Fund That Cashed in on Nook Bets on Marathon Petroleum

NEW YORK (TheStreet) -- Jana Partners, a hedge fund with an activist investing bent, is betting on Marathon Petroleum ( MPC) to be a big payday in 2012.

Jana has been on the right end of several big investments, including the Monday announcement that Barnes & Noble ( BKS) is spinning off its Nook business in a major deal with Microsoft. Jana's bet on Marathon Petroleum specifically is interesting in light of another major Monday deal in the energy space, with the sale of Sunoco to Energy Transfer Partners for $5.3 billion.

David DiDomenico, a partner at Jana, said that the fund has targeted Marathon Petroleum because of the value in the company's logistics and midstream operations, which are hidden in its larger refining business. Before the ETP acquisition, Sunoco was in the process of exiting the refinery business to to focus on energy logistics and infrastructure.

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"In Marathon, what we saw was the perfect mix of assets that we wanted to invest in." DiDomenico said that the company's midstream business will profit from a U.S. energy boom based of shale discoveries, representing 35% of the company's earnings, roughly triple current estimates.

DiDomenico made his comments at the IMN Active-Passive Investor Summit in midtown New York on Monday. DiDomenico said the fund made its investment in November on the heels of Enbridge Energy's decision to reverse the flow of the Seaway Pipeline in the U.S. after buying it from ConocoPhillips. The dip in the spread between WTI crude and Brent crude as a result of the pipeline reversal and a drop in refiners gave Jana Partners a value entrance into Marathon Petroleum's stock in the low $30s, said DiDomenico. The stock was trading above $41 on Monday, though flat on the heels of the Sunoco news.

DiDomenico said the Sunoco deal targets the oil and gas logistics business and the expected growth of the industry as new drilling methods lead to an increase in U.S. energy production.

Last year's spinoffs and sale of El Paso -- Kinder Morgan bought the company in the largest M&A deal of the year -- also targeted the transport of energy. El Paso was a Jana investment.

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Nevertheless, it was a recent non-activist investment that is giving Jana what could be its best recent investment.

On Monday, Jana Partners saw giant profits in one of its newer investments, when Barnes & Noble announced that Microsoft will take a near-20% stake in the spinoff of its Nook digital books and tablets business, in a deal that values the unit at $1.7 billion. Jana recently unveiled a 12% stake in the struggling bookseller, which DiDomenico said the company first built in January.

"Barnes & Noble was not an activist investment," said DiDomenico, who noted that in the firm's analysis, they felt the bookseller's languishing shares in effect gave them an interest in its attractive Nook eReader business for free. "We believe we are in the early innings of an eReader revolution," said DiDomenico. In January, Barnes & Noble said it was exploring a spinoff of the Nook business from its traditional brick and mortar bookselling business after cutting it's 2012 earnings outlook. In Monday's partnership, Microsoft will run Nook on its soon-to-be released Windows 8 operating system and will settle patent related lawsuits.

While Jana Partners had not disclosed support for a spinoff or a full sale of Barnes & Noble in making its investment, DiDomenico said, "the Microsoft investment will fortify the Nook business and position it for success," after the company solidified its position as the second leading eBook business to Amazon's Kindle.

The firm's Barnes & Noble success highlights that Jana Partner is not solely focused on activist investments, targeting just 33% of its portfolio toward change-based causes, noted DiDomenico. Even in those pushes, he said that the firm still needs to see a value in share prices and an investing premise that works even if a change campaign fails. "We don't want to enter any situation where there is only one way out," he said.

In the Marathon Petroleum push, DiDomenico said that Jana Partners is close to realizing added share value after a $10 share gain on the heels of the company's decision to buyback $2 billion in shares and consider an IPO of its midstream businesses in an MLP.

-- Written by Antoine Gara from New York.