October 28, 2008 / 1:27 PM / in 9 years

UPDATE 3-Pershing to unveil potential Target transaction

(Adds Target response, analyst)

By Brad Dorfman

CHICAGO, Oct 28 (Reuters) - Target Corp (TGT.N) shareholder Pershing Square Capital Management said it will unveil a potential transaction to boost the company’s value, sending shares in the discount retailer up as much as 11 percent on Tuesday.

Pershing said it would present the plan at an event in New York City on Wednesday that it described as being “of particular interest to investors and analysts focused on retail, real estate, fixed income and credit.”

Pershing, a hedge fund run by William Ackman, has built a position of just under 10 percent of Target’s shares since taking an initial stake in April 2007.

Target said Pershing had raised several ideas for changing the ownership structure of its real estate assets since May. Target said it is reviewing the ideas and hired Goldman Sachs (GS.N) as an advisor, but noted the proposals have raised “serious concerns on a number of important issues.”

“We respect the spirit with which these ideas were presented and will share our perspective with the financial community in the near future,” CEO Gregg Steinhafel said in a statement.

Officials at Pershing were not available to give further details on the proposal or their discussions and a Target spokeswoman declined to give details on discussions with an investor.

Target’s business has faltered in the past year as a deteriorating economy leads shoppers to cut back on buying items such as clothes in favor of necessities such as food and gasoline.

In August, it reported its fourth-straight quarterly profit decline even as larger rival Wal-Mart Stores Inc (WMT.N) saw profits rise from consumers seeking bargains.

    The retailer has scaled back store-opening plans and taken a tougher stance on its credit cards, but that has not stemmed a 44 percent drop in Target shares since a recent high in September.

    Ackman has explored other proposals to try to increase Target’s share price. During a Target meeting with investors last week, Ackman asked executives a question about a potential derivatives transaction he said would let Target effectively retire more of its own shares.

    Another possible idea is that Ackman would propose some sort of sale and lease-back transaction for Target’s real estate, said Morningstar analyst Joseph Beaulieu.

    He noted that Ackman was already able to persuade Target to sell a large interest in its credit card business to JPMorgan Chase & Co (JPM.N) earlier this year. That operation has presented new risks to Target in recent weeks as more credit card loans go bad.

    John Griffith, Target executive vice president-property development, said at last week’s meeting that Target owns 85 percent of the real estate parcels on which it builds new stores. That allows it more control over design, expansion and remodeling decisions for the stores, he said, according to a transcript.

    Target shares were up $2.77 at $35.46 on the New York Stock Exchange after trading as high as $36.28 earlier in the session. (Reporting by Brad Dorfman; Editing by Brian Moss and Andre Grenon)

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