Target Corporation (NYSE: TGT) has been engulfed in a proxy battle for the past few months with Bill Ackman’s Pershing Square. The activist hedge fund is seeking to replace the company’s board of directors at the retailers upcoming annual meeting on May 28th, but the outcome of the meeting is far from certain. So, who should shareholders side with in this heated battle between management and investors?
Pershing Square’s Proposal
Pershing Square became one of Target’s largest shareholders a couple years ago and has been pushing for changes ever since. Fund manager Bill Ackman believes that Target shares do not reflect the company’s intrinsic value, especially considering its substantial real estate assets. After all, few investors realize that Target is a lot more than a retailer – it’s one of the largest commercial land owners in the United States!
Ackman’s Pershing Square proposed solving this problem through an efficient spin-off of the land assets into a real estate investment trust (REIT). Target shareholders would then own two companies and investors would be able to analyze each one independently. Under the transaction, the land REIT would receive lease payments from Target based on the rate of inflation (CPI) and would be backed by the Target buildings themselves.
Despite the poor market for real estate, the spin-off’s assets would produce income from Target’s lease payments and be secured by the Target buildings. The REIT would also be one of the largest in the United States, which would make it a required holding on many indexes and by many mutual funds. Finally, the fact that it is inflation protected would make it a compelling pairs trade with TIPS (Treasury Inflation Protected Securities) and help it stay at a good value.
Pershing Square estimates that this transaction could help unlock some $30 billion – or $39 per share – of value in Target’s buildings. Meanwhile, Target’s core retail operations would also experience several benefits, including increased free cash flows and improved management focus on retail instead of real estate. The downside to the transaction is a possible ratings reduction due to fewer hard assets on the company’s books.
The Rise of a Proxy Contest
Target management shot down the idea of a spin-off soon after it was proposed, saying that the impact on its credit rating would be too great and that the transaction would be difficult to complete. As a result, Pershing Square proposed its own slate of directors in order to replace the existing board and consider these plans to unlock shareholder value. Moreover, the new board candidates have experience in the credit card and food industries, which are both very important to Target and lacking on the current board.
Coming Up Next…
Pershing Square will also be hosting a “Target Townhall” meeting in New York (and online) on May 11th at www.tgttownhall.com in order to clarify its plans for shareholders and investors.
Target will hold its annual meeting on May 28th at one of its to-be-opened stores in Wisconsin.
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