NEW YORK – A major shareholder in Target Corp. pitched a plan to Wall Street on Wednesday that would spin off the discount retailer's real estate holdings as a separate entity as a way to increase the value of the company and its shares.
Separating the real estate into a publicly traded real estate investment trust would create long-lasting value for the retailer, investor William Ackman told several hundred people — including hedge fund managers and investment analysts — at a meeting in Manhattan.
Ackman runs hedge fund Pershing Square Capital Management, which owns just under 10 percent of Target's common stock and has long been pushing the company to do more with its assets. Target owns most of its buildings as well as the land underneath, he said.
Under his proposal, the new tax-free spinoff would own the land under Target's stores, while the retailer would retain ownership of the buildings and would rent the land back under a 75-year lease on attractive terms.
"There is a very large real estate company, one of the largest in the country, inside the business," Ackman said during the presentation, which was also webcast.
Target issued a statement in response that it has been evaluating similar proposals by Pershing, but has "serious concerns" about the potential transaction. It believes the proposed structure would hurt its debt rating, borrowing costs and liquidity, especially given the current tightness in the credit market.
Ackman told those at the meeting that he approached Target's board with the proposal in May and had another meeting in September. Target had seen most components of the plan before it was shared with the public Wednesday — a move he said he made to create a dialogue among the company's shareholders.
Under the proposal, the REIT would be the exclusive land developer for Target for two years, and after that be the preferred vendor. Target would be able to make any capital improvements to its buildings — such as increasing fresh food sections, expanding square footage — because it would maintain control of the buildings.
The spun-off REIT would be the 62nd largest company in S&P 500 if it existed, Ackman said. It would be the largest REIT in the country.
Ackman said such a transaction could send Target's shares up from $40 to $70 with a 12-month target of $83 by increasing the company's value.
He also noted that outsourcing capital requirements such as land excavation, sewage systems and other capital needs to the new entity would increase Target's cash flow. On average, Ackman estimates that it costs Target approximately $100 per square foot to procure and develop land for its stores. In 2009, that's expected to amount to about $1.1 billion.
Pershing, which also has a stake in bookseller Borders Group Inc., earlier this year pressured Target to make a financial move with its assets. Target ended up selling 47 percent of its credit card receivables to JPMorgan Chase for $3.6 billion in May.
The move assumes Target will sell the rest of its credit-card portfolio in or by 2009.
As consumers cut back amid a weakening economic environment, Target Corp. has fared worse than competitors such as Wal-Mart Stores Inc., which has focused more on its low-prices for necessities like groceries. The Minneapolis company said last week that it is further tightening finance terms for its card holders — even those with good standing. It may also become even more stringent if credit conditions keep deteriorating.
Target shares rose $2.21, or 5.7 percent, to close at $40.72.
AP Business Writer Anne D'Innocenzio contributed to this report.