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William Ackman’s throwing in the towel at J.C. Penney Co. Inc.
This story first appeared in the August 27, 2013 issue of WWD. Subscribe Today.
The lightning rod activist investor arranged on Monday to sell his 39.1 million shares of Penney’s in a stock offering being underwritten by Citigroup — beginning the process that will end his dramatic three-year run as a central figure at the struggling company. The stake represents 17.7 percent of Penney’s stock.
Ackman, chief executive officer of Pershing Square Capital Management, said last week that Penney’s, along with investments in Target Corp. and Borders Group, were his nine-year-old firm’s three “failures.”
“Clearly, retail has not been our strong suit, and this is duly noted,” he wrote to Pershing shareholders. The investor will have ultimately paid dearly for his Penney’s adventure. Last week, he said the stock was trading at more than a 40 percent discount versus his cost to build the stake, through share purchases, call options and other financial instruments.
Ackman is one of Wall Street’s highest-profile investors and does not shy away from jumping into troubled companies, pushing management to make changes. He’s made millions investing in companies such as mall operator General Growth Properties Inc., The Procter & Gamble Co., McDonald’s Corp. and Canadian Pacific Railway Ltd.
The investor charged on the scene at Penney’s in 2010 as a staunch critic of ceo Myron “Mike” Ullman 3rd. He and his partner in the investment, Vornado Realty Trust chairman Steven Roth, used their clout to gain access to the company’s board and, along with the other board members, replaced Ullman with Apple retail wiz Ron Johnson. At the time, Ackman and Roth controlled a combined 26 percent of Penney’s shares.
Johnson, backed both publicly and privately by Ackman, tried to reinvent the staid department store as a series of shops-in-shop with no price promotions. But the high-profile effort was marred by a lack of planning and a series of errors that led to a loss of $1 billion on a 25 percent drop in sales last year.
As Penney’s losses grew, Roth began backing out of the retailer, selling 10 million of his 23.4 million shares for $16.03 each, a sharp loss considering the stock was trading at nearly $28 just before the stake was revealed. Roth continues to own 6.1 percent of Penney’s and remains on its board, although Ackman’s move Monday raises questions over whether Roth will stay the course.
Ullman was brought back on board this year to right the ship, and Ackman helped the retailer secure $2.25 billion in financing. But the company’s long-awaited makeover of its home business flopped, and losses tallied $934 million in the first half.
Ackman saw Ullman as an interim chief and believed the board was dragging its feet when it came to finding a successor. He also had concerns about the company’s capital investment plans, cost control, inventory management and business planning processes.
The frustrations boiled over into a public battle with the board, and once Ackman said his piece earlier this month, he stepped down.
“While there is substantial upside if J.C. Penney’s business turns, there continues to be risk at J.C. Penney,” Ackman wrote last week. “That risk has been somewhat ameliorated by the additional liquidity the company has obtained through the financing and the renewed focus the company will have on managing cash and costs while it works to bring back traffic and sales.”
Penney’s is seen as having access to enough cash to operate for the time being, and by the holiday season it will be selling goods that are reflective of its new positioning under Ullman.
“If J.C. Penney is able to return sales to the levels of recent years, generate historical levels of gross margins and maintain the [selling, general and administrative expense] reductions achieved by prior management, the stock should rise substantially from current levels,” Ackman said. “We believe these objectives are achievable, but how much time they will take is more difficult to determine.”
Ackman, for one, isn’t willing to stick around and see how long it takes. Shares of the company slipped 2.9 percent to $12.97 in after-hours trading Monday.