Activist investor William Ackman is shaking up Target Corp.
Ackman's hedge fund, Minneapolis-based Pershing Square Capital Management LP, has taken a 9.6 percent stake in the nation's number-two discount retailer and he is intent on pressing management to boost shareholder value, according to a filing with the Securities and Exchange Commission on Monday.
Noting Target's differentiated brand, significant growth opportunities and "the strongest operating management in the retail industry," Pershing Square said in the filing that it will "discuss with management ways in which the undervaluation can be corrected."
There has been speculation that Ackman will try to convince Target to sell its highly profitable credit card business, which generates $6.5 billion and contributed $143 million, up 20.6 percent from the year-earlier period, to the company's first-quarter earnings of $651 million. Target has a market cap of $58.8 billion and an enterprise value of $70.2 billion.
Pershing Square has been in this territory before. Ackman acquired stakes in both Wendy's International Inc. and McDonald's Corp. At Wendy's, Ackman has been credited with pushing the company to spin off its Tim Hortons coffee and doughnut chain. He wanted McDonald's to use the proceeds from the sale of its Latin American restaurants to buy back stock and pay shareholders a dividend.
Neither Ackman nor a spokeswoman for Pershing returned phone calls for comment, while Target Corp. declined comment.
"It strikes me as unusual that a group as smart as Pershing believes it can convince Target to shed its core strategic assets, and that would include the credit card business," said Lazard Capital analyst Todd Slater, who has held a buy rating on Target shares since June 2006. "I see no reason why it would agree to turn over the strategic asset to a third party, especially given its performance."
Slater expects the end result of a meeting between Ackman and Target management to be "status quo," and noted that the stock is up 13 percent since the end of May, when Ackman began building up his stake, according to the SEC filing.
"That could well be the point," Slater said. "If Pershing wanted to get a meeting with management, it simply could have called the company. It doesn't take a 10 percent stake."Ackman purchased about 81.8 million shares of Target common stock for $1.98 billion, according to SEC documents. He has already made a hefty profit. Target stock was down 1.8 percent on Monday to close at $68.89 in New York Stock Exchange trading, which would put Ackman's stake at about $5.64 billion.
The stock has gained 46 percent over the past 12 months, trading between $46.35 and $70.75.
Citigroup analyst Deborah Weinswig wrote in a research note Monday that it is unlikely that Target would sell its credit card unit, noting that the credit portfolio is more favorable to its business than other retailers' due to its company-owned bank, Target National Bank.
Instead, Weinswig saw two other areas in which Ackman could focus to raise value at Target, including increasing leverage and repurchasing shares and real estate monetization.
"Target could monetize its real estate through sale leasebacks and use the proceeds to repurchase shares," Weinswig wrote. "However, we believe Target prefers to own its stores for the flexibility and economic benefits."
Goldman Sachs analyst Adrianne Shapira said in a research note that Ackman's investment in Target strays from the investor's past patterns.
"This situation is somewhat different from past Ackman investments, fundamentals are strong, strategy is sound, shareholders have been rewarded, and management has little to apologize for," Shapira wrote. "Given the market's euphoric reaction to the rumored stake, we believe the next big move in the stock will hinge on management's response to Ackman's proposed strategy with the latter likely to be issued alongside Pershing's SEC filing."
She noted that Target's chief financial officer, Douglas Scovanner, has said regarding the credit card business, "We have neither a strategic nor a financial benefit in mind in engaging in any kind of transaction, such as a sale.''
According to the SEC filing, Pershing Square intends to donate one-third of after-tax net profits from the Target investment to the charity organization Pershing Square Foundation, which focuses in part on education, global health care, environmental conservation and human rights.
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