Agitator/Investor Ackman Makes Noise About Target

Hedge fund manager William Ackman of Pershing Square Capital Management has been rattling cages in the retail world for months now, at Borders, Barnes & Noble, and Longs Drugs. But Ackman hit the headlines this week by announcing that Target, in which he holds nearly 10 percent, should spin off its real estate to improve its balance sheet.

Ackman told a Manhattan investor meeting this week that Target should put its property portfolio into a real estate investment trust. The REIT would instantly become No. 62 on the S&P 500 and the largest such trust of its kind.

Woman's Wear Daily laid out the details:

Target owns about 95 percent of its stores and roughly 85 percent of the land under them, he said. By comparison, Macy's Inc. owns 68 percent of its stores and Wal-Mart Stores Inc. owns 63 percent. Ackman said the land and the buildings of Target's stores had a replacement value of about $39 billion, but the stock market only values them at about $13 billion. The investor's plan to extract that value involves creating two closely related companies -- the retail operations, which would own the stores, and a REIT that would own the land. The REIT would lease the land back to Target for 75 years under one master lease that would be linked to the inflation rate.

Target said it would continue to take the ideas, which the company said Pershing and Ackman had put forth privately, under advisement. But it expressed reservations about the valuation Pershing placed on its land and buildings, and said the REIT plan would reduce management flexibility and lead to a lower debt rating and higher borrowing costs for the company.

In August, Pershing stood to make a quick $500 million when CVS bid $71.50 a share for Longs Drugs, in which Ackman had taken an 8.8 percent stake just weeks earlier in the $40 range. Lon Juricic said at Seeking Alpha, "this is an amazing windfall for Ackman and may go down as one of the 'best trades ever.'"