to announce a definitive deal in a couple of weeks, so we should know the answer in the near future (or else he’ll be moving on to a new deal, and I’ll need to put together some new lists / spend my time thinking about something else!).