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In a letter to investors, Bill Ackman suggested his hedge fund, Pershing Square Capital Management LP, is close to a $1-billion (U.S.) investment in a major U.S. company – and the market is betting it will be FedEx Corp.


Bill Ackman, the activist U.S. investor behind the dramatic overhaul of Canadian Pacific Railway Ltd., is looking for his next target.

In a letter to investors, Mr. Ackman suggested his hedge fund, Pershing Square Capital Management LP, is close to a $1-billion (U.S.) investment in a major U.S. company – and the market is betting it will be FedEx Corp.

Shares in the Memphis-based shipping giant jumped 3 per cent on Wednesday before falling 15 cents to close at $103 on the New York Stock Exchange.

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On Tuesday, FedEx shares jumped by about 8 per cent, on more than six times its average daily volume, as reports circulated that Mr. Ackman may have his sights on the company.

Analysts disagree on whether the market is right in picking FedEx as Mr. Ackman's next target. Other possibilities include alarm company ADT Corp. and logistics firm Expeditors International of Washington, Inc., although both are considered long shots compared with FedEx.

Many observers say a move on FedEx would follow the classic Ackman strategy of picking the more troubled player in market with two main players, as he did with CP. But others believe the shipping company doesn't fit the description Mr. Ackman laid out in his recent letter.

He wrote that he was eyeing a large-cap U.S. company that operates in one business, according to Bloomberg.

"The business is simple, predictable, and free-cash-flow-generative, and enjoys high barriers to entry, high customer switching costs and substantial pricing power," Mr. Ackman wrote.

The letter said a fund capped at $1-billion will be set up to invest in the undisclosed company, and Pershing Square will reportedly invest about 15 per cent of its capital in the same stock.

FedEx didn't respond to requests for comment on Wednesday and a spokesperson for Pershing Square declined to speak on the potential investment.

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FedEx is undergoing an aggressive restructuring to cut costs, and Mr. Ackman has a history of forcing major, money-making turnarounds at troubled companies. At CP, he quarterbacked the ouster of CEO Fred Green and the appointment of Hunter Harrison, who has led a successful turnaround that has driven the stock much higher.

However, Mr. Ackman has also made some bad calls, including a money-losing bet on Target Corp.

Brian Acker, chief executive at investment fund Acker Finley Inc., says Mr. Ackman likes to look for situations where he can capitalize on a turnaround in the weaker performer in an industry duopoly. He may be hoping to engineer a stronger FedEx that could have greater success against its major competitor, United Parcel Service Inc., just as he did with CP in its battle with Canadian National Railway Co.

"FedEx could use, in my opinion, substantial financial engineering in terms of its balance sheet and more efficient use of its capital," said Mr. Acker.

"That is where the opportunity is … He [Mr. Ackman] can make a lot of money doing that."

Morningstar analyst Keith Schoonmaker, who has a "buy" rating on FedEx stock, said an investment by Mr. Ackman makes sense given the shipper has an "economic moat" that helps to maintain its duopoly with competitor UPS.

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Mr. Schoonmaker also said there's room for an activist investor to help further much-needed cuts at FedEx, in particular a restructuring of its express business. However, he doesn't see a bitter proxy battle similar to what Mr. Ackman pulled off at CP.

"It would be much more challenging to win a proxy battle against [FedEx chief executive] Fred Smith than it was against Fred Green. The two Freds are pretty different," he said, noting that Mr. Smith founded the company, owns about 6 per cent of the stock, and has begun a cost-cutting process already.

Some analysts speculated FedEx's Mr. Smith could possibly reach out to Mr. Ackman for support.

RBC Capital Markets analyst John Barnes isn't convinced FedEx is Mr. Ackman's investment target.

While FedEx meets the broader criteria of Mr. Ackman's investment profile, Mr. Barnes said it falls short on having high-customer switching costs, given that it doesn't have strong pricing power since customers use both it and UPS.

If Mr. Ackman's target isn't FedEx, he warns the stock could sell off "aggressively" after this week's bump.

"We recognize that if we are wrong and [FedEx] is in fact the target, the stock is likely to move higher and potentially materially higher," said Mr. Barnes, who reiterated his underperform rating on the stock.

"If Pershing Square does make an investment in [FedEx], we will adjust our rating at that time if necessary. Until then, we believe our fundamental analysis is correct and the current earnings outlook for [FedEx] doesn't support the current stock price or valuation."

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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