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Archive for the ‘Pershing Square Capital Management’ Category

Bill Ackman’s Pershing Square Capital Management has opened up an 11% stake in Fortune Brands, Inc. (NYSE:FO). The 13D filed 4 October doesn’t disclose much about the position, but the NYTimes has a great REUTERS BREAKINGVIEWS article Fortune’s Links discussing the position:

After a round of golf with his Titleist clubs, a guy pops into the clubhouse for a Maker’s Mark neat before rinsing off under a Moen showerhead. That’s about the closest Fortune Brands comes to synergies. No wonder the conglomerate makes such a tempting target for an activist investor.

Shareholders won’t be alone rooting for Bill Ackman, whose Pershing Square Capital Management hedge fund revealed an 11 percent stake last week, to break Fortune up. Diageo, the big alcohol company, may one day toast him. The company has long wanted a major bourbon brand. Fortune has two: Maker’s Mark and Jim Beam.

Hypothetical examples aside, Fortune’s three main divisions — spirits, golf equipment and home products — don’t hang together naturally. And there are potentially better, more motivated owners for them. But drinks, accounting for some two-thirds of Fortune’s profit, deserves the primary focus.

The group — which also sells Hornitos tequila, Courvoisier Cognac and Canadian Club whisky — is expected to generate earnings before interest, taxes, depreciation and amortization, a business measure known as Ebitda, of $635 million this year, according to Longbow Research. At 15 times — less than the 20 times Pernod Ricard paid for Sweden’s Absolut vodka — Diageo’s price tag could come to about $9.5 billion.

Subtract that from Fortune’s enterprise value of $12 billion (an $8.4 billion market cap plus $3.6 billion of debt) and the remaining two divisions would be trading at around four times Ebitda, as estimated by Longbow. Citigroup notes that the sporting goods maker Adidas and home products manufacturers like Masco fetch valuations of eight to nine times Ebitda.

Diageo would scramble to pay a top-shelf price for a portfolio that includes some less attractive brands, a few in categories it already dominates. But a handful of smaller players like Gruppo Campari have shown an interest in what insiders call “tail brands.” That would allow Diageo to finance part of a deal with divestitures.

It’s too soon to say for sure whether Mr. Ackman wants to carve up Fortune. But with a thirsty buyer waiting, and a corporate strategy best exemplified by a tipsy golfer in need of a shower, the odds are good.

No position.

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Zero Hedge has a post on Pershing Square’s most recent 13F.  The most notable change is a big position in Citigroup:

He’s also increased his position in Kraft, which is interesting because Nelson Peltz has completely sold out of Trian’s position:

Trian has been whittling down its stake in Kraft since last year, when Kraft made a hostile bid for Cadbury. Kraft later acquired Cadbury for roughly $19 billion in February. Warren Buffett, Kraft’s largest shareholder, was not a big fan of the deal.

In 2007, Peltz pushed for changes at Kraft when he first reported owning a large stake in the world’s No. 2 food company. He eventually won two seats on its board.

Kraft reported Aug. 5 second-quarter profit rose 13% to $937 million as it reaped the benefit of Cadbury and overhead costs savings.

The profit topped the consensus analysts’ estimate. But Kraft softened its sales outlook, citing higher Cadbury inventories and aggressive discounting at U.S. food retailers.

Kraft shares closed Friday at $29.50. Shares are up more than 8% for 2010.

No positions.

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Bill Ackman’s Pershing Square has filed the presentation to be delivered to the shareholders of Target Corporation (NYSE: TGT) at TGT’s 2009 Annual Meeting of Shareholders. See our post TGT archive here.

See Bloomberg’s interview with Bill Ackman about his slate (via The Manual of Ideas):

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In Ackman and Target Tangle in Ballot Brawl, The New York Times’ Dealbook has coverage of the “universal ballot” spat between William A. Ackman’s Pershing Square Capital and Target Corporation (NYSE:TGT).  A candidate on Pershing Square’s ticket, Ronald J. Gilson, who is a law professor at Stanford University and an expert in corporate governance, has proposed that TGT place all the nominees running for election to the board on a single ballot, the so-called “universal ballot.” Presently, shareholders in most proxy fights receive two proxy cards and can vote only for one slate of candidates. Gilson’s proposal would give TGT’s shareholders the chance to pick candidates from both management and Pershing Square’s proxies.

