By Svea Herbst-Bayliss and Katya Wachtel
BOSTON/NEW YORK, April 9 William Ackman's
multiyear bet that he could overhaul ailing retailer J.C. Penney
looks like it may end up being one of his $12 billion
hedge fund's worst investment blunders.
On Monday, J.C. Penney's board dismissed Ron Johnson, a
former Apple executive handpicked by Ackman to remake the
brought back Mike Ullman, whom Ackman has previously criticized.
Now the hedge fund manager, who sits on J.C. Penney's board,
is faced with the prospect of being the largest shareholder in
a company where his influence may be greatly diminished, say
industry analysts and a Pershing Square investor, who did not
want to be identified.
The usually voluble Ackman has yet to publicly comment on
the management shakeup at J.C. Penney, and he did not respond to
a request for comment for this story.
One way for Ackman to salvage something from his 18 percent
stake in the company would be to find a buyer who wanted to take
J.C. Penney private, said people familiar with the hedge fund
and the retail industry. Such a move might help Pershing Square
recoup some of the $500 million in paper losses it is currently
sitting on, these people 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
Even before Pershing Square and Vornado Realty Trust
accumulated big stakes in J.C. Penney in 2010, private equity
investors were circling the struggling retailer.
Today a purchase would be cheaper with the stock price near
$14 a share, down about $6 a share from where Ackman started
buying. And a deal could still be attractive for players like
Blackstone Group, KKR & Co or Apollo Global
Management LLC because J.C. Penney still has valuable
real estate holdings, owning nearly half of its space and
leasing the rest at $4 a square foot. For comparison, retail
space in lower Manhattan rents for an average of $184 a square
Ackman, who has been a J.C. Penney board member since 2011,
has long championed the retailer's vast real estate holdings as
one reason it should be trading at a higher stock price. He also
said less than a year a ago that Pershing Square could make 15
times its money if Johnson's ambitious plan to renovate the
stores and sell more upscale merchandise had worked.
But that strategy, which has yet to bear fruit, resulted in
Johnson's dismissal. It's unclear if new chief executive, Mike
Ullman, will continue with Johnson's plan.
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. Ullman told Reuters on Monday
that he had not spoken with board members besides J.C. Penney
Chairman Thomas Engibous.
But Ullman noted while he was at the helm, Penney's market
value, sales and profits had reached all time highs.
This is not the first time that Ackman has come up short
with a big bet on transforming a national retailer. Investments
his firm made in Target - he put in $2 billion in 2007 - and
bookseller Borders also ended badly. He apologized to clients in
a fund where he invested only in Target and lost 90 percent of
the fund's value. He lost roughly $200 million on Borders.
Johnson's failure to turn around J.C. Penney may mean the
company's board will be less receptive to Ackman's
recommendations, said a frequent hedge fund investor, who does
not have money with Pershing Square.
The investor, who did not want to be named due to his
continuing work in the hedge fund industry, said Ackman, as an
activist, had been effectively "neutered" with regards to
influencing J.C. Penney going forward.
Up until recently Ackman had been a cheerleader for Johnson,
but that changed after the stock price fell 28 percent in the
"They capitulate at the bottom when everyone goes negative
and even board members throw the company under the bus shouting
'We never really liked him anyway' as they show him the door,"
said Shawn Kravetz, whose hedge fund Esplanade Capital exited
its J.C. Penney position last year.
AN UPHILL BATTLE
Now, getting private equity investors interested may be a
"They have a pretty steep uphill battle. They have not
announced any sort of restructuring plan yet. The straight-up
numbers indicate that there is more trouble in sight," said one
private equity executive, who follows the company and spoke on
condition of anonymity.
With an enterprise value of around $5.5 billion, J.C. Penny
is a feasible leveraged buyout target. But private equity has
snubbed deals of late that it has deemed too risky in the
sector, including Best Buy Co Inc founder's efforts to
take the electronics retailer private.
Shares of J.C. Penney were down more than 12 percent in
early afternoon trading following Johnson's departure.
Privately, Ackman has long said the investment could be
risky because it relied so heavily on shoppers liking Johnson's
Pershing Square returned 6.1 percent during the first
quarter even as J.C. 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.
"To me, the whole point here is hubris," said Robert
Sanborn, a Chicago-based hedge fund manager who invests in
equities. "Every single investment idea is fraught with
uncertainty, and one can sometimes delude themselves into
forgetting this by relying on reams of all kinds of data."
"Sometimes these guys just miss the forest for the trees,"