Target Corporation TGT
Target's land is mispriced inside a 5.8x retail multiple; a <20% IPO of 'TIP REIT' followed by a tax-free spin re-rates the real estate at REIT multiples and lifts the stock from $37 to $67 now, $80 by 2010.
Thesis
Pershing Square's revised proposal addresses Target management's five stated objections to the October 29 'TIP REIT' full-spin by sequencing it as a sub-20% primary IPO of Target Inflation Protected REIT followed by a tax-free spin of the remaining >80% in 2010. Target contributes its land and facilities-management services to TIP REIT, which leases the land back via a 75-year inflation-protected master lease. Roughly $5bn of IPO proceeds plus $4.4bn from selling the residual 53% credit-card receivables retire ~$9bn of debt and defend Target's 'A' credit rating. Ackman argues the structure forces a sum-of-parts re-rating from $37 to $67 (+81%), more than doubles dividends from $0.64 to $1.79/share, generates $510mm of first-year tax savings, and reaches $80/share by 2010 — while preserving an 'unwind' option through buyback of the public minority stake.
SCQA
Target Corp trades at just 5.8x 2009E EV/EBITDA on a 20-day average price of $37, with its enormous owned real-estate portfolio buried inside the retail multiple and the global capital markets in deep distress.
Target management rejected Pershing's October 29 full-spin TIP REIT proposal citing valuation, financial flexibility, credit-rating, frictional-cost and management-distraction risks, especially in the post-Lehman environment.
Sequence the deal: do a sub-20% primary IPO of TIP REIT first, lease land back via a 75-year inflation-protected master lease, retire ~$9bn of debt with proceeds, then tax-free spin the remaining >80% to shareholders in 2010.
Force an immediate sum-of-parts re-rating from $37 to $67 (+81%), reach $80/share by 2010, more than double dividends from $0.64 to $1.79/share, save $510mm in first-year taxes, and keep an 'A' category credit rating.
The three reasons
- 1
Target trades at only 5.8x '09E EV/EBITDA while comparable REITs trade 14.5x-35.7x — 22% of EBITDA mispriced
- 2
<20% IPO first / spin later sequence addresses every Target management concern while preserving 'A' credit rating
- 3
Tax-free TIP REIT structure unlocks $37 → $67 immediate, $80 by 2010 plus dividend more than doubles to $1.79
Primary demands
- Form Target Inflation Protected REIT (TIP REIT) holding land and Facilities Management Services
- Execute a 75-year inflation-protected Master Lease from TIP REIT to Target Corp
- Complete a primary IPO of <20% of TIP REIT (instead of full immediate spin)
- Sell remaining 53% interest in credit card receivables for ~$4.4bn
- Pay down ~$9bn of Target Corp debt using IPO proceeds, credit card sale, and FCF
- Tax-free spin-off of remaining >80% interest in TIP REIT to shareholders in 2010
- Purge retained E&P via a ~$1.6bn cash dividend post-spin
KPIs cited
Pattern membership
Precedents cited
- Treasury Inflation Protected Securities (TIPS) — analogue for inflation-linked yield instrument
- Recent 'big box' ground lease precedent transactions (5.9% mid-point cap rate)
Composition what's on the 80 slides
Slide gallery ·
Notes
Second presentation in the Pershing-Target campaign, delivered 3 weeks after the Oct 29 2008 'TIP for Target Shareholders' deck. Classic dialectical structure: restate own prior thesis, quote Target management's 5 objections verbatim (slides 22-23), then present a Revised Transaction (<20% IPO + later spin) that methodically addresses each concern. Tone is notably collaborative rather than adversarial — Pershing thanks Target for 'candid feedback' and frames the revision as incorporating investor + management input. Stake percent is not disclosed in this deck. Signature slides: the multiple peer-gap chart (p.8, 5.8x vs 14.5x/17.0x/35.7x), the stacked-bar sum-of-parts valuation waterfall (p.9, $37→$67→$80), and the Pre-Spin/Post-Spin org-chart pair (p.7, p.49). Rich appendix includes detailed 20-year DCF, TIP-REIT credit modeling and full Target Corp three-statement projections. Historically notable as one of Ackman's most public losses: Target's board rejected the proposal and Pershing's TGT vehicle (PSRH/PSIV) suffered ~90% drawdown during the financial crisis.