Dealbook reports that the shareholder advisory firm RickMetrics Group support the universal ballot proposal:

“Pershing appears to be astutely exploiting the current pro-(shareholder)-choice zeitgeist, and puts Target on its back foot,” RiskMetrics said in a research note issued Tuesday. “It will be challenging for Target, absent some sort of unwaivable legal impediment, to argue against Pershing’s proposal without coming across as anti-shareholder.”

Here is Gilson’s letter to the board:

RONALD J. GILSON

Charles J. Meyers Professor
of Law and Business

April 21, 2009

Mr. Gregg Steinhafel
Chairman of the Board
Chief Executive Officer and President
Mr. Timothy R. Baer
Executive Vice President
Corporate Secretary and General Counsel
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re: Proposal to Use a Universal Proxy at the2009 Annual Meeting of Shareholders

Dear Messrs. Steinhafel and Baer:

On March 17, 2009, Pershing Square Capital Management, L.P. publicly announced that its affiliates had delivered a Notice of Nomination to you proposing to nominate five individuals for election as directors of Target at the company’s 2009 Annual Meeting of Shareholders. I am one of those nominees.

Both Target and Pershing Square have a unique opportunity to make this election historic from a corporate governance perspective. As you may know, the press has reported that SEC chair Mary Schapiro has directed the Commission’s staff to draft proposals for rules governing shareholder proxy access by mid-May 2009. I expect those proposed rules will provide the opportunity for the use of a universal proxy card whereby shareholders can choose – on one proxy card – from among the candidates nominated both by the company and by shareholders. The benefit to shareholders, who may want to choose members from both slates, would be substantial.

I first wrote about the need to remove the barriers to non-control proxy contests some 19 years ago.1 The occasion then was to recommend a change in the bona fide nominee rule to allow a shareholder running a short slate to include the names of the company’s nominees on the shareholder’s proxy card. That recommendation was accepted by the SEC, as I recall at the urging of Mary Schapiro, who was then a Commissioner.

Target and Pershing Square now have the opportunity to proactively provide good corporate governance to the Target shareholders by making it convenient for them to make a choice in what, in the end, is their election. This is not a control contest. The qualifications of the candidates will be fully vetted by the time of the May 28th election, and Target shareholders are entirely capable of assessing the candidates and making a choice. There is simply no excuse to deny shareholders the benefit of the use of a universal proxy card. The alternative will make it procedurally more difficult for Target shareholders to exercise their franchise. This is a problem that we, together, have the power to solve.

I have received assurance from Pershing Square that they would support a universal proxy card for Target’s upcoming Annual Meeting. I now seek the same from you. In the alterative, I ask that you consider allowing the company’s nominees to be named on the Pershing Square Gold proxy card. In either instance, shareholders would have the benefit of being able to choose the best nominees for the job. Target now has the opportunity to hold an election that will be a credit to the company’s corporate governance. I urge you to carefully consider this proposal and do the right thing for Target shareholders.

Very truly yours,

/s/ Ronald J. Gilson

1 Ronald J. Gilson, Lilli A. Gordon & John Pound, How the Proxy Rules Discourage Constructive Engagement: Regulatory Barriers to Electing a Minority of Directors, 17 Journal of Corporate Law 29 (with L. Gordon & J. Pound) (1992).

Here is TGT’s response:

TARGET CORPORATION COMMENTS ON LETTER FROM PERSHING SQUARE NOMINEE RONALD GILSON

MINNEAPOLIS, April 21, 2009 – Target Corporation (NYSE:TGT) today commented on the letter from Pershing Square nominee, Professor Ronald J. Gilson, that Pershing Square filed with the Securities and Exchange Commission (“SEC”). In the letter, Professor Gilson references possible future SEC changes to the federal proxy rules and proposes the use of a universal proxy card by Target and Pershing Square. Pershing Square has initiated a proxy contest to elect its own nominees, including Professor Gilson, to Target’s Board of Directors.

