Hedge fund magnate Bill Ackman of Pershing Square Capital recently had his bid to seat five new directors on the board of Target (NYS: TGT) soundly rejected by shareholders. Management has fought Ackman tooth and nail. Ackman's strategy has been fairly simple. He believes Target should sell off key real estate assets with lease backs for his stores. He also believes Target should, as much as possible, get out of the credit card business by letting a specialist company run that practice. The board has told Big Bill to just buzz off. We are seeing a current Piqqem Sentiment of Target as Neutral with actually not a ton of interest, implying no one sees a big move in the stock coming.The reality is, Ackman's Target (NYSE:TGT)strategy is inappropriate at present, a distraction at best and a really silly way to run the company at worst. The basic math of commercial real estate right now is simple. Values everywhere are plunging as the refinance market for CMBS continues to remain seized up. Even for grade A properties,like some of those that Target is selling, prices would necessarily come in lower due to the simple reality that its impossible to get decent financing for big purchases of anything related to real estate.
The idea of spinning off the real estate assets worked great in a bubble real estate market but its a lousy idea in a declining asset market --- the opposite of buying assets when they are cheap. Another open question is whether Target's woes -- the company has lagged other discount retailers -- are self inflicted or secular. Arch-rival Wal-Mart has mainly seen sales growth in groceries, an area where Target lags far behind. Target has begun to turn its credit card portfolio around, according to company CEO Greg Steinhafel. Not that this makes Target a screaming buy. After all, Ackman has lost several billions (estimated) on Target through one of his hedge funds that only held Target shares and scarfed up options to maximize leverage -- options that have come back to bite Ackman as they have expired.
All of this said, Target's shares will likely rebound nicely with the economy. The merchandise remains high quality. Management is smart. The brand is relatively unsullied and upscale downscale will continue to appeal as American's spend less and save more. So Ackman might get some relief but it won't be by convincing Target management to sell off commercial real estate into the teeth of a rapidly declining market.
Alex Salkever is Director of Research at Piqqem.com, a stock analysis community leveraged to the Wisdom of Crowds.
The idea of spinning off the real estate assets worked great in a bubble real estate market but its a lousy idea in a declining asset market --- the opposite of buying assets when they are cheap. Another open question is whether Target's woes -- the company has lagged other discount retailers -- are self inflicted or secular. Arch-rival Wal-Mart has mainly seen sales growth in groceries, an area where Target lags far behind. Target has begun to turn its credit card portfolio around, according to company CEO Greg Steinhafel. Not that this makes Target a screaming buy. After all, Ackman has lost several billions (estimated) on Target through one of his hedge funds that only held Target shares and scarfed up options to maximize leverage -- options that have come back to bite Ackman as they have expired.
All of this said, Target's shares will likely rebound nicely with the economy. The merchandise remains high quality. Management is smart. The brand is relatively unsullied and upscale downscale will continue to appeal as American's spend less and save more. So Ackman might get some relief but it won't be by convincing Target management to sell off commercial real estate into the teeth of a rapidly declining market.
Alex Salkever is Director of Research at Piqqem.com, a stock analysis community leveraged to the Wisdom of Crowds.
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Reader Comments (Page 1 of 1)
6-03-2009 @ 9:40PM
Jacob said...
I don't think spinning off Target's real estate is a bad idea. Since it's a spin-off and not a sale, there's no value gained or lost either way - it's just transferred into a new entity owned by shareholders. The fact is, Target's real estate is not reflected at all in today's share price, and spinning it off would at least command a multiple for the assets (especially if the TIPS arbitrage idea played out).
Secondly, Pershing Square did not let all the options expire in the Target-only fund. Rather, they ended up rolling out the options into what appeared to be a Jan '11 $35/$65 bull spread (at least the last time I checked). I think this will pay off as Target has outperformed Walmart in recent months and should continue to do so if economic conditions continue to improve.
I think the real story behind the Pershing/Target drama is the problems with corporate elections in America. As Bill Ackman said, shareholders do not really have a choice when it comes to elections, since proxies are non-anonymous and universal proxies are not mandatory. Hopefully, this will change some day and real choice will become available.