February 4, 2015 / 2:01 PM / 5 years ago

Exclusive: Ackman poised to win Zoetis board seats - sources

(Reuters) - Hedge fund Pershing Square Capital Management is pressing for seats on animal health company Zoetis Inc’s board of directors, with an eye to pushing through cost cuts and a possible merger, according to sources familiar with the negotiations.

William Ackman, founder and CEO of hedge fund Pershing Square Capital Management, speaks to the audience about Herbalife company in New York, July 22, 2014. REUTERS/Eduardo Munoz

Pershing Square, the $18 billion fund run by activist billionaire William Ackman, became the biggest shareholder in Zoetis last year, spending about $1.54 billion for an 8.5 percent stake, and has been holding behind-the-scenes talks over the makeup of the board ahead of a Feb. 12 deadline for nominations.

Zoetis, which was spun out of Pfizer in 2013 and has been a public company for less than two years, is to report earnings on Feb. 11.

Three sources familiar with the negotiations, said Pershing Square could get two seats on the new Zoetis board. The sources asked not to be named because they are not permitted to discuss them publicly.

Two of the sources said Zoetis may increase the size of its board from nine to 11 to accommodate the Pershing Square representatives, and said the new board members could push for better cost controls and ultimately a sale to another firm. The sources said that the two sides are still interviewing candidates.

Zoetis and Pershing Square declined to comment.

Ackman’s approach to Zoetis is similar to increasingly popular strategies chosen by other powerful activist investors like Carl Icahn and Nelson Peltz, who have been quietly demanding changes at companies around the board room table.

Some of Ackman’s past moves have been marked by more fiery public campaigns, including his efforts to convince Botox maker Allergan Inc. to sell to rival Valeant Pharmaceuticals last year. Pershing Square was the biggest owner in Allergan, making a bet that turned out to be his firm’s most profitable to date even though Allergan refused to combine with Valeant and sold itself instead to Actavis Plc. Pershing Square had no board seats at Allergan.

Two sources said a Pershing Square contingent on the new Zoetis board could push for a sale of Zoetis in due time. Valeant has been mentioned by industry investors as a possible buyer even though Valeant’s chief executive, Michael Pearson, has denied interest in Zoetis.

They said that one of the new Zoetis board members would likely be Pershing Square partner and Ackman business school friend William Doyle, who introduced the billionaire investor to Pearson before the Allergan bet.

Doyle is a former McKinsey & Co. consultant with a science background who as a board member could provide valuable insight into possible suitors who might want to bid for Zoetis down the line, one of the sources said.

Shares of Zoetis, which has a market capitalization of $22 billion, have gained 38 percent during the company’s less than two-year lifetime.

Ackman’s past shows he’s willing to wait for a bigger payoff. He held a stake in liquor company BEAM for 3-1/2 years, for example, before it was taken over a year ago by Suntory, yielding him a 72 percent gain.

In a letter to clients late last year, Ackman called Zoetis a “scarce asset” and compared it to BEAM.

Pershing Square, which was one of the top-performing large hedge funds in 2014, with a 38 percent return, is to hold its annual investor dinner in New York on Thursday. Some more discussion of the Zoetis investment, code-named “Superman” by Ackman’s team before the investment became public, is possible.

Ackman built his stake in Zoetis at the same time that former Pershing Square analyst Scott Ferguson built a 1.6 percent stake through his hedge fund Sachem Head Capital Management.

Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis and Leslie Adler

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