Bill Ackman comes up with some interesting ideas and this time he's trying to unlock value at Target ($TGT). He manages the billion dollar hedge fund Pershing Square Capital Management (SEC filings) which owns close to 10% of the company. I embedded a video of him on Charlie Rose a few days ago here. He's trying to unlock the value of Target's illiquid real estate by spinning off <20% into a real estate investment trust (TIP REIT) at a discount. The plan would be to spin off the rest to shareholders at a later date. He believes Target would realize the real estate value by allowing this new entity to trade freely alongside REIT and "Big Box Ground Lease" EV/EBITDA multiples on the market. Which makes sense.
Also from his presentation he believes Target would realize higher free cash flows by a) shifting land capex to the REIT and b) writing off the after tax rent expense since Target would be paying rent to this newly formed entity. Which would save he believes about $888 million.
The revised transaction webcast w/ slides from 11/19/2008 can be found here. If that doesn't come up try here which has links to both of his webcasts and slide pdf files. Here is the revised transaction pdf file. Hopefully the links still work in the future.
It would be an interesting new high yield instrument with a very clean balance sheet. Plus he also points out that the REIT's dividend would rise with inflation or consumer price index (CPI). But if the full transaction went through would retail sales turn around in time to help out with the new rent (ebitda) payout? Look what happened to Mervyns!
1. Developers Diversified Realty and Macquarie DDR Trust Announce Acquisition of Mervyns Real Estate Portfolio,
2. Inland Western Announces Acquisition of 25 Mervyns Properties.
3. Macquarie DDR Trust - Mervyns announces restructure
4. Mervyns files for Chapter 11 bankruptcy
Ackman explained in the presentation that Target had enough EBITDAR coverage to withstand a big retail sales squeeze. Plus Target is obviously a better discount retailer than Mervyns. He also talked about selling off credit card receivables to raise even more cash to pay down debt. Their 53% ownership (other half owned by JP Morgan) of the receivables could yield a $4.4 Billion book value. Listen to his webcast and look at the presentation. So would Target be better off collecting income from risky, yet favorable spreads or raising cash to pay down debt? Plus the Fed is about to extend credit to consumers. Bill Ackman did say it could be tough for this type of transaction to take place during this market environment.