William Ackman, A Nominee for Shareholder Choice, Sends Letter to Barron's
Editor
NEW YORK, May 23 /PRNewswire/ -- William A. Ackman, founder of Pershing Square
Capital Management, L.P. and a Nominee for Shareholder Choice, today sent the
following letter to the editor of Barron's newspaper:
To the Editor:
As a long-time Barron's reader, I was disappointed to read Andrew Bary's
recent article, "Ackman's Target Campaign is Off-Target," which does your
readers a disservice for it fails to accurately characterize what our proxy
contest at Target is about, and is riddled with numerous materially false and
misleading statements.
Pershing Square has been one of Target's largest shareholders for more than
two years. Over the last two years, we have had a constructive and cordial
dialogue with Target management about various strategic initiatives which we
believe could create significant long-term shareholder value while reducing
the company's credit risk, increasing its access to capital, and potentially
improving the company's already strong credit ratings.
After two years of working with the company from outside the boardroom, we
felt that we could better assist the company in creating more value if one
representative from Pershing Square joined the board and one mutually
acceptable additional director with relevant expertise were also added to the
board. Unfortunately, the nominating committee rejected me and every other
nominee we proposed for the board giving us no choice but to seek shareholder
support for adding new independent directors to the board. The nominating
committee to this day has refused to explain the basis for rejecting me and
the other independent directors we proposed.
While we think highly of Target management, Target's board has become insular
and unwilling to consider directors outside of their intimate circle.
According to Target's proxy materials, the nominating committee did not even
meet once in 2008, but still collected their annual fees for committee
membership. The nominating committee would also not meet or interview the
independent director candidates we proposed. Insularity and not-invented-here
thinking have caused the demise of many of our country's one-time greatest
retailers; Sears and Kmart, being but two of many such examples. We are
working hard to make sure this does not happen at Target.
Target's board has consistently taken steps to protect their incumbency that
we believe are not in the best interest of shareholders. Target's board has
extended the 12-year term limits that were put in place by the company's
founding family (originally designed to ensure "fresh blood and new
perspectives") to 15 years and most recently 20 years. The most recent term
limit extension was done to accommodate Solomon Trujillo, the recently deposed
head of Telstra, an Australian telecommunication company. We don't understand
why the board believes an additional three-year term for Mr. Trujillo on top
of the 15 years he has already served would add value to Target's board
compared to the numerous other board candidates with more relevant experience
and better and more relevant operating track records than Mr. Trujillo.
The board has also gone so far as to ask shareholders in this election to
limit the number of directors to 12 to reduce the potential for even one of
our proposed nominees to join the board. The company has also adopted a
staggered board and merged the Chairman and CEO roles including chairmanship
of the executive committee, governance approaches that Ken Dayton, one of the
founding family members opposed in his public pronouncements about corporate
governance more than 25 years ago. The board has refused to allow
shareholders to vote on a universal proxy card in this election which would
allow shareholders to choose which nominees it wants on the board without
being forced to attend the shareholder meeting, which the company has located
at a construction site for a new store in Wisconsin, a location not designed
to be convenient to the vast majority of Target's owners. As an alternative
to a universal proxy card, we have offered to add the incumbent directors to
our proxy card to make choice easier for shareholders. The company has yet to
respond to our offer to do so.
In light of the nominating committee's rejection of all of our proposed
nominees, we had no choice but to run a proxy contest to seek shareholder
approval for new independent directors. Despite the implications of Mr.
Bary's article, this proxy contest is not a platform for a change in strategy
at Target. Rather, we have identified five new independent directors, four of
the five with no affiliation with Pershing Square, so that shareholders have
the opportunity to choose among the nominees we have proposed and the
incumbents to determine who would best represent shareholder interests on the
board going forward. We have no coordinated plan with these directors despite
Mr. Bary's implication to the contrary. Rather, we believe adding new
independent directors with CEO-level food retail, credit card, and real estate
experience to the board in addition to a top corporate governance expert and
major shareholder would materially improve the background, experience and
shareholder alignment of the board of directors and their long-term oversight
of the company and its management.
