Affluent Business Magnate Bill Ackman Recently Increased His Bet on a Preferred Stock: He Intends to Maintain Ownership "Indefinitely"
Bill Ackman and his firm, Pershing Square Capital Management, have a soft spot for real estate giant Howard Hughes Holdings (HHH). They hopped on board in 2010, injecting funds in a rights offering, placing the share value at a lofty $47.62.
Despite Ackman's approval of Howard Hughes' management and their accomplishments over the past 15 years, the stock's performance has left him feeling somewhat underwhelmed. With a 35% return between 2010 and August 2023 before Pershing's involvement, that equals a meager 2.2% annual gain.
Not one to back down, Ackman is ready to rise to the challenge. He's planning an ambitious move: taking a significant chunk of the remaining public shares in his stride. His intention? To hold onto it for the long haul.
The proposed deal: a closer look
In a letter to Howard Hughes' board of directors, Pershing Square's holding company proposed creating a new subsidiary. This sub would buy over 11.7 million shares from the existing float at $85 a pop, a sum total of $1 billion.
Simultaneously, Pershing would also kick off a $500 million share repurchase program, aiming to pick up an additional 5.8 million shares. The funding for this comes from new bonds issued by Howard Hughes itself. Eventually, this subsidiary gets absorbed back into Howard Hughes, maintaining the existing management team.
The $85 offering price represents a 18.4% premium over Howard Hughes' stock price on January 10 and a 38.3% premium compared to August 2022, when Pershing dropped a hint about such a transaction in a 13D form to SEC. As of January 13, Howard Hughes had 31.2 million outstanding shares - so that's a whole lot of dollar bills!
Should this deal materialize, Pershing's shareholding would balloon to anywhere between 61.1% and 69.2% of the outstanding shares. The exact percentage depends on how shareholders respond to this proposition. They can choose between getting cash at $85 per share or swapping their shares for positions in the post-merger company.
Ackman estimates that if all shareholders decide on the cash option, they'd walk away with 56.4% of the total payout. In this scenario, Pershing would retire over 5.8 million shares. But if shareholders opt for the rollover plan, then shareholders controlling nearly 38% of the public float would swap their shares for $85 per share, giving Howard Hughes an extra $500 million to play with.
Holding Howard Hughes for the long run: Ackman's vision
In his letter to Howard Hughes, Ackman pens away, "We're in it for the long haul with Pershing Square Holdco's stake in HHH. In plain English, we're holding onto HHH stock...forever."
With its portfolio of master-planned communities (MPCs) sprawled over more than 101,000 acres across six states, Howard Hughes runs one of the largest development projects in the US. This mini-city setup includes retail, residential, and commercial sectors, offering residents an integrated lifestyle experience.
Recently, Howard Hughes spun off its Seaport segment assets into Seaport Entertainment Group. Pershing retains shares from this spin-off and applauds the move, describing it as a smart step towards focusing solely on MPCs. Check out those decades of potential growth, Ackman gushes!
Management at Howard Hughes feels the company has been undervalued and has presented a sum-of-the-parts (SOTP) analysis, putting the value of the company at a whopping $118 per share. The bulk of this value comes from the MPC assets, making the spin-off a strategic move to maximize shareholder value.
Perhaps SOTP valuations are tempting, but they do require patience. After all, the market takes its sweet time to fully appreciate a deal like this. Meanwhile, with Ackman jumping in and taking the wheel, maybe it's time for investors to take a second look, if they haven't already.
Following Ackman's ambitious plan, Pershing Square is planning to invest significantly more money in Howard Hughes, aiming to increase their shareholding by acquiring a substantial portion of the remaining public shares.
With the proposed deal, Pershing Square is expressing their confidence in the long-term potential of Howard Hughes, as they plan to hold onto their stake in the company 'forever'.
