Ackman's Plan for Target Real Estate

During his two hour long presentation, Pershing Square Capital Management's, William Ackman made a compelling argument for Target to unlock the equity of its real estate without losing control of its buildings by spinning off the land into a Target Inflation Protected REIT. Ackman's business case revolved around a handful of key points:

1)Target would retain control of its buildings and brand

2)The deal would improve Target's access to capital

3)And decrease its capital needs

The New York Times has more.

William Ackman, the activist investor and hedge-fund manager, proffered an idea on Wednesday that he claimed was worth billions. He wants Target Corporation, the large discount chain, to sell the land underneath its stores to a new unit set up for the purpose. Target, he proposes, would pay rent to the spinoff, with existing Target shareholders gaining stakes in the new real estate business.

The supposed benefit? Mr. Ackman foresees a big increase in the total value the stock market would attach to a sliced-up Target, as much as 74 percent by his reckoning. That would include a payday of several billion dollars for Mr. Ackman's hedge fund, Pershing Square Capital Management, which owns nearly 10 percent of Target.

The potential cost? According to several analysts and Target itself, the complicated new setup would hurt Target's credit rating and thereby raise its cost of borrowing, perhaps undermining the company's ability to survive the economic downturn. And the company believes a sliced-and-diced Target would ultimately have less control over its stores, the lifeblood of the business.

The plan might lead to transitory gains in the short run, but in the long run, “the retailer would be on much shakier ground, so to speak,” wrote Carol Levenson, director of research for Gimme Credit, a bond research firm. In an e-mail message, she added that “with overleveraged retailers going under right and left, and inhospitable lending and commercial paper markets,” the timing of such a transaction could not be worse.


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