The current board has also failed to create a culture of stock ownership at
Target. Senior management had not purchased one share of Target stock in the
last five years until one day after we launched this proxy contest. Rather
than purchase stock in the company, the board and management have sold more
than $400 million of stock in the last five years. The board owns less than
0.27% of the company's stock and options despite their extended tenure on the
board and the annual restricted stock and option grants they have received
over the years.
While Mr. Bary's article implies that our candidates are somehow my cronies, I
am the only Pershing Square affiliate on our proposed slate. The other
proposed nominees have no affiliation with Pershing Square. Neither I nor
Pershing Square has any commitments, agreements, or understandings with any of
these proposed directors other than they have agreed to serve if elected to
the board, and we have agreed to indemnify them from any costs they incur as a
result of the proxy contest.
The Nominees for Shareholder Choice, as this slate is identified, include Jim
Donald, one the country's top grocery store executives who helped Wal-Mart
develop and grow their now-dominant superstore strategy; Richard Vague, the
co-founder of First USA and Juniper Financial, one of the most successful
credit card executives in the country; Michael Ashner, a major owner/operator
of real estate; and Ron Gilson, one of the country's most important experts on
corporate governance with a joint appointment at Columbia and Stanford's law
and business schools.
We believe that Mr. Bary's confusion about what we are trying to achieve at
this election has to do with the fact that it is extremely rare for
shareholders to have a choice of more than one nominee for each board seat.
In the most democratic country in the world, so-called corporate "elections"
for which Target's is but one example, have become a farce. How can it even
be called an election if there is no alternative choice for each seat on a
board? In its previous uncontested elections, Target's director nominees have
been elected by a plurality which means that directors who receive as little
as one vote can be re-elected year after year. This is particularly absurd in
light of the fact that brokers are allowed to vote a shareholder's stock in
favor of incumbent directors without their clients' consent.
It is easy to understand why so many of our major financial institutions have
failed because of inadequate board oversight when one considers that
effectively none of these directors had to compete to earn the right to
represent shareholders on these boards. What would our country be like if
voters had no alternative but to vote for only one presidential candidate
every four years, the mailman could vote for the incumbent without your
consent, the incumbent could spend your money to advertise his campaign, and
there were no term limits?
The Securities and Exchange Commission clearly also views the current approach
to corporate elections as problematic in light of the SEC's recent proposal,
announced last week for public comment, to give major shareholders an
opportunity to propose alternative directors on a company's own proxy card if
they hold 1% of a company for a year or more. Unfortunately, this rule was
not yet in effect when we launched our own contest at Target, so we have had
to spend $10 million or more of our own money to give shareholders a choice at
this shareholder meeting. Next year, if the SEC's proposed rule is in effect,
you are likely to see alternative independent directors proposed by
shareholders at hundreds of companies. This will cause boards to take
nominating new qualified directors seriously, and I guarantee you the quality
and independence of directors will rise. I also suspect that Target's
nominating committee will now begin to take its job seriously and will likely
meet more than the zero times it met in 2008. Don't be surprised to see
Target's board and the rest of the corporate lobby fight the SEC's proposal
aggressively because it threatens incumbency and their overly cozy and insular
boards.
Now I will address some of Mr. Bary's specific assertions about the two areas
of strategic opportunity at Target about which we initially met privately with
management over the last two years. Our first initiative was an attempt to
convince the company to form a partnership with a major financial institution
and transfer the credit and funding risk of its credit card receivables in
exchange for an ongoing earnings stream to compensate Target for acquiring
customers, assisting the bank partner in growing receivables, marketing the
program, running the call center and other elements of the business where
Target, as opposed to the partner bank, has a competitive advantage. For
years, Target's shareholders had pushed the company to follow the lead of its
principal competitors who have all chosen a credit card partnership approach
to their credit card businesses. By September 2007, we were successful in
finally causing Target to take a look at alternatives for its credit card
operation.
In May of 2008, the company took a partial step with its credit card program
in a transaction with J.P. Morgan which in economic substance amounts to a
non-recourse financing of 47% of the company's receivables. Unfortunately,
this transaction left Target in a first-loss position with respect to
effectively all of its receivables and requires the company to continue to
fund its remaining receivables, an expensive, risky, and capital-consuming
proposition. We believe that Target's failure to implement a true
credit-risk-transfer partnership has cost the company hundreds of millions of
dollars in losses and billions of dollars in the company's stock's resulting
price decline. While we were disappointed with the form of the J.P. Morgan
transaction, we viewed it as a step in the right direction that we hoped would
ultimately lead to a future, true partnership transaction which will reduce
more risk and free up more capital, contributing to an increase in shareholder
value.
