Highbridge Capital Management 3Q 2013

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

What’s the deal? Why did Highbridge Capital start position in Groupon?

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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 buy Groupon Inc (GRPN)?
Highbridge has a 0.54% position in Groupon in its total portfolio.

Groupon revenue increased 5% to $595.1 million in 3Q 2013, compared with $568.6 million in 3Q 2012. It said North America revenue growth of 24% was offset by a 21% decline in EMEA and a 4% decline in Rest of World. Gross billings, which reflect the total dollar value of customer purchases of goods and services, increased 10% globally to $1.34 billion in 3Q 2013, compared with $1.22 billion in 3Q 2012. It saw a loss of $2.6 million compared with a loss of $3 million in 3Q that translates into a break-even EPS. It said its email business was slightly pressured in 3Q due to the rollout of its new marketplace Pull. Pull enables customers to search among thousands of options in its top markets and find relevant deals that they can buy and use instantly. In addition, results were impacted by 3Q seasonality and double-digit declines in email open rates related to the new Gmail promotions app that was rolled out earlier in the quarter.

It reported that in September 2013, North America saw more than half of transactions completed on mobile devices. This contributed to the more than 40% of transactions completed on mobile devices in the month globally. It said the number of its active users grew 10% year-over-year, to 43.5 million as of September 30, 2013, comprising 19.9 million in North America, 14.0 million in EMEA, and 9.6 million in Rest of World.

The company also announced an agreement to acquire Ticket Monster, one of the leading ecommerce companies in Korea, for $260 million in cash and stock. Founded in 2010, the company serves millions of customers with a broad range of product, local and travel offers, and is one of the fastest growing ecommerce companies in the region. It has more than $800 million of annualized billings.

In 4Q 2013, Groupon anticipates normal seasonal strength and strong holiday sales interest, in addition to email headwinds and further investment in marketing initiatives to drive adoption of its Pull marketplace. It expects revenue of between $690 million and $740 million, and earnings per share excluding stock compensation and acquisition-related expenses, net of tax, of between $0.00 and $0.02.

It announced this year’s Black Friday and Cyber Monday were the two biggest days in North America in Groupon’s history. For the full four-day weekend, billings were up nearly 30% compared to last year. Products from such categories as toys, electronics and home goods were top sellers on the website and mobile apps. Overall, about 55% of North American transactions were completed on mobile devices over the four-day weekend.

In 3Q 2013, the company beat analyst estimates on earnings but missed on revenue. By building a robust mobile platform, and rolling out its marketplace Pull, the company aims to gain from mobile related transactions and transform to a full ecommerce marketplace. The stock is up more than 130% YTD.

Groupon (GRPN) is a global leader in local commerce, making it easy for people around the world to search and discover great businesses at unbeatable prices. Groupon is reinventing the traditional small business world by providing merchants with a suite of products and services, including customizable deals, payments processing capabilities and point-of-sale solutions to help them attract more customers and run their operations more effectively. By leveraging the company’s global relationships and scale, Groupon offers consumers incredible deals on the best stuff to eat, see, do, and buy in 48 countries. With Groupon, shoppers discover the best a city has to offer with Groupon Local, enjoy vacations with Groupon Getaways, and find a curated selection of electronics, fashion, home furnishings and more with Groupon Goods.

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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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