Bill Ackman Case Study Of GGP At Value Investing Congress 2012 [LIVE]VW Staff
Bill Ackman, CEO of Pershing Square Capital, is giving his presentation now. Pershing Square Capital is a value oriented hedge fund, which occasionally shorts. The fund has total assets under management of $10 billion. Ackman is famous for his activism which includes recent campaigns against management of The Procter & Gamble Company (NYSE:PG) and Canadian Pacific Railway Limited (NYSE:CP) (TSE:CP). At the Value Investing Conference last year, Ackman discussed his for long thesis FHBS, J.C. Penney Company, Inc.(NYSE:JCP) and Howard Hughes Corp (NYSE:HHC), where Ackman is currently involved in an activist campaign.
Below are live notes:
(See our full coverage of the Value Investing Congress here).
Bill Ackman’s pitch is TBA for now, there has been buzz and speculation all day about his idea. Most at the VIC are expecting a more detailed pitch on Ackman’s recently reported stake in Proctor & Gamble (PG). While the conference room was half full for most of the morning, it is close to a packed house now.
Bill’s First Idea: General Growth Properties (GGP)
He likes the business because it’s a portfolio of senior secured bonds for retailers
Bill is giving a quick review of his GGP thesis, maybe as a backdrop for his main pitch
Brookfield worked with Pershing Square to acquire the company, and Brookfield owned 29% of the post-bankrupt stock. After purchasing Fairholme’s stake, Brookfield now owns an even bigger stake.
GGP did fall considerably in the middle of 2011, and Bill had a conversation with David Simon from Simon Properties. Simon had attempted to buy the company 4 previous times, and didn’t want to miss out again. About 4 months later Brookfield was ready to talk with Simon about selling 68 assets, but he had to sign a 2 year standstill from making a bid for the overall company. Brookfield presented 68 weak assets at a steep price, and Simon said no thanks.
The issue is the logical exit was Simon, and now they are off the table. With Brookfield acquiring larger stakes, and Simon out of the picture, Pershing was worried about Brookfield gaining too much control without a clear exit. With that, Ackman wrote a letter to the Board of GGP urging the board to pursue a deal with Simon. The Board unanimously rejected Ackman’s idea without hiring a financial advisor, so the company will remain independent.
Of the 9 Board Directors, Bill is particularly interested in Mark Patterson. He is labeled an inependent director, but has a history of being Brookfield’s investment banker while previously working at Merryl Lynch. Delware court so far agrees with Ackman.
Pershing typically does not push for a sale, they like to make their money in the public markets. But not Brookfield is gaining control without paying the premium for control.
Brookfield is now up to roughly 45% control without paying the change of control premium. So Brookfield does not control GGP today, but they are trending in that direction.
To prevent Brookfield from gaining too much control, a 45% ownership stop was put in place. But Ackman believes this threshold is much too high.
In typical M&A deals roughly 20% of shares don’t actually vote the proxy. But even if 90% of shareholder respond to the vote, Brookfield’s 45% may be enough. With that in mind, Ackman believes there will always be a “Brookfield discount”.
Bill believes that by allowing Brookfield to take a “creeping control” without paying a takeover premium, the Directors have breached their duty. There is case law to support his argument that the Directors breach their fiduciary duty.
Pershing put out various documents on the matter in the press, and Simon rebutted stating that they have no interest in GGP. But Ackman thinks there is more to it for Simon, despite their persistent denial of interest. He cites direct earnings call quotes from 2010 where Simon denies interest in GGP, only to follow up with offers for the business. Ackman believes Simon is very intersted in buying GGP, otherwise he wouldn’t be up in front of us pitching it. Ackman is “quite confident Simon will make a bid”.
Ackman thinks this is a very attractive investment on a stand alone basis. Spinning off HHC, acquiring 11 Sears anchor pads, refinancing. He thinks it’s a much better company today than it was a few years ago. The asset portfolio is much smaller, but also of a much higher quality. Ackman is arguing that as a target, GGP is much more attractive to Simon today than when they made their previous 4 inquiries.
“A Simon merger is substantially superior to GGP remaining independent shareholders”
Ackman doesn’t view it as a sale transaction, but instead as a merger. He thinks there are real synergies for Simon and GGP, and shareholders would get a nice premium. For him there is no basis that an independent board should turn down a deal.
GGP has warrants outstanding, held by Pershing, Brookfield, and Fairholme. A transaction would get rid of these warrants which have been an overhand for GGP
Ackman believes the shares are worth at least $24in a transaction. He cites a recent Citi report that states $24 is fair. This would be a 30% premium
Now Ackman is running through a synergy analysis for a GGP-Simon combined entity. He is arguing it’s a perfect fit, and Simon has grown over time through great acquisitions like this. He is arguing that it’s a great deal for GGP shareholders, but would also be accretive for Simon and cause their share price to range.
There are potential antitrust issues, but GGP sold over 50 mall assets since 2010 and Ackman believes more can be divested if necessary. Overall Ackman doesn’t consider Antitrust a meaningful issue.