The company said, “We believe Professor Gilson’s proposal, coming at this stage of the proxy contest, would cause delay and confusion. Shareholders have a clear choice between our independent nominees on our WHITE proxy card and Bill Ackman’s slate on Pershing Square’s gold proxy card. We note, as does Professor Gilson, that the SEC may be considering a proxy access proposal. Any such proposal should be allowed to proceed on an appropriate timetable allowing for careful review and consideration by the SEC of a number of issues, including whether proxy access should be available to an entity, like Pershing Square, which has initiated its own proxy contest. In the meantime, the current proxy rules provide a framework for the conduct of the proxy voting process that is perfectly adequate for resolving the issues that Pershing Square is raising.

“With Target’s Annual Meeting only five weeks away, we believe our shareholders clearly understand the choice between our independent directors and the Pershing Square slate. We will be mailing our proxy materials shortly and encourage our shareholders to use our WHITE proxy card to support the reelection of the directors nominated by our Board.”

Shareholders who have questions about voting or the matters to be voted upon at the Annual Meeting are encouraged to call MacKenzie Partners, Inc. at 800-322-2885 Toll-Free or Georgeson at 866-295-8105 Toll-Free. The company will hold the 2009 Annual Meeting of Shareholders on Thursday, May 28, 2009. Target will be distributing proxy materials to shareholders of record as of March 30, 2009.

And Pershing Square’s response:

Pershing Square Comments on
Target’s Objection to Universal Ballot Proposal

New York – Pershing Square Capital Management, L.P., and Professor Ronald J. Gilson, who has been nominated by Pershing Square to serve as an independent director of Target Corporation (NYSE: TGT), expressed disappointment with Target’s response to Professor Gilson’s letter seeking the use of a universal proxy card, naming both Target’s and Pershing Square’s nominees, for use in connection with Target’s upcoming Annual Meeting of Shareholders.

“Rather than causing confusion, the proposal would eliminate confusion by giving shareholders something they would otherwise lack – the simple chance to choose the best among all of the candidates, rather than between two slates of candidates.” commented Professor Gilson. Pershing Square believes that the adoption by both Target and Pershing Square of a universal proxy card would reflect best-in-class corporate governance, and would result in the most qualified directors being elected, regardless of which proxy card a shareholder returned.

On the universal proxy card proposal, Bill Ackman of Pershing Square said, “it’s important for shareholders to have a choice so that they can vote for whichever candidates they prefer, regardless of which proxy card they submit. Pershing Square wants to provide shareholders with that freedom of choice. We are hoping Target will as well.”

Because proxy cards have not yet been mailed, and because new proxy cards are easy to print from the company’s or Pershing Square’s website, Pershing Square does not believe that adopting a universal proxy card would add any material expense to the proxy contest. Pershing Square also noted that it would be willing to bear the additional printing costs of the universal proxy cards.

Furthermore, Target’s public explanation for its refusal to use a universal proxy card does not address why Target would not permit its nominees to be named on Pershing Square’s Gold proxy card. Indeed, based on the timing of Target’s public response, Pershing Square questions how the matter could have been raised with its Board of Directors and whether Target’s nominees were given the opportunity to consent to being named on a universal proxy card or Pershing Square’s Gold proxy card.

Pershing Square requests Target’s nominees for permission to be included on the Gold proxy card in the event that the company will not consent to a universal proxy card.

[Full Disclosure:  We do not have a holding in TGT. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Steven M. Davidoff, The Deal Professor, has an analysis of the proxy fight between William. A. Ackman’s Pershing Square Capital and Target Corporation (NYSE:TGT) in his NYTimes.com DealBook column, Target’s Challenge.  Pershing Square has fund dedicated to its investment in TGT, which Davidoff says controls 7.9% of the company through stock and call options. TGT has a staggered board with twelve directors, four of whom are up for reelection for this year’s meeting, which is scheduled for May 28. Pershing Square, claiming that TGT’s board really comprises thirteen members, has submitted a slate comprising five nominees.

Davidoff writes that Pershing Square’s claim of an extra member relates to Robert J. Ulrich’s resignation from the board in January this year:

Pershing contends that, under Target’s articles of incorporation, the board does not automatically shrink as a result of a resignation; rather, a vacancy is created – in this case, a vacancy for a 13th director to be elected this year.

Pershing bases its claim on Article VI of Target’s articles of incorporation. The article states that:

The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors consisting of not less than five nor more than twenty-one persons, who need not be shareholders. The number of directors may be increased by the shareholders or Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of this Article VI; provided, however, that any change in the number of directors on the Board of Directors (including, without limitation, changes at annual meetings of shareholders) shall be approved by the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as defined in Article IV), voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors.”

