Upslope Capital recently published its Q4 investor letter in which the investment firm discussed important changes to its portfolio positions during the quarter. Among the key changes is initiating a short position in Crown Holdings, Inc. (NYSE:CCK), a $7.4-billion consumer packaging company based in Philadelphia, Pennsylvania. Let’s take a look at Upslope Capital’s commentary on Crown Holdings.

George Livadas, the founder and portfolio manager of Upslope Capital, wasn’t happy with Crown Holdings’s bet to acquire Signode Industrial Group for $3.91 billion in cash. He writes in the letter:

Since inception of Upslope’s strategy (at a prior firm), Crown has been one of our largest long positions. However, a large acquisition in an unrelated business, announced just six days before Christmas ticked the ‘very questionable capital allocation’ box for me. Crown’s $4 bn acquisition of Signode – an industrial/transit packaging company – undercut a number of the reasons I (and I suspect other shareholders) liked the stock: predictable, a cyclical cash flows, de-leveraging, ramping share buybacks, and the prospect of a dividend. The deal, which added a materially cyclical business and a significant amount of debt, negated each of these attributes.

Why did Upslope Capital decide to open a short position in Crown Holdings, Inc.? Livadas says:

Most of the time, when I decide to exit a long position, flipping and initiating a short position is not actively considered. However, in my view, there are few more obvious ‘green-lights’ to short a stock than a questionable, seemingly empire-building acquisition. While it’s possible Signode will ultimately be a win for Crown, I believe the odds favor value destruction due to the flimsy strategic rationale. As one analyst asked during Crown’s call announcing the deal: “how does Crown become a better company…[with] Signode in the portfolio?” Management did not have a good answer.