WHEN: Today, Monday, March 14th
WHERE: CNBC's "Closing Bell"
Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with ValueAct CEO Jeffrey Ubben on CNBC's "Closing Bell" (M-F, 3PM-5PM ET) today, Monday, March 14th. Following is a link to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000501485.
All references must be sourced to CNBC.
UBBEN ON THE MARKET
JEFF UBBEN: I would say in the last year or two, the recurring revenue cash flow in good times and bad model company has been increasingly priced away from us because, you know, if your opportunity cost is 1% or 2% and I can get a nice predictable, cash flow stream at 10%, that's just too rich. So our current return is increasingly not available to us at the sort of high quality companies that we seek. So we have really – we have been selling a number of our companies where we've been there, kind of done all we could –
KELLY EVANS: Like Microsoft.
JEFF UBBEN: and the stocks are fairly valued. So we sold some Motorola, we've sold some Adobe, we've sold some CI, we've sold some Microsoft. And it's been hard to redeploy that. The only high-quality business that we have found in the last 12 months is Rolls Royce which – where the stock is down by half.
UBBEN ON FANG STOCKS
KELLY EVANS: And this comes in a year so you guys were down about 2% last year. The S&P was up. And largely speaking it was because of the FANG stocks. You know, you had Facebook, Amazon, Netflix, Google, the kind of names that I think the Value community generally hates.
JEFF UBBEN: Yeah.
KELLY EVANS: Why does it seem –does it make your job easier or harder when that's the case? I understand that the returns might not look as good for a one-year period, but –
JEFF UBBEN: It's hard for a Value person because, you know, we started in 2000. And this is what happened in 2001 when you had – or 2000 when you had more of a market cap go into fewer and fewer names kind of sucking money out of value stocks. And then what happens is the valuation bubble bursts. Right? And it spreads out into value companies.
KELLY EVANS: Is that what is happening now do you think?
JEFF UBBEN: Maybe. Right? Maybe. Certainly last cycle the valuation bubble was largely public. The companies went public much faster. And the money came out really fast. This time, more and more companies are private. And so I think the bubble will burst slower.
UBBEN ON FOX INVESTMENT
KELLY EVANS: Is there going to be a price at which some of the Netflix's of the world do look attractive to you?
JEFF UBBEN: No. No, I mean, our goal is to take a trailing edge company like Adobe or Microsoft when they were ten times earnings and make them go from old tech to new tech. Right? And both those cases, you know, Adobe was considered done because Jobs didn't put the flash on the iPhone. We were like, "We'll just put HTML into the suite and you're fine." And then Microsoft was viewed as defending Windows with Office. And really what they should've done just, you know, let Windows go. Open up, like. And so with management change there, we went from old tech to new tech. So if you look at Fox, it's much more interesting to us to own Fox at eight times EBITDA and 12, 13 times earnings and just move from old media to new media.
KELLY EVANS: I'm guessing having read your investor letter, that it involves going direct to consumers.
JEFF UBBEN: Yeah.
KELLY EVANS: Because your letter basically also talks about Adobe and Microsoft, and says, "The key here is to identify companies you can get rid of the middle man that might be destroying that relationship between the company and its customer." It would seem like media companies are a perfect candidate for that to be able to just stream their content directly to the consumer and really own that relationship.
JEFF UBBEN: It would be surprising that the aggregator wins. Now if the aggregator develops its own great content, which Netflix maybe it can do because they have enough cash now. They're spending $5 billion a year
KELLY EVANS: Do you watch House of Cards?
JEFF UBBEN: I've seen it a little bit. But I don't – I'm not crazy over it.
KELLY EVANS: Yeah. And what about Rupert Murdoch? I mean, management is also a key plank of a lot of these companies in the investment case. Do you have confidence that if that leadership transition to James happens –
JEFF UBBEN: We think James is terrific. I mean, we think he is the young anti-establishment sort of CEO that can, you know, be part of or lead the change.
UBBEN ON HALLIBURTON / BAKER HUGHES
KELLY EVANS: Is the Halliburton, Baker Hughes deal going to happen? And if it doesn't do you have a plan B for your stakes in those companies?
JEFF UBBEN: If the deal does happen, we're going to do really well because we'll get a big – it's a 25% spread. If the deal doesn't happen, I think people may have lost track of what happens to Baker's balance sheet when the cash comes in from the breakup fee. And we also think that, you know, the products in a technology at Baker are, you know, best in class. So we kind of feel we're sitting close to asset value, which gives us downside protection. We have a pristine balance sheet, which gives us leverage at the bottom. And so we think it's – we're actually pretty excited about – the other side of oil is interesting, you know, people say that it's going to maybe go to 55 and hang out there. No way. I mean the other side of oil with the disinvestment we've seen, it will go – between now and 2019, it could – the marginal barrel could easily push it to 100 again.
KELLY EVANS: Really?
JEFF UBBEN: Well, there's that much disinvestment, right? So and –
KELLY EVANS: But everybody says –
JEFF UBBEN: Everybody's been fired or let go. So the ability to bring these barrels on quickly is going to be very difficult.
UBBEN ON OIL PRICES
KELLY EVANS: What would you say to people who have this view of the market that they'll be able to meet – add barrels in a second to meet that higher price?