(emphasis added)

Pershing bases its argument on the italicized language, which states that only a 75 percent vote of the shareholders can reduce the size of the board. Target has disputed this claim, presumably relying instead upon the clause after the italicized language, which provides the power to the board to approve the change.

Target is claiming that the clause modifies the entire requirement for shareholder approval. In contrast, I presume that Pershing is claiming that this language modifies only the part about a 75 percent vote requirement, and otherwise a shareholder vote is mandatory. The ambiguity is certainly there, and given the penchant of courts to interpret articles and bylaws against the drafting companies and in favor of the shareholder franchise, Pershing has a viable claim. It would be more certain if Target were incorporated in Delaware, but it is actually incorporated in Minnesota.

Last week, Pershing offered to arbitrate the issue. Instead, Target has simply and rather cleverly put the matter to its shareholders in its proxy filed Monday. Target has ceded the issue to its shareholders, and asserted that because the change has been approved by a majority of the board of directors, it now only needs the affirmative vote of the majority of the outstanding shares of Target common stock voting at a meeting where the quorum requirement is met. Thus, Target has avoided an initial litigation skirmish that it had a real chance of losing, while appearing shareholder-friendly at the same time. A nice trick.

A nice trick indeed. It seems to us that the net effect of TGT’s fancy footwork is to reduce the threshold for the resolution to shrink the board from 75% of the votes entitled to be cast to a simple majority, which could have been their intention all along. As we’ve discussed recently in the context of the Biotechnology Value Fund (BVF) proxy fight for the board of Avigen Inc (NASDAQ:AVGN) (see our post archive here), achieving a supermajority is nigh on impossible. In BVF’s case it was two-thirds, rather than three-quarters, of the votes entitled to be cast. BVF was unable to get over the line, even at that slightly lower threshold, though they held around 30% of AVGN’s stock and therefore only needed the support of a little over half of the other stockholders. We believe that BVF was ultimately unsuccessful because 30% of AVGN’s stockholders neglected to vote at all, and those votes not cast counted for the incumbents. TGT is clearly concerned it might find itself in a similar position. Even though TGT has the distinct advantage of being the incumbent, they clearly recognize that the 75% threshold is improbably high. At such a high threshold, votes not cast can be fatal to the resolution, so they’ve taken measures to reduce the threshold to a simple majority. We think this will still prove too high for the incumbents, but it’s a nice card to play if you have it in your hand to do so. Davidoff notes that only Pershing Square has nominated a fifth director to take office. This means that if the resolution does not pass and TGT’s board remains at thirteen members, one of Pershing Square’s nominees is automatically elected. We’ll watch the outcome with interest.

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Pershing Square Capital Management hosted its Annual Investor Dinner in late January (Dealbreaker has a copy of the presentation (.pdf).) We’ve previously written about Pershing Square in relation to its position in Borders Group Inc (NYSE:BGP). It was not one of our better calls.

Pershing Square’s investment strategy makes for interesting reading:

We seek simple, predictable, free-cash-flow-generative businesses that trade at a large discount to intrinsic value

  • Mid-and large-cap companies
  • Typically not controlled
  • Minimal capital markets dependency
  • Typically low financial leverage and modest economic sensitivity
  • Often hidden value in asset base
  • Catalyst for value creation which we can often effectuate

At the right price, we may waive one or more of the above criteria
Our selection process is designed to help avoid permanent loss of capital while generating attractive long-term returns.

Pershing Square’s investment strategy is more Buffett than Graham (or more Fisher than Graham), but note that they do seek value that may be hidden in assets. Pershing Square’s returns have been extraordinary, as this slide attests:

pershing-square-cumulative-net-returns1

Although not all Pershing Square’s positions were winners:

pershing-square-2008-winners-and-losers

(via Dealbreaker)

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Borders Group, Inc. (NYSE:BGP) has released its 10Q for the third quarter. We’ve previously posted about BGP here. When we first looked at it, we said that it presented a rare opportunity to invest in a stock with a well-known brand alongside one of the best activist investors in the US, William A. Ackman of Pershing Square Capital Management, L.P. At that time, BGP’s market capitalization was $39.4M (at the previous day’s close of $0.65) and we estimated that its liquidation value was some 250% higher at $135M or $2.23 per share. Well, we’ve now had an opportunity to review the 10Q for the third quarter and the results aren’t pretty. In fact, we now believe that there is a risk that the assets may have no value in a liquidation and we’re out.

