Pershing Square forays further into retail maelstrom

Fri May 1, 2009

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Will Pershing's historic intervention save General Growth Properties?

By Pete Gallo

Pershing Square Capital Management simply couldn't stop grabbing headlines in April - from its investment chief Bill Ackman publicly floating a national economic recovery plan to his hedge fund's renewal of its proxy war with troubled retailer Target.

But the biggest new development in the Pershing Square portfolio revolved around the hedge fund's historic intervention to save Chicago-based General Growth Properties, the nation's second-largest mall owner, which filed for Chapter 11 protection in mid-April.

It's historic because General Growth Properties' failure represents the largest real estate bankruptcy case in U.S. history. And Securities and Exchange Commission filings show that, in April, Pershing Square inked a $375 million senior secured debtor-in-possession term loan agreement, aimed at increasing the hedge fund's stranglehold on the company while providing a means for General Growth to forestall individual creditors from foreclosing on its 200 major mall properties.

At the start of the year, prior to General Growth's bankruptcy filing, Pershing Square owned 23.3 million shares in the firm, a 7.4% stake. That financial stake swelled to a stunning 24.6%, an economic exposure equivalent to 54 million shares (including loan exposure and additional share purchases), according to an April 16 filing with the SEC.

At 52 cents per share (as of April 21) the pink-sheet-traded company may look like a stuffed white elephant at a tag sale. But it has upside potential, not to mention lots of real estate collateral in play.

For starters, the loan calls for a $15 million fee to be paid to Pershing Square. And the loan itself will carry an annual rate of Libor plus 12% (with minimum Libor set at 3%), an April 16 SEC filing shows.

It's unclear when Pershing cash will hit General Growth, since the matter is pending in a court hearing slated for May 8. In the meantime, General Growth will attempt to stay afloat using the $148 million in cash the company has on hand. (Interestingly, U.S. Bankruptcy Court Judge Allan Gropper agreed to allow the company to use that cash as collateral, which should help offset some of the risk for Pershing Square's proposed $375 million loan intervention.)

Daring. But will it work as an investment?

Clearly, Ackman thinks so. It was hardly an impulse buy. Pershing Square had plenty of time to make its push into General Growth Properties.

Regulatory filings show that Pershing's equity buildup was quick but methodical, with no shares owned by the hedge fund prior to the third quarter of last year. For roughly the past 18 months, the highly leveraged mall operator had essentially been financially crippled, unable to refinance or sell any of its properties.

And without cash, the company was stuck with undeveloped mall properties - not just in the U.S. but also in far-flung corners of the world, like Brazil and Turkey, where it has numerous joint ventures and the potential to score wins even if retail erodes further.

One short-term risk for Pershing Square Capital might be that existing creditors, especially those of less secured mortgage-backed securities, might start foreclosing on General Growth's actual mall properties (some of which are held by subsidiaries and joint ventures). Still, if it comes to a mall property fire sale somewhere down the line, the massive and senior stake by Ackman's hedge fund is the investment shop's ticket to be the first taker of proceeds.

Of course, it could be a colossal mistake. The verdict is still out on Ackman's other big activist bet in retail: Pershing Square has a 26.7 million-share (3.5%) stake in troubled retailer Target, whose stock slumped in the final quarter of 2008 but this year has risen from $34 to $38 as of April 20. (That's still way below the $63 Pershing paid per share when it started amassing the stock in June 2007.)

But Ackman doesn't quit. In April, Pershing renewed a proxy war to get Target on the path of growth, filing an April 20 letter with the SEC that called Target's current board "suboptimal," and asking for for a new slate of members, including credit card, retail and real estate sharpshooters to help the company. Ackman has long been unable to get Target to sell off its credit card business, but he may renew that effort at the May 28 shareholder meeting.

Meanwhile, Target chairman Gregg Steinhafel has used company filings to call on shareholders to fight Ackman's "risky hedge fund agenda."

ISSN: 2151-1845 / CDC10004H

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