Highbridge Capital Management 3Q 2013

Part 5
Highbridge Capital Management 3Q 2013 (Part 5 of 7)

Why did Highbridge Capital exit Cosan?

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Highbridge Capital Management, LLC is a multi-strategy alternative investment management firm founded by Glenn Russell Dubin and Henry Swieca in 1992. In late 2004, J.P. Morgan Asset Management purchased a majority interest in Highbridge, creating one of the first and most significant strategic alliances in the hedge fund industry. In July 2009, J.P. Morgan Asset Management completed its purchase of substantially all remaining shares of the firm. Highbridge and its affiliates manage approximately $29 billion in capital for many of the world’s most prominent institutional investors, public and corporate pension funds, endowments, foundations, family offices and high net worth individuals. The firm is based in New York with offices in Hong Kong and London.

The fund bought new positions in Lowe’s Cos Inc (LOW), Schlumberger Ltd (SLB), Groupon Inc (GRPN), and Tempur Sealy International Inc (TPX) in 3Q 2013. It sold its positions in Cosan Ltd (CZZ), Cummins Inc (CMI), and Tractor Supply Company (TSCO).

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Why sell Cosan Ltd (CZZ)?
Highbridge exited a 3.94% position in Brazilian sugar and ethanol producer, Cosan Limited.

Cosan SA Industria & Comercio posted a profit of $91.18 million from a reported net loss of $96.1 million in the previous quarter. It said the profit was supported by its growing retail fuels unit. However, earnings declined 26.3% year-over-year. It said earnings were impacted due to losses from foreign exchange variations, unrecorded deferred fiscal credits and higher financial expenses due to increase in debt because of the Comgás acquisition. The results included  gas distributor Companhia de Gas de Sao Paulo, or Comgas, in which Cosan acquired 60% in November 2012 from BG Group PLC for BRL3.4 billion.

Revenue increased 300% due to fuel, sugar and ethanol sales. However, sugar production declined 1% and crushed sugar volume fell 2% due to unfavorable weather conditions. It saw an increase in revenue across all its five segments Raízen Energia, Raízen Combustíveis, Rumo, COMGÁS, Lubricants and Specialties. The Radar segment saw a 22.7% fall in revenue due as no property sales took place during the quarter.

Cosan SA Industria & Comercio operates as a holding company, which produces and sells sugar and ethanol. The company operates through six segments: Raízen Energia, Raízen Combustíveis, Rumo, Radar, COMGÁS and Cosan Outros Negocios. The Raízen Energia segment engages in the production and marketing of a variety of products derived from sugarcane, including raw sugar, anhydrous and hydrated ethanol, and activities related to energy cogeneration from sugarcane bagasse. The Raízen Combustíveis segment involves in the distribution and marketing of fuels and lubricants, through franchised network of service stations. The Rumo segment includes logistics services for the transport, storage and port lifting of sugar. The Radar segment engages in the buying, selling and leasing of agricultural land for growing sugar cane and grains. The COMGÁS segment includes the distribution of piped natural gas to customers in the industrial, residential, commercial, automotive, thermal generation and cogeneration. Lubricants and Specialties segment, comprises industrialization and distribution of lubricants under the brands Mobil and Comma, resale of base oil and automotive specialties in Brazil and other 40 countries, through plants located in Rio de Janeiro, Brazil and Kent, United Kingdom. The company was founded in 1936 and is headquartered in Sao Paulo, Brazil.

According to analysts, volatility in sugar prices and uncertainties over ethanol pricing are impacting the sector. There are also concerns that the U.S. Environmental Protection Agency (EPA) proposal to reduce the amount of biofuel that refiners must mix with fuel may curtail demand for Brazilian sugar-cane ethanol  in 2014 that might impact Raízen Energia’s ethanol exports. Raízen Energia is a joint venture between oil producer Royal Dutch Shell Plc (RDSA) and Cosan SA Industria & Comercio.

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The fund started in 1992 with $35 million in capital and is named after the 19th century aqueduct that connects Washington Heights and the Bronx. It seeks to attain consistent capital appreciation primarily through arbitrage and absolute return investment strategies in the global financial markets.  The firm has evolved over the past nineteen years and developed a diversified multi-strategy investment platform comprising more than six distinct investment strategies which serve as “alpha engines”.  Some of Highbridge’s core absolute return investment strategies include Convertible Bond Arbitrage, Credit, Global Macro, Long/Short Equity and Statistical Arbitrage.

Founder Glenn Russell Dubin was born in 1957 in the Washington Heights section of upper Manhattan. He graduated in 1978 with a degree in economics from Stony Brook University and began his career in finance as a retail stock broker at E. F. Hutton & Co. in 1978.  In 2010, Dubin was instrumental in broadening the Highbridge investment platform by partnering with J.P. Morgan Asset Management to lead the acquisition of a majority interest in Gávea Investimentos, one of Brazil’s most prominent alternative investment managers. Dubin stepped down from the CEO position at Highbridge in July 2013 and continues to remain as the chairman at the firm.

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