Ackman had fun reading the prospectus for BPY: Brookfield Property Partners, LP. In this partnership Brookfield will own the GP, and Brookfield will contribute assets to the new entity in exchange for preferred share and a special dividend. Ackman argues it’s a way for Brookfield to monetize their real estate assets, and that its easy to negotiate a good deal when its with yourself. He argues they are selling their stake in GGP through vehicles like this, and public shareholders will have no voting rights. Ackman quotes a few “risks” from the prosectus, including the fact that Brookfield owes no fiduciary duty to the shareholders.
Ackman can’t figure out who would own BPY. Brookfield is warning shareholders how bad the entity is for them, and the amount of K1’s will create massive accounting costs. Ackman can’t figure out why anyone would pay more than $0.00 for this stock. But with a $1 dividend and a 500 plus page prospectus, maybe Brookfield is hoping to lure retail investors searching for yield.
BPY is designed not to become an Investment Company. Ackman argues that the Investment Company Act was designed to protect investors, and Brookfield doesn’t want that.
Ackman now reading Brookfield’s full letter to Pershing because “its just sooo good”
Ackman reading the full letter in a mocking tone, getting some laughs from the crowd
In the letter: “Brookfield has compounded at 18%”
Ackman: “Well when you do BPY to your investors its easy to compound 18%”
Ackman continues about the pitfalls of BPY, noting that: “I figure this out last night”
Now Ackman arguing that while Brookfield was reviewing their last offer from Simon, in which he had to sign a 2 years stand still, Brookfield was actually drafting all the docs for BPY. 6 days after the agreement was inked the BPY prospectus came out. Brookfield was really trying to block Simon out. Ackman thinks that Brookfield is trying to prevent a merger with Simon because they want BPY to go through.
5:55pm EST: Conclusions
Brookfield wants to prevent a Simon merger to instead focus on BPY
Ackman says now its time for the Board of GGP to form an independent committee and look at a transaction with Simon
Bill thinks that once the GGP Board allows the company to open their books to Simon, everyone will see that a GGP-Simon merger is the best solution.
6:00pm EST: Q&A
Ackman wraps up, by far the longest pitch of the day.
Ackman again reinforces that the GGP Board did not think about the deal the right way previously. GGP and Brookfield are trying to frame Pershing as a short-term hedge fund investor looking for a pop. He just wants them to take a serious look at a deal with an independent financial advisor. Ackman thinks that with a first class investment bank and law firm the deal should get done.
Now a question about JCP. He compares JCP at $25 it to GGP back when it was trading for pennies. Everyone thought he was an idiot. There is enormous skepticism about JCP, but he thinks the CEO is doing the right thing on a 5-7 year time frame.
Ron Johnson is building a mall within a mall, using the 120,000 square feet of the larger 700 stores. He is taking that square footage of racks and racks, and building the Street, the Square, a food court, etc and he is leasing out this mall. In the past the coupons and discounts scared away all the quality tenants. Brands like Joe Fresh will have 700 stores within JCP by next spring. Disney is opening up 500 stores. Plus there are numerous great local brands rolling out across the country. Now there are distinct brand environments. David Simon walked through the JCP in TX and thought is was interesting, now thinking about how Simon should react to it.
Good news is the new shops are working. Bad news is everything else is not working. When Ron announced his plan the stock went to $43, it fell back to $19 on bankruptcy rumors, now back to where Pershing acquired it. “If you can think more than 3 months in the future” he really likes it because the stock is trading at nothing more than the asset value.
Bill now hitting a question on why P&G is undervalued. He thinks its a great company, a 175 year old growth company which is rare. But the last few years have been tough. They always lead in market share growth and margins. Bill attributes recent issues to senior management. Pershing paid around $62, which for a 16x P/E its a good price for a great business that is turning around. He argues its a historically low multiple on depressed earnings.
Bill thinks they will recruit the next CEO from outside the P&G organization. He explains that many P&G executives have left to go work elsewhere.
Ackman did sit down with the board to discuss the history of P&G and his thoughts. He thinks the board is very talented and they don’t want to sit and watch PG underperform. In the meantime with the dividend PG shareholders get paid to wait.
Ackman does have a new short idea, but they are building the position and are not ready to reveal it yet
Ackman continues on the issues with BPY, It sounds like he just dug into the prospectus last night for the first time. He thinks ultimately the least sophisticated investors will end up with this security as they are drawn in by yield. He thinks it is too difficult to short a partnership, but he in no way recommends buying BPY shares.
Back to JCP. Customers used to go to the store because of coupons. Bill thinks that the in store experience has never been better. The service, the customer reviews, are all great. The issue is getting people in the store without the coupons. Ron’s haircut idea is a way to drive traffic, but in a way that is better for the brand.
After 1:15 mins straight, Ackman is now done with Q&A and walks off the stage. That ends Day 1 of the Value Investing Congress 2012.