J.C. Penney Hires Goldman Sachs for Ackman Battle

J.C. Penney taps investment bank to aid in discussions with activist investor.

J.C. Penney Co. Inc. has taken a page from the Target Corp. playbook and hired Goldman Sachs to help play defense against activist investor William Ackman, sources said.

This story first appeared in the October 13, 2010 issue of WWD.  Subscribe Today.

Ackman plans to “engage in discussions” with Penney’s management and other stakeholders concerning the firm’s “business, assets, capitalization, financial condition, operations, governance, management, strategy and future plans.” Little is known of Ackman’s plans beyond that catchall laundry list, which was included in one of last week’s regulatory filings from Pershing Square Capital Management, where he is chief executive officer.

Last week Ackman unveiled a 16.5 percent stake in Penney’s, and said he was working in tandem with Vornado Realty Trust, which holds another 9.9 percent of the retailer’s shares.

“It’s the most economically sensitive stock we’ve invested in,” said Ackman, touching on the topic at the Value Investing Congress in New York Tuesday.

“Most of the retail sector doubled and tripled from the bottom, but Penney was a laggard,” Ackman said, according to Barron’s coverage of the conference.

“I haven’t met with management yet, and it’s rude to talk about a company before meeting with management. But I thought it was a very high-quality asset base. Their real estate portfolio is better than the competition.

“The General Growth bankruptcy will tell you a lot about what J.C. Penney owns,” he continued. “When the market values the stock at 3.5 times EBITDA [earnings before interest, taxes, depreciation and amortization] and a lot of earnings come from shopping mall real estate, it’s incredibly cheap. The company did not fire people over the last couple years, which means they have a lot of untapped potential. If we do nothing, it could lead to attractive returns, and, then, we think we have some ideas.”

Clearly, Penney’s is getting ready for that intellectual onslaught.

“In a situation like this, you always want an investment banker at your side so you can respond correctly,” said one retail source close to Penney’s.

A financial source noted, “Ackman can push for changes, but he can’t make changes.”

In hiring Goldman, Penney’s turns to a big Wall Street bank with a track record of dealing with the 44-year-old Ackman. Target successfully fended off the investor last year in a proxy battle to shake up the retailer’s board.

Ackman’s campaign to tweak Target began in 2007 with an effort to remake its credit card business. The retailer hired Goldman to look into alternatives for the division, ultimately selling almost half of its credit card receivables to J.P. Morgan Chase. Target also used the bank to look into its real estate assets and then to meet with Ackman on the topic.

While Ackman and Vornado collectively control 26.4 percent of Penney’s, Ackman is seen as the more assertive investor.

“I get the sense that what he really wants to do is stir up the pot and get attention on one thing, maybe change some management just to get them to think about their strategy differently,” said Rosemary Sisson, director and debt analyst at Knight Libertas. “That’s what he did at Target — he didn’t make a big impact, but he made a lot of noise. For retailers that have been around a long time and run by the same people for a long time, it really isn’t such a bad thing to have someone come in from the outside and say, ‘Hey, have you thought about this?’ They may be forced to listen [to Ackman] because he’s dangerous and could cost them their jobs.”

Ackman didn’t respond to a request for comment, and officials at Penney’s and Goldman declined comment.

Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, said a short-term, rather than long-term, strategy would be problematic at Penney’s, which a decade ago was “as close to a dinosaur as you could find.” That was before the tenures of former ceo Allen Questrom and current chairman and ceo Myron E. “Mike” Ullman 3rd.

“Penney’s is going to need the same solid combination of wisdom as well as managerial knowledge to optimize what its potential really is,” said Aronson.

Ullman is expected to meet with Ackman and Vornado chairman Steven Roth within a week to 10 days to get a read on their intentions. Penney’s board reportedly had a conference call last week right after the news on the investment broke and is expected to convene again soon.

“Mike Ullman needs the backing of the board more than ever now, but this is just an investment so far,” said the retail source. “There is nothing anybody has done yet that would require Goldman Sachs or Penney’s to react at this point. This is at a very preliminary stage. Management has to remain cool and deliberate and stick with the strategy.”

Vornado is the landlord for Penney’s in many locations, including the Herald Square flagship, and is said to have a good relationship with Penney’s.

Furthermore, Ullman is entrenched at Penney’s. Neither he nor the board is likely to buckle under outside pressure for change. “Ullman has the support of the board and the support of his staff. I think he’s got strength,” said the retail source.

For now, “it’s business as usual,” with Ullman in New York this week for, among other reasons, the MNG by Mango launch party Tuesday night. Mango, the Spanish fashion chain, is launching shop-in-shops at Penney’s.

According to a research report from Sandler O’Neill, Vornado’s return on its stake in Penney’s is “likely to come from capturing upside in JCP stock rather than unlocking the real estate. While there may be certain trophy stores whose value would be increased by either leasing to another retailer or converted to another use, we do not believe that those opportunities are widespread.”

Penney’s owns 416 of its 1,108 stores.

Shares of the retailer closed at $33.78, up 66 cents, or 2 percent, Tuesday. They’ve now risen 16.5 percent since closing at $29 last Wednesday, just before word of Ackman’s investment in the retailer began to circulate.

Since Aug. 31, when Penney’s stock bottomed out for the 52 weeks at $19.42, shares are up 73.9 percent.

Retail stocks, down for much of the day, jumped into positive territory in the last two hours of trading Tuesday after notes from the Federal Reserve’s Open Market Committee meeting of Sept. 21 said it would be “appropriate to take action soon” if the pace of economic recovery didn’t accelerate. The committee also indicated its intention to keep the federal funds rate at between zero and 0.25 percent.

The broader market followed a similar path. The Dow Jones Industrial Average, dipping below 11,000 at one point in morning trading, finished the day at 11,020.40, up 0.1 percent, while the S&P 500 rose 0.4 percent to 1,169.77.