JEFF UBBEN: I mean, just look at the loss of people. I mean, you know, who's going to be there to drill it and to – so you look at the loss of people. You look at the companies that have basically – are leaving the industry. And the – when you don't run up a pressure pumping a piece of equipment it goes – it gets cannibalized and goes away. So there's a ramp up that is going to create a tremendous sweet spot certainly in North America for Halliburton. And globally because the, you know, it's very cathartic, right? To get kind of the excess supply out of the system, both labor and equipment.
KELLY EVANS: Who else then? Because the valuations of so many of these companies are trading at levels that you guys must be looking through here every day.
JEFF UBBEN: We like to sell the bullets to the warriors. We don't like to be the warrior, you know, and go kill ourselves. So we're more service-oriented and, you know, and we are balance sheet focused. So Baker Hughes, to us, is the only place we're really interested in playing right now.
UBBEN ON VALEANT / ALLERGAN
JEFF UBBEN: You know, it's a weird two years. The Allergan ambush, for lack of a better word-- we acquired a lot of enemies, for sure. And then, you know, the-- we're really unprepared for the bear raid-- or, you know, the political wins that kind of hit us in the face. Really unprepared for that.
KELLY EVANS: But what about the whole Philidor aspect of this? You must have been unprepared for some of those revelations too.
JEFF UBBEN: I mean, especially pharmacy businesses were being employed by many drug companies. And there is-- a tension that-- that we should all want between affordability and accessibility. Right? And if you have-- a dermatology drug that really works for you-- your doctor should be able to prescribe it to you-- versus having a PBM push you to a generic that may not work as well and, you know, by the way, their business model pays them to do so. So I think you want-- tension in the system. And that's what the specialty pharmacy business or, you know, that's their role. And whether it's well done or not is, you know, is another-- question. So we're looking at that.
UBBEN ON VALEANT CEO J. MICHAEL PEARSON
KELLY EVANS: Do you think Michael Pearson's still the right guy for the job?
JEFF UBBEN: Yeah, so Mike it's really unfortunate that, you know, in the middle of the most critical period as we're changing this business model-- more toward consumer pay with Walgreens as a partner that Mike gets sick. And so-- he is incredibly, incredibly driven incredibly smart. He's a great problem solver and we're solving problems as we speak-- as the model changes and shifts. He's about, you know, 80% back. I mean, he really was sick. And you know, and he's finding his energy as we speak. And, you know, it's surprising how quickly he's attacked and having come back. And really being as determined as you can be on behalf of shareholders to solve his problems. You know, so we, you know, we think Mike is the right guy for the job now.
KELLY EVANS: What's your target now with the invest-- I mean, the business model does seem like it has to fundamentally change. Or maybe it doesn't. You know, the wh-- the idea that they would be very light on research and development-- acquired drugs raise their prices to what they view as competitive in the market-- is under fire as you mentioned politically-- also because there's competition out there for some of their successful, existing drugs. Company has a high debt load. Obviously now in a host of doubters about its future prospects. Does that make it more appealing to you as a value investor or does it give you pause about how long you can remain in the stock?
JEFF UBBEN: Well, I mean, we bought some really good assets. There's real growth to these assets. And we really have a capital structure that is quite low-cost. We have a tax rate—by merging with Biovail that's, you know, very-- low cost. And so-- and we have a tremendously diversified revenue base. I mean, it's-- we've got emerging market businesses, we've got ophthalmology, we've got dermatology, we've got neurology, we've got GI. I mean—
UBBEN ON VALEANT'S VALUE
KELLY EVANS: Do you think it'll be—a $200 dollar stock again?
JEFF UBBEN: --so I think you can earn your way into that. Yeah. I mean, I, you know, the you know, we really haven't been able to control the narrative at all, the short sellers and the media, you know, that are dying for some new crisis like Enron-- --or whatever is-- it's kind of filling the space. We're just-- as we do here we-- just put our head down and, you know-- try to make sure the company is better when we leave it than it was when we got there.
UBBEN ON NEW INVESTMENTS
KELLY EVANS: A couple quick final questions. You mentioned you only might make-- one or two real-- new investment decisions a year. How close are you to resetting some of the portfolio today?
JEFF UBBEN: You know, it was really game on three weeks ago. And we, you know, we-- we're ready. We're always doing work on companies. We have about 600 companies we follow globally. And-- we brought $100 million of one, you know, we're excited about.
KELLY EVANS: You want to tell us what it is.
JEFF UBBEN: No I can't Yeah. 'Cause I wanna buy more. We went all over the country visiting operations. We know management-- some. And then it just, bang, right- right up 20-- 20-- 25%-- in our face. So-- you know, it's frustrating. We are carrying almost 3 billion in cash, which is a lot for us.
KELLY EVANS: But it sounds like what you're saying is that your fund itself may or may not be that much larger but the targets could 'cause there could be a lot of better targets at the bigger companies that you kind of just alluded to.
JEFF UBBEN: Yeah, I mean-- it's up for debate whether the market is really much less efficient at big cap than it is at small cap. You know, Adobe was super cheap at 25 bucks because everybody was-- I think they were long-- they were long sales force and short Adobe. You know, and Rolls Royce is super cheap 'cause they were long Safran and short Rolls Royce. And Microsoft is super cheap 'cause they were long Google and short Microsoft. So, you know, the long/short world is big enough-- and they're-- always looking for their hedge that, you know, so far we've been able to find, you know, bigger, cheap, high-quality businesses to work with.
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