Our next initiative with Target was to encourage the company to look at
potential alternative ownership structures for its real estate. Target owns a
greater percentage of its real estate than any other major retailer. In the
article, Mr. Bary characterizes our transaction as, "placing Target stores
into a real estate investment trust and leasing them back from the REIT." He
then goes on to quote Richard Sokolov, President of Simon Property Group,
"Transferring all of this real estate will constrain Target's flexibility to
make renovations, expansions and enhancements that are part of the ongoing
evolution of any retailer."
In fact, we never proposed that Target consider transferring its stores to a
REIT. Rather, we proposed that Target would continue to own its stores while
contributing the land under its stores to a REIT. This is an extremely
important and material difference. The benefits of our proposed structure is
that there would be no restrictions whatsoever on Target making "renovations,
expansions and enhancements that are part of the ongoing evolutions of any
retailer." In fact, there would be no covenants at all other than the
requirement that Target make semi-annual rent payments. Target already leases
the land for 10% of its stores. Our proposed transaction would simply expand
this percentage to nearly all of Target's stores.
Because a ground lessor, in this case the REIT, would have the security of
Target's guarantee on the lease plus approximately $20 billion of additional
security from the buildings on the land (which would be transferred to the
REIT in the event of a default), the REIT would have an extremely secure
income stream. As Mr. Sokolov as well as other sophisticated real estate
investors should know, ground leases trade at extremely low cap rates because
of the security and the inflation-protected nature of ground lease rental
streams. Big box retail ground leases even for inferior credits to Target
trade at 6.5% and lower cap rates. We believe a 1,400 property
cross-collateralized pool of 75-year ground leases guaranteed by Target would
likely be valued at an even lower cap rate or higher multiple of cash flow
than a one-off ground lease transaction to an inferior tenant.
We also designed our proposed REIT transaction so that it would be ratings
neutral or potentially even enhance Target's already strong credit ratings.
In our revised transaction which we made public in November of last year,
Target would sell a 19.9% interest in the REIT and pay down debt with the
approximate $5 billion of IPO proceeds. Next, the company would complete a
credit card partnership transaction and take the $8 billion or so from the
sale of its receivables and pay down debt. Target would continue to own 80%
of the REIT until such time as the company's free cash flow reduced debt to $5
billion, less than one turn (one times EBITDA) in leverage. Only at this time
would the company spin off the remaining interest in the land REIT to
shareholders.
In our proposed transaction, Target's ongoing dividends would now be paid by
the REIT, at an approximate three-fold higher level than the current dividend
rate. Target's ground rent expense would be tax deductible and future land
acquisitions would be funded by the REIT. The company would retain its stores
which it could continue to depreciate for tax purposes. As a result of these
features, Target's after-tax, after-cap ex, and after-dividend free cash flow
would be materially higher than it is presently and its outstanding debt would
decline by approximately $13 billion. With only $5 billion of debt (which
could be repaid in approximately two years) and a 75-year ground lease with no
covenants, Target in our view would be in a materially superior financial
position than it is today. This would not only benefit Target but also the
REIT because the stronger Target's credit quality, the more valuable the REIT
would be.
In his article, Mr. Bary makes the unsupported statement that our proposed
REIT would trade at approximately 10 times cash flow. While the REIT universe
has been under pressure over the last year because of declining occupancy,
declining rents, tenant bankruptcy risk, large capital expenditure
requirements requiring funding, and most REITs' inability to refinance debts
as they come due, Simon Property Group continues to trade at approximately a
7.5% cap rate, or approximately 15 times cash flow. Our proposed Target REIT
would have no debt, a strong investment grade tenant, little if any
maintenance cap ex (land leased to Target does not need to be maintained), and
no occupancy risk, elements which we believe would cause this REIT to trade at
a material higher valuation than the 15 times multiple awarded to Simon
Property Group.
That said, our issue with Target's board was not that they rejected our REIT
proposal, but rather that they would not authorize the company's advisors to
work to develop a superior alternative to what we proposed. By limiting
Goldman Sachs to a narrow review of our proposed transactions, Target and its
shareholders were deprived of the opportunity to consider other potentially
superior alternatives.
