Pershing Square Pitches Target Land Leaseback

James Mammarella, November 3, 2008

New York —Activist investor William Ackman mounted a public presentation here last week as his firm Pershing Square Capital Management proposed a tax-free spin-off to create a new owner of the land under the stores and warehouses owned by Target.

Target owns about 95% of its buildings and about 85% of the land under them, Ackman estimated. By spinning off the land it owns to a specialized real estate investment trust (REIT) and then renting it in a 75-year master ground lease, he projected that Target would cut its debt and capital outlays, free up cash, boost return on capital, and improve its valuation and stock price. All at little risk, Ackman added.

Both Target and the new entity, dubbed Target Inflation Protected REIT or TIP REIT, would earn more on their invested capital — enough to double the share value within a year, Pershing predicted.

The transaction would also increase the dividend paid to Target shareholders — who would also participate as shareholders of the TIP REIT — from 60 cents per share this year to $1.86 in 2009, he said.

The presentation estimated that Target owns some $39 billion in buildings and land — but the market only assigns that asset a value perhaps a third of that. The challenge, said Ackman, is for Target to tap that value fully, while maintaining control over its physical base.

Prior to the event, Target management had issued a statement, in which it noted, “Target has been evaluating these ideas with the assistance of outside advisors, including Goldman Sachs.”

After Ackman's presentation, Target issued a second statement, saying analysis of the proposal “raises serious concerns on a number of important issues.” Among these, Target cited accuracy of valuations, reduction of financial flexibility, potential jeopardy to Target's debt ratings, tax implications, and “the risk of diverting management's focus away from core business operations over an extended time period to execute such a complex transaction, particularly in the current environment.”

Ackman's earlier prompting helped move1,684-store Target to sell about half its credit-card receivables to JPMorgan Chase this year in a deal valued at $3.6 billion.

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