UPDATE 2-Vornado selling nearly half its stake in Penney

Mon Mar 4, 2013 7:40pm EST

(Adds analyst, investor reaction)

By Ilaina Jonas and Olivia Oran

March 4 (Reuters) - Vornado Realty Trust is selling nearly half its stake in U.S. retailer J.C. Penney Co Inc , a source familiar with the matter said on Monday.

The news, which saw Penney shares fall in after-hours trade, came less than a week after the department store chain reported its sharpest sales drop since announcing a grand transformation plan 13 months ago.

Vornado is one of Penney's largest shareholders and its chairman, Steven Roth, sits on the retailer's board.

Deutsche Bank was offering a block of 10 million shares in Penney that was being sold by Vornado, the source told Reuters. Earlier, CNBC said Deutsche Bank was offering the Penney shares at a price of between $16.40 and $16.60 a share. That is below the price at which Vornado acquired Penney shares.

"I think the public market will like this even though the economics are terrible," Michael Knott, analyst with Green Street Advisors said, adding that the move showed Vornado's commitment to exit non-core investments.

Vornado investors have been unhappy with the firm's investment in Penney, which has been struggling to turn around under Chief Executive Ron Johnson.

"This investment was a big distraction. It's been a huge loss of shareholder money," said analyst Alexander Goldfarb with Sandler O'Neill and Partners. "It's been a very poor outcome, but it's certainly not a surprise."

According to a regulatory filing at the end of the fourth quarter, Vornado owned about 18.6 million common shares at an average price of $25.76 per share. The firm also had a right to buy 4.8 million Penney shares at $29.10 per share.

The second-largest U.S. real estate investment trust after Simon Property Group Inc, Vornado last week said it recorded a $224.9 million non-cash charge in connection with its Penney investment.

"J.C. Penney is a newer investment, which is struggling right now," Roth told investors on the earnings call.

Representatives for Penney and Roth could not be reached for comment on Monday.

Penney shares were down 1.7 percent at $16.45 in after-hours trading, while Vornado shares were up 1 percent at $82.19. (Reporting By Olivia Oran and Ilaina Jonas; Writing by Ben Berkowitz and Dhanya Skariachan; Editing by Bernard Orr and Tim Dobbyn)

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