Tuesday, October 26, 2010

JCPenney, Fortune Brands Respond to Ackman

Bill Ackman generated considerable enthusiasm and attention at the recent Value Investing Congress. Known for his persistence and aggressive campaigns, Ackman has delivered substantial returns to investors—his fund, Pershing Square, has a historical 24% annual return and $7 billion AUM. He gained public attention from his tense six-year battle against bond insurer MBIA Inc. The activist investor ultimately shorted the company for a net return of more than $1 billion—a fascinating showdown that was later chronicled in Christine Richard’s Confidence Game.  Now Ackman has his eyes set on JCPenney (JCP), Fortune Brands (FO) and General Growth Properties (GGP). Putting his money where his mouth is, Ackman has allocated $2 billion of his fund’s net asset value to taking on esteemed-retailer JCPenney and holding company Fortune Brands.

Thus, it was no surprise that Ackman was the center of attention at the Value Investing Congress. The activist investor first stated that he is bullish on the US economy. Ackman argued that, due to the credit crisis and recession, US companies have been hoarding cash. Cash can be applied to share buybacks, dividend distributions, and other measures that juice up stock price either in the short-term or long-term. (JCP, for example, has $2 billion worth of cash and cash equivalents.) Further, companies are currently undervalued—a quality which makes the environment particularly ripe for activist investing. Ackman added that debt financing is relatively cheap, the improving housing market, revitalization of private equity investments, and so forth, are signs of an improving economy. But what exactly is Ackman likely to push for in JCPenney, Fortune Brands, and General Growth Properties—and how is his investments faring thus far?

Evidently, both the managements of JCP and FO aren’t particularly happy of Pershing Square’s latest 13D findings. Pershing Square currently owns 16.5% of JCP and 10.9% of FO. The two companies have both taken measures to oppose Ackman’s impending proxy battle. Fortune Brands is currently seeking out an investment bank (potentially Credit Suisse) for counsel. Pershing Square has not stated how it specifically aims to reshape the company, but many have speculated that Ackman sees value in spinning-off the company’s divisions from one another.

JCPenney, on the other hand, has taken rather direct actions to defend against shareholder activism. On October 22,  JCP employed a poison pill with a 10% trigger. The company writes, “The Board of Directors authorized the adoption of the Rights Agreement, which has a one-year term, to promote fair and equal treatment of the Company’s stockholders in connection with any initiative to acquire control of the Company and in light of recent rapid accumulations of a significant percentage of the Common Stock”. Notably, the trigger is set just above Vornado Reality Trust’s 9.9% ownership. Stephen Roth, Chairman of Vornado Reality Trust, plans to work alongside Ackman in his activist campaign. Should any investor exceed the 10% threshold, other common stockholders have the right to purchase a fraction of JCP’s preferred shares, thus diluting the 10%+ acquirer’s ownership. The poison pill expires on October 14, 2011. JCPenney’s shares dropped 3% following the news. Lastly, Goldman Sachs and Barclays Capital (financial assistance) and Skadden, Arps, Slate, Meagher & Flom LLP (legal assistance) have been hired to help the retailer defend against Pershing Square’s investment. Ackman has mentioned the following as catalysts to boost shareholder value: JCP’s attractive real estate portfolio, excess cash and non-operating assets, cheapness (trading at 3.5x EBITDA), absence of short-term debt, and low company layoffs (relative to the industry).

The Howard Hughes Corporation, a spin-off of GGP that Ackman will chair, is not going to be a REIT. GGP shareholders’ stock will be converted into 0.0983 shares of the spin-off and one new share of GGP. Howard Hughes’ heirs, who resisted the conversion, were promised $230 million. With $250 million worth of commitments, the Howard Hughes Corporation will focus on developing the South Street Seaport, malls, master planned communities, and GGP’s Chicago headquarters. As of now, Ackman’s investment in GGP has increased 650% to $1.5 billion.

While Ackman’s recent stock returns have been considerable, only time will tell whether or not he will be able to generate long-term value for investors and shareholder of JCPenney, Fortune Brands, and General Growth Property. Based on his history, it really can go either way. One thing is for sure, if history repeats, the proxy battles will be exciting to follow.

Posted by David Schatz