Activist investor William Ackman has tailored his proposal to spin the land on which Target Corp. stores sit into a separate real estate investment trust, or REIT, to better address the retailer’s concerns.

This story first appeared in the November 20, 2008 issue of WWD. Subscribe Today.

Ackman, whose Pershing Square Capital Management LP controls just under 10 percent of Target shares, proposed on a conference call Wednesday “test-driving” the REIT with a minority stake initial public offering of less than 20 percent valued at about $5 billion.

In a presentation last month, Ackman suggested a complete spin-off of the land as a way to raise Target’s stock price, which he considers undervalued. That idea raised concerns at Target about the retailer’s credit rating, financial flexibility and the potential for the deal to distract management.

In the revised transaction, Target would create the REIT, go through with the minority IPO and sell off the remainder of its credit card receivables business before putting more of the REIT’s shares on the market.

Target could then use $3 billion of the $5 billion raised by the IPO, another $4.4 billion from the credit card sale and additional cash from operations to pay down $9.2 billion in debt, Ackman said. The moves would allow Target to maintain its top-grade credit rating, he said.

The company has sold 47 percent of its credit card business to J.P. Morgan Chase & Co. since 2007.

“We think the sooner the company does this, the better position the company is in to take advantage of market opportunities and the better the balance sheet is for the company,” Ackman said.

Target was examining the proposal. “Our analysis is still in process, no decision has been made and we will share our conclusions once the analysis is complete,” a spokeswoman said.

Ackman estimated Target could be ready for the IPO by late in next year’s third quarter, and it would take about another year for the company to be ready to spin off the REIT entirely. Should Target decide against the move after the IPO, Ackman suggested it could buy back shares at a rate agreeable to investors.

Assuming the spin-off of the remaining 80 percent interest occurred in 2010, Ackman said the revised transaction would increase the combined stock price of the two public entities to $79 from $37 by that year.

The proposed REIT would lease the land back to Target under a 75-year master lease agreement that would be tied to the inflation rate. The Minneapolis-based retailer owns about 95 percent of its stores and roughly 85 percent of the land under them. The new REIT would be the largest in the country.

Target shares fell 10.3 percent to $26.96 Wednesday as the Standard & Poor’s Retail Index dropped 7.1 percent overall.

“Some investors are concerned about timing given the markets, others are concerned given Target’s less than enthusiastic reaction,” said Todd Slater, equity analyst at Lazard Capital Markets. “I think Ackman’s plan has many merits.…It’s clearly proactive

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