Ackman may be eyeing exit as JC Penney bet in tatters

BOSTON/NEW YORK Tue Apr 9, 2013 1:32pm EDT

Activist shareholder William Ackman of Pershing Square Capital Management speaks during the Canadian Pacific Railway Ltd. shareholders and analysts meeting in Toronto February 6, 2012. REUTERS/Mike Cassese

Activist shareholder William Ackman of Pershing Square Capital Management speaks during the Canadian Pacific Railway Ltd. shareholders and analysts meeting in Toronto February 6, 2012.

Credit: Reuters/Mike Cassese

BOSTON/NEW YORK (Reuters) - William Ackman's multiyear bet that he could overhaul ailing retailer JC Penney (JCP.N) looks like it may end up being one of his $12 billion hedge fund's worst investment blunders.

On Monday, JC Penney's board dismissed Ron Johnson, a former Apple executive handpicked by Ackman to remake the retailer, and brought back Mike Ullman, whom Ackman has previously criticized.

Now the hedge fund manager is likely searching for his own quick exit from an investment that is costing his $12 billion Pershing Square Capital Management millions in losses and has tarnished his reputation, say industry analysts and investors.

Selling off parts or taking the company private would be ways to quit now that JC Penney's slumping stock price has cost Pershing Square some $500 million in paper losses, people familiar with the firm said.

"The faster Ackman and group sell JCP's valuable assets to someone else, the more value they will capture," said George Bradt, managing director of PrimeGenesis, an executive consulting firm. "The longer they stay distracted with sure-to-fail ideas like fixing the business or taking it private, the less value will be left when JCP finally ceases to exist."

Taking it private is also a viable way for Ackman to get out. Even before Pershing Square and Vornado Realty Trust showed up in 2010, private equity investors were circling.

Today, a purchase would be cheaper with the stock price near at $14 a share, down about six dollars a share from where Ackman started buying. And a deal would still be attractive for players like Blackstone Group (BX.N), KKR & Co (KKR.N) or Apollo Global Management LLC (APO.N) because JC Penney still has valuable real estate holdings, owning nearly half of its space and leasing the rest at $4 a square foot.

Ackman has long championed JC Penney's vast real estate holdings as one reason the company should be trading at a higher stock price. Joining the JC Penney board in 2011, he also said less than a year a ago that Pershing Square could make 15 times its money if Ron Johnson's ambitious turnaround plans worked.

But that strategy resulted in Johnson's dismissal, and his plans to upgrade the stores and merchandise is in tatters. Now Mike Ullman, the CEO Ackman forced out has been brought back from retirement to run the company, so there is little reason for an activist investor to stick around.

The usually voluble Ackman has yet to publicly comment on the management changes at JC Penney, and he did not respond to a request for comment for this story.

Shares of JC Penney rose almost 11 percent late Monday after Johnson had been ousted, but the stock fell when the company said Ullman was back, and continued its plunge on Tuesday, its shares down more than 10 percent in early afternoon trade.

"What we have now is clearly the worst case scenario and Bill will be looking to make as graceful an exit as quickly as possible," said one Pershing Square investor, who asked not to be named because he is not authorized to speak publicly.

Privately Ackman has long said the investment could be risky because it relied so heavily on shoppers liking Johnson's plan.

More stinging for Ackman personally may be that he appears to have been marginalized on a board that went back to the old boss, even though Ullman's tenure may not be long given that he has no employment contract.

"It appears the board is grasping for stability and the situation is more dire than outsiders realized," said Damien Park, the president of Hedge Fund Solutions, which tracks activist investors who push for management changes. "Ackman and the remainder of the board have a lot of work to do to demonstrate they're acting as a cohesive group."

One thing Ackman will likely not do is try to put the JC Penney investments into a side pocket the way some other hedge funds have done with their own poorly performing assets.

So far Pershing Square, which has strict liquidity conditions where investors need about two years to get their money back, has not been hit with heavy redemptions and the JC Penney investment is liquid enough to sell it off over time.

Pershing Square returned 6.1 percent during the first quarter even as JC Penney's stock was tumbling, suggesting that investors have no reason to run for the exits right now.

But the pick does cast a shadow over Ackman's record where average annual returns of 20 percent have made him a favorite with pension funds and other big investors.

The failure of Ackman's "candidate has resulted in substantially diminished credibility for him prospectively," said one investor who is not invested with Ackman but did not want to be named due to his continuing work in the hedge fund industry.

This does "not bode well for the board's receptivity to <Ackman's> future recommendations. He is now a neutered activist," the person said.

(Reporting By Svea Herbst-Bayliss in Boston and Katya Wachtel in New York; Editing by Leslie Gevirtz)

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Comments (2)
OnTheGround wrote:
Why anyone would turn a company like JC Penney over to a hedge fund is beyond me. William Ackman deserves at least as much of the blame, if not more, for the mess the company was in prior to the firing of Ron Johnson. Congratulations to the board for a good decision!

I just bought socks at a local Penney’s. They did not have a designer label on them, or a picture of Ellen Degeneres. People in the worlds of celebrity worship and praising the rich (whether they are crooks or not) are out of touch with America. Get a clue!

Apr 09, 2013 4:21pm EDT  --  Report as abuse
GrantTT wrote:
Whoa, hold on here. If you step back and look at the broad picture, it the true culprit seems to be Stuart Ackman. His mischief began with Target a few years ago, and when he was bested by Target management, he was left crying at the podium at the Target shareholder’s event. Poor Stu, this time, he is trying to deflect the blame again. When will his investors wise up?

When he went on attack at JCPenny’s, he recruited Johnson who was a superstar at both Target and Apple, and then brought in Target’s EVP of Marketing Michael Frances Now tell me that was not a vindictive move to save face from his failed Target coup? The problem with decisions based on personal vendettas is that they are rarely the best decisions from a business standpoint. JCP is the classic case in point. Greg Steinhoffel CEO of Target must be smiling broadly this week.

Ackman wanted instant change from Johnson, and swayed the board to go along with a plan quickly patched together, and now he shames Johnson. Now Ackman is trying to push all of the blame on Johnson instead of owning up to his flamboyant fiasco. Michael Frances was smart to get out before the blood flowed too fast, and ended up on his feet at Dreamworks (just a matter of going to one outrageous fantasy world to another.)

So with all of the finger pointing going on, let’s take a moment to flip a finger towards Ackman. He is destroying shareholder value plain and simple. He is playing with the big boys, and is clearly out of his league. This is the guy who in a short time has destroyed an American retailing icon. Sure, Johnson made some mistakes, but he also did some brilliant things to refresh the brand.

Someone please give Ackman a basic Monopoly game board so he can at least learn and understand the basics before he tries to go on to his next financial disacter. Sure, he is likely to cheat, but it’s only play money.

Stuart, its’ time to shed a few more tears for the gullible people who have supported Pershing Capitol, yet that would take a conscience. While you lack the conscience, you certainly have mastered the “con” part…

Apr 09, 2013 4:31pm EDT  --  Report as abuse
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