By  on July 16, 2007

Shares of Target Corp. were heavily traded on Friday as investors digested the news that activist investor William Ackman's Pershing Square Capital Management had taken a 5 percent stake in the discount retailer.

Shares closed at $70.14, up 0.14 percent in trading Friday on the Big Board. Nearly 19.5 million shares were traded, compared with a three-month average daily volume of 9 million.

Shares of Target have been heavily traded for a week since the disclosure that Ackman's firm might take a stake in Target, possibly to get the retailer to sell its profitable credit card business. In the past week, there was some doubt about whether Target would want to sell.

Late Thursday, Bloomberg News reported that Ackman had purchased more than a 5 percent stake in Target, and that the stake would not be disclosed in regulatory filings until this week. A spokeswoman for Pershing Square confirmed that the company took a more than 5 percent stake.

Bear Stearns' fixed income analyst Frank Henson on Thursday reiterated his firm's "underperform" rating on shares of Target.

"Although we do not believe management is interested in selling the credit card business, we cannot discount the possibility of a shareholder activist, such as William Ackman, attempting to persuade management to sell this division. Although we do not believe that a sale of the credit card division would be a negative event for bondholders, we are concerned that Mr. Ackman could be interested in monetizing other assets, such as the company's real estate, and/or recapitalizing the company," Henson wrote in an updated note on Target.

The credit analyst said in his update that Target had a receivables balance of $6.5 billion in the first quarter of 2007, which he estimated was backed by $1.9 billion in securitized debt. Presuming a sale at a 10 percent premium, Target could raise almost $5.3 billion in pre-tax proceeds, which "could be returned to shareholders via a special dividend or share repurchase activity," he said.

As for the real estate component of Target's assets, Henson noted that the discount retailer owned 85 percent of its store base, or 1,260 out of 1,488 stores, at the end of fiscal 2006. Henson wrote that he had not heard of anything that would suggest Ackman was eyeing sale and leaseback transactions, but noted, "We remain concerned about this risk considering his prior attempt to do so at McDonald's."Ackman is known for his acumen in finance and real estate. 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. Ackman also had a stake in Wendy's, where he pushed the company to spin off its Tim Horton's coffee shops.

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