The updated value proposition

BGP has made a $175M loss for the quarter, operating cash flow was negative in the amount of $51M and the company has taken on $55M in new debt. By way of contrast, in the last quarter to August, while the company made a loss of $9M, operating cash flow was positive in the amount of $77M and the company retired $129M in debt. Our summary analysis of the balance she

et is set out below (the “Carrying” column shows the assets as they are carried in the financial statements, and the “Liquidating” column shows our estimate of the value of the assets in a liquidation):

bgp-q3-summaryBGP’s value remains concentrated in its inventory and property, plant and equipment, both of which are up slightly on the last quarter. Compared to $18.01 per share in Q2, inventory is now $20.75 per share, which we’ve written down by two-thirds to $13.91 per share (written down value of $12.07 in Q2). Property, plant and equipment is now carried at $27.18 per share compared to $27.04 per share in Q2. We have written it down the by half to $13.59 per share (slightly higher than the written down value of $13.52 per share in Q2). While its assets have increased slightly, the real problem for BGP is the growth in its substantial liabilities. Total liabilities now stand at $29.83 per share, up from $25.92 per share, the debt portion of which is up from $7.69 per share to $8.68 per share.

Our previous estimate for the liquidating value of BGP was around $2.23 per share. We now estimate that its liquidating value is -$9.6M or $-0.16 per share. This is on the basis of a very conservative treatment of its tangible assets and does not take into account BGP’s intangibles, like consumer brand recognition, which must have some residual value. We also note that BGP has a seasonal business, and this most recent quarter sees BGP in a much better position than the same quarter last year, at which time we estimate that its liquidating value was closer to -$4.87 per share. We think there’s a good chance that BGP will have some substantial asset value next year, and that it’s worth more than its liquidation value, but on our very conservative treatment of its assets, it has a negative liquidating value at this point in time.

As a brief diversion, set out below is a summary financial analysis of BGP without any discount applied to the assets (both the “Carrying” and “Liquidating” columns shows the assets as they are carried in the financial statements):

bgp-q3-summary-carrying-valueIn this analysis, with no discount applied to the carrying value of the assets, BGP appears wildly undervalued. We prefer our much more conservative estimate of liquidating value for two reasons:

  1. We think the discounted values are more likely to be right; and
  2. If we’re wrong in our estimate, we hope that we’ve applied a sufficient discount that we’re wrong on the upside, and not the down side. Valuing assets in liquidation is not an exact science. Prior to the actual sale, we don’t know with any certainty how much any given asset might yield. If we were to value assets at close to their carrying values, we think that more often than not we’d be disappointed.

You can read more about our undervalued asset situations philosophy on our About Greenbackd page and our rationale and method for calculating values on our About liquidation value investing page.

Conclusion

Our overly optimistic conclusion when we first wrote about BGP deserves repeating here (if only to stop us doing it again). We said, “It’s not often that the stars align like this: a stock with a well-known brand selling at less than a third of its value in a liquidation with one of the best activist investors in the US controlling almost a third of its outstanding stock. BGP has already embarked on its value enhancing transformation. We believe that, given time, BGP will be worth more than its liquidation value, but, if we’re wrong, it’s still trading at a third of that value, which is a bargain.” We even bolded that last part, which, in retrospect, we regret. While we still agree that BGP has a well-known brand, Will Ackman is one of the best activist investors in the US, and BGP will be worth much more than its liquidation value, it’s no longer trading at a third of its liquidation value, so the downside protection is gone. Our focus here is undervalued asset situations, and BGP is not an undervalued asset situation at this time. So that mean we’re out for now. We are, however, going to keep an eye on it for its next few quarters to see if the value returns.

BGP closed yesterday at $0.58. We liked it at $0.65, so we’re down 9.83% on an absolute basis.

The S&P 500 closed yesterday at 904.42 and closed at 816.21 (+10.81%) when we liked BGP, so we’re down 20.64% on a relative basis.

[Disclosure: We have a holding in BGP but we plan to exit it soon. We may acquire it again in the future. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.]

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