Bill Ackman Pushes Target to REIT Spin Off, Pershing Square Capital
10/30/08 Categories: Deals
Hedge
fund manager Bill Ackman of Pershing Square Capital
Management proposed a deal
to Target shareholders and executives that would separate
Target's business operations from its currently owned land. The
land would become a Real Estate Investment Trust (REIT) spin off,
and Target would have to sign long-term land leases with the REIT.
His fund already owns 10% of Target's stock.
Ackman argues that his deal would create value for Target, and in many cases spin-offs of subsidiaries in companies can create value, but what happens when you pull all of the most valuable assets out from under a company? Wouldn't that take away from Target's ability to get credit and cause Target to become a less valuable company? The balance sheet of Target would show a huge depletion of assets, which is a significant factor in the value of a company.
I don't see one good reason why Target would want to pay an inflated rent amount on something they already own. This REIT that Ackman wants to create would essentially suck the value out of Target by driving the cost up. Also, did I mention, the REIT is going to force Target to pay a dividend to it. Ackman claims the dividend won't be that high, but dividend claims can change from quarter to quarter, so who knows? I think this has been done before...
Remember the late department store Mervyn's? Mervyn's department store has gone bankrupt and will be closing all of its stores and firing all employees due to Cerberus Capital Management's structured deal of separating land and retail operations. They do something called "tunneling" where they have the land company charge the retail company an extremely high lease price, and also forced Mervyn's to pay a really high dividend to the land owning company. This is what drove Mervyn's to its end. Cerberus pulled the assets out from under the company, sucked it dry, get to sell off the land, and reap giant profits.
Kmart was not helped by Eddie Lampert's hedge fund doing a similar deal where they separated the land and sold it off, leaving Kmart on life-support after a bankruptcy filing.
Both Eddie Lampert and Cerberus Capital Management have made exorbitant amounts of money, and they left shareholders and employees absolutely nothing.
Bottom Line, these type of deals have proved to destruct value of the company. Management and Shareholders : DO NOT let Ackman's arrogance and financial sophistication seduce you into ruining such a great company. Ackman knows that he can make more money off of the real estate Target owns than he ever could on Target itself. Once he makes anywhere from several hundred million to a couple billion dollars, do you think he will care about Target?
Ackman argues that his deal would create value for Target, and in many cases spin-offs of subsidiaries in companies can create value, but what happens when you pull all of the most valuable assets out from under a company? Wouldn't that take away from Target's ability to get credit and cause Target to become a less valuable company? The balance sheet of Target would show a huge depletion of assets, which is a significant factor in the value of a company.
I don't see one good reason why Target would want to pay an inflated rent amount on something they already own. This REIT that Ackman wants to create would essentially suck the value out of Target by driving the cost up. Also, did I mention, the REIT is going to force Target to pay a dividend to it. Ackman claims the dividend won't be that high, but dividend claims can change from quarter to quarter, so who knows? I think this has been done before...
Remember the late department store Mervyn's? Mervyn's department store has gone bankrupt and will be closing all of its stores and firing all employees due to Cerberus Capital Management's structured deal of separating land and retail operations. They do something called "tunneling" where they have the land company charge the retail company an extremely high lease price, and also forced Mervyn's to pay a really high dividend to the land owning company. This is what drove Mervyn's to its end. Cerberus pulled the assets out from under the company, sucked it dry, get to sell off the land, and reap giant profits.
Kmart was not helped by Eddie Lampert's hedge fund doing a similar deal where they separated the land and sold it off, leaving Kmart on life-support after a bankruptcy filing.
Both Eddie Lampert and Cerberus Capital Management have made exorbitant amounts of money, and they left shareholders and employees absolutely nothing.
Bottom Line, these type of deals have proved to destruct value of the company. Management and Shareholders : DO NOT let Ackman's arrogance and financial sophistication seduce you into ruining such a great company. Ackman knows that he can make more money off of the real estate Target owns than he ever could on Target itself. Once he makes anywhere from several hundred million to a couple billion dollars, do you think he will care about Target?
Why Invest in Stocks?Find Out On Zecco.com Free Blogs, Forums & Trade.
|
