Monday, October 11, 2010

A Busy Week for Bill Ackman

Last week, activist investor Bill Ackman, founder of Pershing Square Capital Management, was particularly busy. Along with being named the future chairman of the newly formed Howard Hughes Corporation, Ackman filed two Schedule 13D statements: one for J.C. Penney and another for Fortune Brands. Ackman believes that both J.C. Penney and Fortune are "undervalued" and represent "attractive investment[s]". In Item 4 of both filings, Pershing Square states that it "expect[s] to engage in discussions with management, the board, other stockholders of the Issuer and other relevant parties concerning the business, assets, capitalization, financial condition, operations, governance, management, strategy and future plans of the Issuer".  

Hedge Fund Solutions has been closely tracking Pershing Square's activist investments:

General Growth Properties, Inc. ("GGP")
23,953,782 Common Shares (7.5% of the outstanding Common Shares)
54,907,669 Common Shares under certain cash-settled total return swaps

Bill Ackman has been in charge of General Growth's bankruptcy reorganization since the company first entered Chapter 11 in April 2009. Under the reorganization plan, GGP will become two separate companies, financed by $8.5 billion from Pershing Square and other investors. One company will be called General Growth and manage 185 shopping malls; another will be called The Howard Hughes Corporation. The latter spin-off will will consist of a portfolio of real estate assets, master planned communities, malls, GGP's Chicago headquarters, and will be managed by a nine member board. On October 8, 2010, GGP announced that Ackman will become the chairman of The Howard Hughes Corporation.

In a press release, Ackman stated, "I am extremely pleased that we have assembled such an experienced, talented and dynamic group of individuals to serve as directors… I also believe the Howard Hughes name -- which reflects the success and vision of one of our country's greatest entrepreneurs -- is a fitting brand for this world-class portfolio of real estate assets. We look forward to create long-term value for our shareholders"

According to Reuters, "Pershing Square will own 9.5% of Hughes when it emerges from bankruptcy", which GGP expects to occur in November.

General Growth Properties, Inc. (GGP) is a self-managed real estate investment trust (REIT). The Company has ownership interest in, or management responsibility for, over 200 regional shopping malls in 43 states, as well as ownership in master planned communities and commercial office buildings. GGP’s business is focused in two main areas: Retail and Other, which includes the operation, development and management of retail and other rental property, primarily shopping centers and Master Planned Communities, which includes the development and sale of land, primarily in large-scale, long-term community development projects in and around Columbia, Maryland; Summerlin, Nevada, and Houston, Texas and its one residential condominium project located in Natick (Boston), Massachusetts. All of its business is conducted through GGP Limited Partnership (the Operating Partnership or GGPLP).

J.C. Penney Company, Inc. ("JCP")

39,075,771 Common Shares and 4,156,700 American-style call options (16.5% of the outstanding Common Shares)
602,600 notional shares of Common Shares under certain cash-settled total return swaps

Pershing Square started purchasing shares of JCP since August 17, 2010. The activist hedge fund continued to hold below 5% of JCP until September 28 when it purchased call options to 4 million shares. SEC law stipulates that investors have within 10 days to file a Schedule 13D after accumulating 5% or more of a public company's stock. Toward this end, after exceeding the threshold, Ackman started rapidly purchasing JCP to the tune of 23 million additional shares, ~4.2 million American-style call options, and 602,000 cash-settled total return swaps, bringing his aggregate economic exposure to 16.8%. The options' weighted average strike price is $26.23--most of which expire next May; the remainder in January 2012. Pershing Square paid approximately $903 million for its stake in JCP.

Stephen Roth's Vornado Reality Trust also filed a Schedule 13D, revealing its 9.9% ownership of JCP. Vornado is a real estate investment trust (REIT) which owns over 100 million square feet of commercial real estate. Ackman states that he "and the Vornado… intend to consult in connection with each other on strategic matters relating to [J.C. Penney] and their investment in the Common Stock."