For years, despite consistent advice from shareholders to complete a credit
card partnership, Target's board refused to consider these alternatives. The
company is now saying it completed an inferior credit card transaction only
because the market deteriorated by the time company executed its transaction.
We hope Target does not make a similar error with respect to other potential
strategic opportunities because of their unwillingness to even consider
alternatives.
Please publish appropriate corrections to Mr. Bary's article.
Thank you.
Sincerely,
William A. Ackman, A Nominee for Shareholder Choice
Vote Now - Vote Today
The date of Target's Annual Meeting is this coming Thursday, May 28, 2009.
Target shareholders should vote on the Internet (for instructions, please go
to www.TGTtownhall.com), by telephone, or by signing, dating and returning the
GOLD proxy card as soon as possible to vote FOR the Nominees for Shareholder
Choice and AGAINST Target's proposal to limit the board to 12 directors. If
you have already voted on the white proxy card, you can change your vote by
submitting a later dated GOLD proxy card. If you have submitted both a white
and GOLD proxy card, only your latest arriving proxy card will count, so
please vote again on the GOLD proxy card to ensure your vote is counted
accurately. For more information on how to vote, as well as other proxy
materials, please visit www.TGTtownhall.com or call Pershing Square Capital
Management, L.P.'s proxy solicitor, D. F. King & Co., Inc., at 1 (800)
290-6427.
About Pershing Square Capital Management, L.P.
Pershing Square Capital Management, L.P., based in New York City, is an SEC
registered investment advisor to private investment funds. Pershing Square
manages funds that are in the business of trading - buying and selling -
securities and other financial instruments. Funds managed by Pershing Square
have long positions in stock, options and other financial instruments tied to
the performance of Target Corporation's stock. Pershing Square has and in the
future may increase, decrease, dispose of, or change the form of its
investment in Target Corporation for any or no reason.
Additional Information
In connection with Target's 2009 Annual Meeting of Shareholders, Pershing
Square Capital Management, L.P. and certain of its affiliates (collectively,
"Pershing Square") have filed a definitive proxy statement on Schedule 14A
with the Securities and Exchange Commission (the "SEC") containing information
about the solicitation of proxies for use at the 2009 Annual Meeting of
Shareholders of Target Corporation. The definitive proxy statement and the
GOLD proxy card were first disseminated to shareholders of Target Corporation
on or about May 2, 2009.
SHAREHOLDERS OF TARGET ARE URGED TO READ THE PROXY STATEMENT CAREFULLY BECAUSE
IT CONTAINS IMPORTANT INFORMATION. The definitive proxy statement and other
relevant documents relating to the solicitation of proxies by Pershing Square
are available at no charge on the SEC's website at http://www.sec.gov.
Shareholders can also obtain free copies of the definitive proxy statement and
other relevant documents at www.TGTtownhall.com or by calling Pershing
Square's proxy solicitor, D. F. King & Co., Inc., at 1 (800) 290-6427.
Pershing Square and certain of its members and employees and Michael L.
Ashner, James L. Donald, Ronald J. Gilson and Richard W. Vague (collectively,
the "Participants") are deemed to be participants in the solicitation of
proxies with respect to Pershing Square's nominees. Detailed information
regarding the names, affiliations and interests of the Participants, including
by security ownership or otherwise, is available in Pershing Square's
definitive proxy statement.
Cautionary Statement Regarding Forward-Looking Statements
This letter contains forward-looking statements. All statements contained in
this letter that are not clearly historical in nature or that necessarily
depend on future events are forward-looking, and the words "anticipate,"
"believe," "expect," "estimate," "plan," and similar expressions are generally
intended to identify forward-looking statements. These statements are based on
current expectations of Pershing Square and currently available information.
They are not guarantees of future performance, involve certain risks and
uncertainties that are difficult to predict and are based upon assumptions as
to future events that may not prove to be accurate. Pershing Square does not
assume any obligation to update any forward-looking statements contained in
this letter.
Contact: Global Strategy Group
Julie Wood (917) 282-5840
SOURCE Pershing Square Capital Management, L.P.
Julie Wood, Global Strategy Group, +1-917-282-5840
