Bill Ackman is one of the most closely followed investment personalities on Wall Street. As CEO of hedge fund Pershing Square Capital Management, Ackman has been at the center of some creatively structured investments in recent history.
Last week, he posted on social media that his fund had started buying shares of ridehailing platform Uber Technologies (UBER +1.11%) in January. On the surface, this move might seem like a typical Ackman investment -- buying stock in a leading brand, with a growing market opportunity, all at a reasonable valuation.
However, I think there could be a hidden opportunity influencing this new position. I'm going to explore one of Ackman's more notable investments from many years ago and draw a parallel to why I think he could be employing a similar strategy when it comes to Uber.
NYSE: UBER
Key Data Points
More than meets the eye
In the early 2000s, Pershing Square had a position in fast-food chain Wendy's. At the time, Wendy's owned a subsidiary called Tim Hortons, which is primarily a coffee and donut chain in Canada.
During his analysis, Ackman discovered that Tim Hortons was generating close to $500 million in operating income. In his mind, the Tim Hortons business alone could reasonably be valued at around $5 billion (simply applying a 10x multiple to the business' operating profit).
What's unique, though, is that the market capitalization of the entire Wendy's business was around $5 billion. In other words, the market was essentially applying no value to the Tim Hortons segment.
Ackman proposed that Wendy's spin off the Tim Hortons business, a move that could be seen as a way for Wendy's to generate some obvious cash flow while simultaneously streamlining its business to focus on core competencies -- namely, hamburgers and other sandwich varieties. Wendy's did indeed sell Tim Hortons in 2006.
This is a unique example in which Ackman found a valuable asset hidden inside a larger business, and creatively found a way to leverage activist investing strategies to structure a deal and profit from an otherwise mundane business such as a fast food chain. I think there could be more than meets the eye when it comes to his new position in Uber.
Image source: Getty Images.
Why there could be more to the Uber investment
When you think about Uber, my bet is that you immediately think about the company's taxi business. But Uber is more than just a ridehailing platform. The company has made inroads in other areas of the mobility market -- namely in delivery services for food, alcohol, and consumer goods.
One thing many investors may not realize is that Uber has ownership stakes in other businesses, too. One company that Uber has a sizable investment in is called Grab Holdings based in Singapore. Grab is an app that offers products spanning delivery, mobility, and even financial services solutions primarily throughout Southeast Asia.
Right around the time Ackman disclosed his position in Uber, Grab was rumored to be considering a merger with rival platform GoTo. While GoTo's public relations team has dismissed these rumors, I find the timing and potential of a deal interesting nonetheless.
Why Uber's stake in Grab could be quite valuable
In the past year, Grab has made some notable improvements underscored by accelerating revenue and a transition to consistent positive cash flow. The market has taken notice of these efforts, as shares of Grab have risen by 39% in the past 12 months (at recent prices). Interestingly, shares of Uber have only gained a measly 8% over that time -- vastly underperforming the S&P 500 and Nasdaq Composite.
The lack of price appreciation in Uber is quite perplexing since the company is generating record levels of cash flow and continuing to build leadership positions in the core mobility segment at global scale.
In a way, I think the market is not assigning much (if any) value to other opportunities touching Uber through the company's numerous equity stakes in tangential businesses. I think it's possible that Ackman might see Uber's ownership stake in Grab as a mispriced asset, and one that echoes similar potential to the hidden value that was unlocked through the Wendy's-Tim Hortons transaction.
It's possible that Uber's management team would consider exiting its Grab position, given Grab's ongoing momentum and its potential desirability as an acquisition candidate. As such, Uber could theoretically reinvest any profits recognized from a deal into growth areas that could enhance the company's core mobility and delivery businesses, namely through partnerships in the autonomous driving realm.
Remember to keep this in mind
It is critically important for investors to realize that the ideas explored in this piece are purely my own. At this point in time, I have not seen or heard any comments from Uber's management team, Bill Ackman, or Pershing Square that hint at any motives Uber may have with Grab.
While there do appear to be some similarities between Ackman's history of identifying value through hidden assets and what could potentially be recognized at Uber as a similar situation to Wendy's, the analysis in this article is still rooted only in my own personal musings.