Although Ackman has not yet indicated what changes he will specifically push for in JCP, based upon his previous activity with Target and McDonald's, his current investment in General Growth Properties, as well as his overall form of shareholder activism, it is likely that he will focus on real estate catalysts. In his activist campaign against McDonald's Corporation, Ackman stated that the company should not be in the business of operating its own stores. The shift away from a capital-intensive business model, Ackman argued, would allow for McDonald's to repurchase a greater number of its shares and pay out larger dividends to shareholders. For Target Corporation, real estate again was the area of concern for Pershing Square. Ackman proposed an elaborate scheme for Target whereby the company would sell its credit-card business and manage its real estate in a spin-off REIT. Ultimately, Pershing Square lost all of the five board seats that it fought for; however, Target repurchased $10 billion of its shares and sold approximately 50% of its credit-card business. J.C. Penney could very well represent an opportunity for the activist investor to heal the scars earned during the Target battle. In its latest quarterly report, the company stated that it has ~$5.3 billion worth of property and equipment.

In addition to focusing on real estate catalysts, Ackman is also likely to push JCP to pay back some of its debt, distribute dividends, repurchase shares, or some combination of the aforementioned. As of July 31, 2010, the company currently has $2 billion worth of cash and cash equivalents. Furthermore, the retailer has a plan that offers golden parachutes to executives in the event that an investor accumulates more than 20% of the company's stock. (Important Note: a "Group" filing from Pershing and Vornado would exceed the 20% ownership threshold and trigger the right to issue change of control payments) CEO Myron Ullman's golden parachute is worth 2.99 times his target bonus and annual salary. Therefore, corporate governance and "excessive" executive compensation arrangements could be another source of contention for J.C. Penney if it needs to defends itself against shareholder activism.

Lastly, the retailer's stock has struggled to perform on a comparable basis against larger companies like Macy's and Kohl's. According to The New York Times, prior to Ackman's involvement, over the last 12 months J.C. Penney's stock has decreased 7.6%.

J. C. Penney Company, Inc. (JCP) is a holding company whose principal operating subsidiary is J. C. Penney Corporation, Inc. (JCP). The Company is a retailer, operating 1,108 JCPenney department stores in 49 states and Puerto Rico as of January 30, 2010. Its business consists of selling merchandise and services to consumers through its department stores and Direct (Internet/catalog) channels. JCPenney sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products through Sephora inside JCPenney and home furnishings. In addition, its department stores provide with services, such as styling salon, optical, portrait photography and custom decorating.

Fortune Brands ("FO")

16,668,636 Common Shares (10.9% of the outstanding Common Shares)
603,486 notional shares of Common Shares under certain cash-settled total return swaps

Unlike J.C. Penney, Fortune Brands has done incredibly well, rising 30% this year; as a result, it is unsuspecting that an investor would press for changes in such a company. However, Ackman is not your typical investor. He is an activist investor who has taken on well-managed companies in the past (read: Target) and has been relentless in his campaigns from beginning to end--Fortune Brands will probably be no exception.

In particular, the company's eclectic brand mix makes it highly vulnerable to spin-off proposals. Fortune has a golf division, which owns Titleist, FootJoy, Scotty Cameron Putters, and Pinnacle Golf; a home and security division, which owns Waterloo Industries, Masterbrand Cabinets, Moen, Master Lock, American Lock, Fypon, Therma-Tru Doors, Vista Window Company, and Simonton Windows; and lastly a spirits division, particularly noted for its Jim Beam, Sauza tequila, and Maker's Mark bourbon products. Based upon the focus of Pershing Square's previous activist campaigns, Ackman is likely to argue that the disharmony of the company's brand mix is evidence that Fortune will be more valuable existing as separate entities.

Fortune Brands, Inc. (Fortune Brands) is a holding company with operating companies engaged in the manufacture, production and sale of distilled spirits, home and security products, and golf products. Fortune Brands operates in three segments: Spirits, Home & Security and Golf. In June 2009, the Company acquired the EFFEN vodka brand and related assets from the Sazerac Company, Inc. In June 2009, the Company sold the Old Taylor whiskey brand and assets to Sazerac Company, Inc.

Images extracted from (1), (2), (3), and (4).

Posted by David Schatz, Hedge Fund Solutions